Why People Are Pulling Their Money Out of China

beijingsmogbannerManufacturing cost in China continues to rise and at a rapid pace.  It was expected to happen, but not exactly at the rate that it’s happening or at least that’s what Mark Miller, CEO of Prince Industries is saying.  China has lost its position as the top ranking manufacturer’s choice in the world.  The cost of productivity has taken a hike and so has its investors.

It was estimated that the cost of outsourcing China’s goods would be equal to if not greater than that in the United States.  This study was completed by AlixPartners.  They (Steve Maurer, managing director) went on to say that “the Chinese manufacturing cost advantage has eroded dramatically in the last few years.

Years ago, China was the cheapest manufacturer in the world, however, this is not the case any longer.  The high cost of labour and wages, the cost to ship and the value of currency contributes to the fact that people are pulling their money out of China.  If things continue to go in the same direction, China’s situation will not improve.

Shanghai, home to Prince Industries, is responsible for increased wages by at least 12% over the last ten years.  Hourly wages have been going up alongside the cost to ship around the world.  The competition to attract skilled labour increases manufacturing cost in China due to minimum wages continuing to rise. In order to keep the labor force active, wages should match the cost of living.

Moving Out of China

Since the cost to produce goods has risen rather heavily in China, many companies are pulling out of the country in order to save money.  The masses propose a move to a higher ground where the cost of labour is “offset by higher productivity of the American workers.”

On the other hand, some don’t believe that everyone will pull out of China.  Hal Sirkin of the Boston Consulting Group reports that the Chinese domestic demand is growing by 10%.  More so, if they make a decision to pull out, their export plants will then make the necessary conversions to fit the need of the market’s growth.

The manufacturers who suffer due to the high cost in specific areas will likely move to communities where labour cost are not so high.  Others have found that being in inner China works for them, then there are those who have not had much success in the area.

Prince Industries Move into China

Although the cost of productivity has risen in China, it appears that Prince Industries has doubled its annual revenue.  Prince Industries moved its operations in Chicago to China and has seen an increase of twice the amount it did the year before.  This tremendous increase is chiefly due to the plant in Shanghai, which is now supplying its customers with goods and services.

The idea paid off for Prince Industries, even in the changing market.  However, the move would not be beneficial for everyone, nor did they move all of their assets to China, however. The move had a lot of people worried that they would take everything over to China.  The consequences of a move such as this would eventually damage the economy.

While it’s true that China has taken the lead for many years, significant players will be watching to see what happens next.  The rate of exchange has helped to level exports and manufacturing costs.

Overwhelming Pollution Problems

Recent concerns in China are that American companies who choose to operate in China are having difficulties securing senior executives.  The reason – intense pollution. The air pollution in China is overwhelming.  This is another reason people are looking to pull manufacturing out of China.

Over half of the firms and corporations operating in China can’t fill the positions they need.  Professional businessmen and executives are not flocking to meet the demand in China or so says a survey taken by Bain and Company and the American Chamber of Commerce located in China.

American Companies in China

In addition to the pollution, the warm welcome is not the same for American businesses anymore.  A sizable portion, almost half, of businesses report that they simply don’t feel welcome in China. This is a big change from a decade ago. On the other hand, 43% said that didn’t notice a difference, leaving 10% to feel at ease.

Of the respondents involved in the study, 55% said “They believe foreign firms were being singled out in recent enforcement campaigns, making many of them less likely to invest in China.”

Nevertheless, businesses are optimistic about their potential and short-term goals.  In fact, seven out of ten were hopeful about the future, especially when it comes to growth of the service industry.  Still, money is not flowing it as it had in  the past.  This trend only represents the mood of foreign reserves and the current surplus.