Blog for updates and happenings in logistics in the Asia-Pacific region

February 11, 2014

Changing Landscape of China’s Supply Chain

Exploring the key dynamics impacting low cost manufacturing in China . . .

As China continues its impressive development path of the last twenty years, it has now become two economic markets that are interconnected and converging – its Global market which is driven by mass production for export to developed countries, and its local market which revolves around rapidly expanding domestic consumption.

Multi-national companies first came to China to take advantage of low-cost labour and Special Economic Zones. Nowadays they remain in China to sell products to Chinese consumers in the local market. One development has fuelled the other. As quoted by the Economist ‘foreign firms came for the workers, now they stay for the shoppers’.

The logistics emphasis is therefore no longer just on transporting products from the factories to the ocean ports on the eastern seaboard for export to the west. Nowadays there is just as much emphasis on distributing goods within and throughout the domestic China market in order to reach the increasingly prosperous consumers located all over this vast country.

Amongst the many dynamics influencing shifts in China’s production landscape, Labour related challenges are one of the key driving forces for change:

Labour Shortages – the migrant labour force in the coastal areas, in the range of 200 million workers, is reducing in size. There is now more work available in the inland provinces, where workers can live at home with their families, instead of in a cramped dormitory at a coastal factory. Some migrant workers who have worked away from home for 20 years or more may have saved enough money that they do not need to work in the factories anymore. Living costs in the developed coastal cities are continually rising, so in many cases the lower cost of living in a rural province more than offsets the lower wages, resulting in more actual spending power from the workers’ net disposable income.

Labour Costs – in coastal areas the cost of labour is becoming more expensive, with the minimum wage increasing by an average of over 18% last year. Local governments are committed to raise workers’ wages, with Guangdong province having a mandate to increase the minimum wage by 20% for each of the next five years. This reflects national priorities to increase domestic consumption and thereby reduce the economic dependency on exports.

Labour Unrest – there is emerging unrest and dissatisfaction amongst factory workers in the coastal cities. Historically these migrant workers had little choice but to accept the poor working conditions in the factory complexes. However, the latest generation of young migrant workers are better educated and technologically enabled. They are much less willing than previous generations to put up with the hardships of factory life. As digital natives they are constantly connected through technology and thus become more organised and vocal in their protests for higher wages and improved conditions.

Supply and demand economics thus come into play, whereby the reduced supply of labour commands a higher price. In Guangdong province, there are currently one million vacancies for production workers, even with most factories offering salaries above the minimum wage. These labour challenges, together with government incentives to attract investments into the provinces, and potential cost savings in the region of 40% on land and 50% on labour, are resulting in some of China’s production moving inland.

To address these dynamics and capitalise on the rapid emergence of inland consumption, companies will need to adapt and adjust their business models accordingly – reconfiguring their supply chain ecosystems to focus on the expanding domestic markets throughout China.

Businesses that successfully address this challenge will become empowered to gain competitive advantage and drive profitable business growth – accessing the knowledge and networks that provide independent and informed supply chain insights will be critical to your success.

Mark Millar provides value for clients with independent, external and informed perspectives on their supply chain strategies in China and Asia. Clients have engaged Mark as Speaker, MC, Moderator or Conference Chairman at over 300 events in more than 20 countries. The Global Institute of Logistics recognised him as “One of the most Progressive People in World Logistics”.  Based in Hong Kong, Mark serves on the Advisory Board of the Logistics and Supply Chain Management Society (LSCMS) 


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