From Workshop to Shopping Mall – Is China’s Manufacturing Dominance Ending?

China has become known as the "world’s workshop". But with rising inflation, increasing labour costs, and struggling consumers in the west is that reputation about to change?

China's manufacturing industry has been waning in recent months. The logistics federation purchasing managers index for manufacturing dipped to its lowest rate in more than two years in July, according to a recent Bloomberg report.

There has even been talk of higher wages, inflation and rising fuel costs leading companies to move their manufacturing operations outside of China, as financial benefits have eroded.

A report from Boston Consulting Group (BCG) suggested wages are increasing by 15 percent to 20 percent each year, leading to companies producing goods which can be "manufactured in modest volumes" returning to the United States.

While industry is slowing, this makes no change to the impact it has had on manufacturing in the western world over recent years and certainly does not spell the end of China as a major manufacturing location.

China's Impact

In drawing such a large share of the global manufacturing market, China forced other countries to seriously consider their strategy and realign their goals.

Speaking to the UK publication the Manufacturer, Simon Griffiths, chief executive of the Manufacturing Advisory Service-West Midland, said: "[China's rise] has had a major effect on UK manufacturing and resulted in our industry moving towards the higher value added part of the global chain."

However, he believes there is now a slight backlash taking place against Chinese manufacturing, saying: "We are beginning to see orders return to our shores, from international companies worried about the technical expertise of manufacturing businesses in Asia."

And China is now also being seen as a target for exports from the markets it managed to unseat with its manufacturing rise. Its huge domestic market is seen as a key target for CEOs.

PwC's recent Growth Reimagined report into industrial manufacturing found 54 percent of executives in the industry see the Asian country as a key location for future sourcing.

Many also now see a base in China as an asset for accessing the country's increasingly affluent domestic market, created in part as a result of the high wages which are partly driving manufacturers away.

Future for Manufacturing

Looking forward, PwC predicts it's possible the interest manufacturers are showing in China, and the other BRIC nations, could make them "hyper-competitive battlegrounds."

"In China, for example, revenues are rising steadily but margins are falling. So any company entering such markets will need to ensure it has a sustainable operating model," the report said.

Process improvement methodologies like Lean Six Sigma – long a staple of manufacturing in developed countries - have been growing in importance in Chinese manufacturing as a result.

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Emerging markets are also expected to play a significant role in allowing manufacturers access to top talent, although mature markets will certainly play their part here too.

Graeme Billings, global industrial products leader at PwC, said: "The war for talent is particularly acute in rapidly emerging markets. Many businesses are therefore stepping up the overseas deployment of key employees."

He added: "The number of international assignments among multinationals has increased 25 percent over the past decade, and PwC predicts that will grow by another 50 percent over the next ten years."

BCG believes it is the requirement for high-skilled workers which will see manufacturing moving back to the United States, but also has three key reasons why China will continue to be a key player within the global manufacturing landscape.

Firstly, group partner Doug Hohner sees the domestic market as being too large a draw to ignore. With countries in Western Europe lacking "the flexibility in wages and benefits that the US enjoys", the group sees the lower wages of China being a greater attraction.

Finally, Hohner said although cheaper countries like Vietnam, Indonesia and Thailand are likely to absorb some of the demand, they don't have the infrastructure, labour or supply chains to take on international manufacturing on any significant scale.