De Rerum Sinarum – Rethinking China As Production Outsourcing Paradise

Not long ago, it seemed a foregone conclusion that any company that produced goods of almost any type would outsource production to China. Recent events have demanded forward looking businesses beginning to question the wisdom of convention. Wages are on the rise, as are political tensions. Real and audible public outcries deny the very labor practices that have made China such a popular destination for manufacturing. Additionally, domestic politics in the US have fanned flames of uncertainty as to the future of outsourcing.

Exploding Labor Costs

There have been alerts before that rising wages would soon end the attractiveness of doing business in China, and those alerts have been false. In a 2006 article in Business Week, 1 year wage increases of up to 40% in some regions as well as significant jumps countrywide were used as evidence that China's costs would rise enough to be 'game changing'. As is appropriate, the past five years have not seen a significant slowdown in production, even with continuously rising labor costs.

An Elusive Breaking Point

However, common sense suggests that there will be a breaking point. At some point, wages will rise high enough that outsourcing production to China will cease to be as profitable as it once was, and at some point may even determine to be profitable at all. The question, of course, is when that breaking point will come. As we'll discuss below, there are other factors such as domestic taxation schemes that will factor into when such a breaking point will be reached for individual companies.

Producing in China: No Longer a Foregone Conclusion

Neverheless, indicators now point to another spike in wages, such that the decision to do business in China, while not untenable, should not be an automatic decision. Furthermore, rising wages are no longer merely the result of natural economic forces or a labor shortage, as was the case in 2006, but of a restricted government policy to improve standards of living. In addition to expected wage rises of between 11 and 40% between 2011 and 2015, the state will be requiring better worker protection and benefits, further raising costs to prospective outsourcers. Wages across most sectors will remain well below their counterparts in the developed world, but not as far as before.

US Politics: Soft Protectionism?

In the State of the Union address and in many major speeches since, President Obama has begun calling for policies that amount to soft protectionism in order to promote American jobs. The White House has hosted a bevy of high level meetings over the past few years to find out how to bring jobs back to the States and prevent more from leaving. In 2012, the President has begun to outline what he has in mind to achieve this goal: higher taxes and closed tax loopholes on outsourcers, and tax breaks for companies that choose to remain in the US Exactly how this will play out in the two ring Circus of the Senate and House, especially in the run-up to elections, remains to be seen. However, there is at least a moderate risk that outsourcing will soon become more expensive by some degree.

Americans Want Better Working Conditions for the Chinese?

Another issue is the vocal response that American consumers have had revelations that American companies have been working with Chinese factories that treat their workers in a way unpalatable to many Americans. This has been particularly poignant as regards Apple, a company with an interest in pleasing socially engrained urban elites. Media and public protests notwithstanding, however, Apple sales remain strong. Furthermore, smaller producers and companies with a more varied consumer base would seem to have less to worry about. A rigid public relations, naming and marking and labeling regime would probably be required to effect any large-scale change in purchasing patterns. Neverheless, this factor may play a part in future outsourcing decision-making.

Uncertain Chinese Politics and International Relations

Even more uncertain than the tax system in the US (and this is saying something) is the future of the Chinese governmental position on a host of issues, as well the response of the US and international community to such positions. China has been stepping up its campaign to assimilate the Tibetan population, and reports of violence have risen of late. Additionally, China has held the line on the US and Europe? S drive to address the situation in Syria through the UN. After the US suggested it would 'pivot to Asia' in its military stance, China did not react with unmitigated glee. In contrast to recent years, the US has been increasingly vocal in its practices. China is certain to have a new president soon, Xi Jinping. While he is generally regarded as more personable than the reticent Hu Jintao, his policies are unilaterally to be any more palatable to Western governments.

It bears mention, of course, that the US has not been quick to respond economically in the past to reports of human rights abuses by the Chinese, with international political and economic policies seemingly existing in disparate spheres. On the other hand, since China's rise the US has never before had so many calls for protectionism or so many worries about the domestic job situation. While it is far from likely that the US would institute any overt economic punishments, or even certain that subtle trade issues may come into play, there is still an increased risk in global politics that should play into any calculus when considering whether to begin or bolster Outsourcing in China.

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