I recently took a trip to with a Client and our Hong Kong based services broker to vet some manufacturers for several newly developed products. We ranked the candidates on usual categories such as technical aptitude, quality control, worker conditions, and of course cost. That’s where the surprise would come.
On the ride from the Shekou Ferry terminal into Shenzhen, we cruised along a paved road that could easily have been in a major US city. Our host explained that not long ago it was a dirt road. In the 1990’s Shenzhen’s migrant work force and consequently, GDP grew at a sharply increased pace. China eased foreign travel restrictions to the region in 2003 further contributing to economic growth. Workers streamed from the countryside to take manufacturing jobs, and the bountiful labor supply kept manufacturing costs attractively low – until they weren’t low anymore. With the economic growth, the extreme polarization of wealth and class are giving way to the rise of a middle class. Workers are demanding better pay and better jobs. While still well below advanced manufacturing nations such as South Korea, wages in the Shenzhen region are currently on pace to double over a 6 year period.
So what did we do? Logistic simplification, reduced shipping costs and the opportunity for more robust collaboration with the manufacturer offset the modestly lower labor cost and resulted in selection of a domestic candidate in this case.
The next time we set up a manufacturing line abroad, assuming basic requirements are met, I’d like to have a look at other up & coming locations including Indonesia, Vietnam, each of which have labor costs of 60% or less those in China. Some African nations, India, and Mexico are other possibilities. Of course these lower cost options are not without concerns of their own such as primitive supply chains, and non-existent patent law resulting in shameless product rip-offs.