A formidable competitor

This is an excerpt of the original article. It was written for the March-April 2016 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2016

When I visit my millennial-aged daughter in Chicago, I’m amazed at the number of packages dropped off by UPS, FedEx and the USPS at her three-unit building on a daily basis. It’s as if she and her neighbors are single-handedly keeping Amazon in business. All those drop-offs got me to wondering: Does any of this make sense if you think about a carbon footprint? Rather than deliver millions of packages to one address at a time every day, wouldn’t it be more sustainable if we all just drove to the mall to do our shopping? After all, doesn’t research indicate that a signi cant percentage of consumers, especially millennial consumers like my…

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China rose from an underdeveloped backwater to an industrial juggernaut on the strength of its vast pool of low-wage workers. Labor cost advantages enabled Chinese manufacturers to take over industries ranging from consumer electronics to machine tools. But cracks have begun to appear in this model. China’s official manufacturing purchasing-managers index (PMI) fell to a three-year low last summer, dropping into contraction territory for the first time in six months. The stock market tumble earlier this year seemed to indicate further disarray.

Behind the numbers are indeed signs that China’s cost advantages are starting to slip. While wages in China remain well below those of western countries, manufacturers find far lower labor costs in Vietnam, Myanmar, Indonesia, Bangladesh, and even India. At the same time, high staff turnover undermines productivity in Chinese factories. In high-tech for example, many original device manufacturers (ODMs) suffer turnover rates of 15% to 20% per month. High turnover reflects a tightening labor supply in a country where demographics favored employers for the past several decades. That is changing, with the number of available workers expected to fall from a peak of 915 million today to 890 million in 2025.

Bloated cost structures and inefficient manufacturing processes take another bite out of productivity. Chinese manufacturers are up to 70% less efficient than Western counterparts in indirect functions such as materials handling and quality assurance. Raw materials conversion rates also lag global norms: A Chinese steelmaker uses three times as much water and twice as much energy to produce a ton of steel than more efficient manufacturers in Germany.

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