China Economics: Unraveling the Mystery of China’s Low Cost
This paper offers insights into the economics of manufacturing in China. While the game is rigged to some extent by the way business is done and the involvement of government, the real answer as to why Chinese companies seem to have a much lower cost base lies in a low-labor-cost mentality that pervades their operations, resulting in a low-cost environment that Chinese companies create for themselves. Business methods that use labor to creatively save on other costs, the management of extremely low-cost supplier networks, and a customer satisfaction approach that substitutes extraordinary customer service for product maturity and quality are among the factors that create a cost advantage. The paper presents evaluations and scorecards to assist in evaluating whether a given company can achieve these “China cost” efficiencies. We then discuss the business environment, presenting our methodology for evaluating whether “pushing the envelope” on cost is a business mandate versus a matter of choice versus a matter of little importance. Finally, the paper discusses the potential for outsourcing to substitute for internal means of achieving cost efficiencies.