Despite the China Price Advantage, in a few short months China seems to have lost its ascendant place among global competitors. What happened?
Commodity Price Spike
We are all only too familiar with the radical fluctuations in commodity prices in the last 24 months, especially oils steep rise across ’07 and ’08. This had a dampening effect on China’s export economy as it became much more expensive to ship goods across the ocean.
Currency Fluctuations
We saw that one of the factors contributing to the China Price Advantage was Beijing’s pegging the RNB to the dollar. The economic upheavals that began late ’07 disrupted this, however, and the dollar dropped. Suddenly, it was more expensive for American companies and consumers to buy Chinese goods. But the reverse also held—it became cheaper for the Chinese to buy U.S. goods. The U.S. saw an uptick in exports. This could mark the beginning of an significant trend...
Quality Catches Up
This has been the single-most significant factor in China’s faltering globally. An outfit called AMR Research surveyed supply-chain managers across 2008 and found that between January and October the number of companies planning to source from China dropped by almost half. The most-cited concern: quality, followed by concerns about intellectual property.
...the biggest source for quality risk and intellectual property theft in our global supply chain.
~AMR Research
High-profile quality debacles like lead paint on children’s toys and melamine in milk have lent a certain stigma to the “Made in China” label. Even for giant multinationals experienced in global sourcing, it is too difficult to implement quality measures.
How far back can an audit really go, especially where management has 20 years of experience faking compliance to rules set by their own government?
~AMR Research
Many companies are finding that the quality risk offsets any cost savings they realize from the China price.
Systemic Inequality
We noted that wages are lower in China than the U.S. but those “low” wages earned by urban industrial workers, and the accompanying standard of living, are still much higher than those of China’s rural peoples. This systemic inequality generates a certain degree of political unrest. It doesn’t get much press because China’s media is controlled by the government and because the rural areas are so far from the public eye. It remains significant, however, especially since China’s last revolution, unlike the European revolutions that we are more familiar with, originated in the rural areas. Despite this uncertainty, January ‘09 marked the first time more autos were bought in China than the U.S. While we must be realistic about the challenges, we should also view China as a potential customer, not just a competitor.
But what about India? How has it fared recent economic storms?