China GDP Growth and Manufacturing Competitiveness

Recent news about China’s GDP has highlighted that it will soon equal that of the US using the purchasing power parity (PPP) metric. Given that the manufacturing boom in China was largely dependent on lower labour rates, how can this be explained?  The reality is that China’s total GDP is still very much smaller the US, just over half the size at current exchange rates.  In addition, China’s total GDP is shared by a population that is 4 times greater than the US.  The country level GDP numbers hide that consumer income on a per capita basis is still significantly lower than the developed world.  This reduced purchasing power depresses prices of goods in China and explains why using PPP metric the gross GDP numbers can be considered equivalent.

However, incomes are still growing quickly in China and this was reflected in another story:  Boston Consulting Group has highlighted that manufacturing productivity increases in the west, particularly in the US and the UK are changing the economics of sourcing decisions. Eastern Europe manufacturing is no longer cost competitive compared with the US, and the UK is now the most cost competitive location within western Europe.  Increases in China labour costs and lower energy costs in North America have closed the cost advantage for China over the US to around 5%, and Mexico is now more cost competitive than China.  These analyses overturn much of the conventional wisdom about the cost benefits of off-shoring production for western markets to Asia and eastern Europe.  A growing number of companies have already reached the same conclusion and are considering re-shoring production closer to the consumer base. Not least because off-shoring has a host of significant disadvantages which are no longer offset by lower costs.

So where is this going to lead business decision making?  Although doing business in China can be difficult, not being in business there will ignore the growth opportunities the large population and increasing incomes will bring in the future.  However investment in new manufacturing capabilities for exporting to western markets from China may now be less attractive.  Western companies looking for growth will continue to look east and will continue to manufacture there, but will be seeking higher productivity to remain cost-competitive.  For servicing customers in their home markets, the traditional manufacturing heartlands of the US and UK now look well positioned for a resurgence in investment.  Supply chain managers are about to face some unexpected new challenges.


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