Like it or not, the world is a global marketplace. For U.S. manufacturers to remain competitive they must combine the best of American technology and advanced products with components built at lower offshore labor rates. "Purchasing Agents" are now becoming "Offshore Sourcing Specialists". Like Jason in search of the Holy Grail, these buyers are looking for manufacturing capabilities that offer low production costs with as few drawbacks as possible.

The consensus is that mainland China offers the best environment for offshore components sourcing. In this article we will explore the advantages and potential pitfalls involved in manufacturing in China and provide practical advice on how to proceed with a first sourcing project. The information provided is the result of 10 years of experience assisting companies with this process.

Why Sourcing in China?

Obviously there are many countries that are candidates for overseas sourcing. China, however, combines advantages that are unique to the world's most populous nation. These include:

-  One of the world's lowest labor rates ($200 per month)
-  Abundant indigenous raw materials
-  A well developed industrial base
-  Aerospace and defense industries that are technology drivers for the industrial sector
-  A mature communications and transportation infrastructure
-  A stable economy

Labor rate. There are actually two different labor rates in China. The rate paid by indigenous Chinese companies ranges from $80 per month to $150 per month for labor ranging from blue collar assembly to white collar engineering. If you buy from an indigenous company this is the labor rate which is calculated into the cost of the product. If you attempt to hire Chinese labor directly, the labor rate will jump to about $400 per month with the worker receiving $80 - $150, while the rest reverts to the government. Foreign owned Joint Ventures (JVs) pay the best salaries and positions with JVs are highly coveted.

Abundant Indigenous raw materials. Most raw materials you will need are available in China as native products. For example, natural rubber, steel and aluminum are all native. However, due to the growth in the Chinese economy, even native materials are often insufficient to meet the demand, so China has become one of the world's major importers of scrap iron, aluminum, copper, and steel.

Well developed industrial base. Since China was isolated from trade with the west from 1949 until the beginning of President Nixon's ping pong diplomacy in the 1970s, China developed a highly self-sufficient industry. Aided by the Russians during the 1950s and 1960s, many large industrial facilities were built. From the perspective of a western observer there seems to be an amazing variety of factories that make the same kinds of industrial goods found in the U.S.

Aerospace and defense industries. Spurred by a need to develop militarily, China built many factories that are "mil-spec". Certain regions of China, such as inland Chengdu and coastal Dalian are particularly noted for these plants. As the military standoff with the Soviet Union faded, China converted many of these factories to civilian production.

Mature communications and transportation infrastructure. Ten years ago, telecommunications with China was fraught with problems. Phone lines were scarce, connections noisy, and costs almost prohibitively high. Now fax and voice communications between the US and China is cheap and reliable. Connections via Internet are becoming more common, dropping costs substantially. The transportation infrastructure is still somewhat of a problem. While ocean shipping from coastal cities is fast and reliable, there are vast inland areas which have very poor highways making rail transport a necessity.

Stable economy. Despite the political scrutiny that China is subject to, the Chinese economy looks surprisingly stable from the outside looking in. For example, although China has experienced periods of high inflation due to double-digit growth in its economy, export prices have remained surprisingly stable. By international agreement, the ratio of Chinese Renmenbi (RMB) to the U.S. dollar is held fairly constant. Quotations to US companies are almost always in US Dollars.

What Products Are Available From China?

This is a very difficult question to answer. Unlike the U.S., there are no comprehensive directories, like the Thomas Register, in China. A number of attempts, some quite serious, have been made to develop a comprehensive directory, but none have succeeded. Part of the problem lies in the way in which Chinese factories are organized. In the US, factories are organized horizontally; that is, a manufacturer of watt-hour meters will buy the cast parts from one factory, the plastic parts from a second, and the glass parts from a third. In China, the watt-hour meter factory is likely to set up a casting workshop, a plastic injection molding workshop, and a glass workshop, as well as a tooling workshop to build the molds and jigs that are required. From a US perspective, this factory then, is not only a good candidate for watt-hour meters, but also for the production of cast, plastic, and glass parts, or for the production of production tooling!

It is probably easier to define the range of products by identifying those products that are not good candidates for Chinese production. Products with high labor content are better candidates than those with low. For example, machined castings are more likely to demonstrate greater cost savings then stamped metal products whose production is highly automated. The other limiting factor is technology. Generally speaking, in any given technology, China is one or two generations behind, so looking for a leading edge sub-micron integrated circuit is not likely to be successful.

As a general rule, you won't know if a product is available in China until you try to source it. And even then, you may be left wondering.