Sourcing & Manufacturing in China: An Introduction

China is the world’s biggest supply market and the first country that comes to people’s minds when discussing manufacturing. Since the 1980s, it’s transitioned from primarily producing low-cost products to becoming an advanced manufacturing market.

In this article, we review what products are produced in China and why it remains an attractive supply market. We will also tap into the topics of nearshoring and the China Plus One strategy, due to recent supply chain disruptions and companies’ goals to diversify.

We finalize the article by reviewing some of the major cities for manufacturing and what kinds of products are produced there.

China Overview:

• Population: 1.4 billion
• Capital: Beijing
• Bordering countries: 14 – including Russia, India, Vietnam, Pakistan, and Myanmar
• Major cities: Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin, Chongqing, Chengdu

What products are manufactured in China?

China is often referred to as “The World’s Factory” and we hardly find any products that can’t be produced there. While the country has manufactured low-cost products like toys since the 80s, it is shifting more to advanced manufacturing.

This is something we will review in greater detail later in this article.

To give you an overview, below are just some examples of products that can be manufactured in China today:

• Cars and automotive parts
• Commercial and agricultural vehicles
• Furniture
• Electronics
• Garments and textiles
• Chemicals
• Agricultural products
• Batteries
• Machinery and equipment

In recent years, companies have started to diversify their supply chains by moving at least parts of their manufacturing outside of China. Asian countries that benefit from the trend include Vietnam, Indonesia, and the Philippines, for example.

Perhaps you have heard of the China Plus One strategy, a term used when companies try to diversify production to other countries, due to an overconcentration of investments in the Chinese market.

Nearshoring has also become an increasingly common topic due to recent global supply chain disruptions and exorbitant freight rates. An example of nearshoring is when an American company outsources manufacturing to a neighboring company such as Mexico.

In Europe, manufacturers often turn to low-cost countries like Serbia and Poland when deploying nearshoring strategies.

Benefits of Manufacturing in China

China still excels in many aspects and some foreign companies find it difficult to shift production to other markets. Below you can find some of the major reasons why China continues to be a major supply market globally.

Low Labor Costs

Even if labor costs have increased much in China in previous years, it’s still considered a Low-Cost Country (LCC) for manufacturing. Of course, we have to consider productivity when discussing labor costs, but this is still the definition.

There’s also much room for development in the Central and Western parts of the country as most manufacturers are concentrated along the East Coast.

Manufacturing capabilities

China has transitioned from being a pure low-cost supply market to an advanced manufacturing market. “Made in China” is not what it used to be as consumer apprehensions have changed.

The country is now a leading manufacturer in advanced industries like automotive, telecom equipment, and robotics, in addition to consumer products. Compared to Vietnam, which is specialized in industries like electronics and garments, China has a much wider industrial base.

Business eco-system

Not only does China have an enormous industrial base but its business eco-system plays a vital role domestically and overseas. Relocating production from China is easier said than done, considering the large number of sub-suppliers located in the country.

This is particularly the case in the automotive and electronics industries, for example, which require many sub-parts and components. If you approach suppliers in Southeast Asia you’ll notice that many rely on imports of sub-components from China.

Besides, some products are still cheap enough to produce in China, it doesn’t make sense for manufacturers in other countries to make the products.

China’s growing consumer market

China has one of the biggest consumer markets globally, which encourages foreign manufacturers to keep production locally. By doing this, they can avoid tariffs as well as reduce logistics costs and lead times.

Increasingly more companies want to target China’s growing consumer market and companies who are already present will have an advantage.

Disadvantages of Manufacturing in China

As mentioned earlier, wages are higher in China and increase at a faster pace than its Southeast Asian peers. In Vietnam, salaries are around a third on average compared to China and increase slower.

Again, I want to highlight that we should also consider productivity when discussing labor costs. China is also a far more developed market in terms of manufacturing and supply chains.

A second issue is the long transportation lead times to Europe and the US, and the currently high freight costs. Due to recent supply chain disruptions and the COVID pandemic, some companies find it unbearable to produce in Asia, turning to nearshoring, at least partly.

The ongoing trade war with the US has hurt both countries. Imposed tariffs have encouraged foreign companies to look for alternative markets, to outsource at least parts of their production.

Industrial Regions and Cities

The East Coast is significantly more developed and more densely populated compared to the rest of China. While the land size of Gansu province is almost as big as Sweden, its population is similar to that of Shanghai, with 26 million inhabitants.

In this section, we review the most interesting cities and provinces for manufacturing activities. The logistics infrastructure and business eco-systems are also comparatively more developed in the areas.

Shanghai

Shanghai is the biggest city in China after Chongqing in terms of population and is considered its financial center.

Along with Beijing, Tianjin, and Chongqing, it’s also a municipality. This means that the cities have the same rank as provinces and are under direct control by the central government.

Having the biggest port in the world, Shanghai is vital for both the imports and exports of goods, acting as a distribution hub. The automotive industry is one of the city’s most important.

Companies like Volvo Cars, Volkswagen, and GM all have factories here. Of course, this has resulted in a plethora of sub-suppliers that set up operations in Shanghai or its vicinity.

In addition to automotive, the city is also a major producer of electronics, petrochemicals, integrated circuits, advanced equipment, and biomedicines.

Shanghai Free Trade Zone

China’s first Free Trade Zone was established in Shanghai. Other domestic Free Trade Zones such as in Tianjin, Guangdong, and Fujian have all used the same legal framework.

With a massive size of 121 sq.km. the zone comprises four areas:

• FTZ Bonded Area
• Lujiazui Financial Area
• Jinqiao Export Processing Zone
• Zhangjiang High Tech Park

Each zone fills a specific purpose, which can be seen by the names.

Beijing

With a population of almost 22 million, Beijing is considerably important for both business and national trade decisions. The city is home to many of China’s state-owned companies and has the most Fortune Global 500 companies globally.

It’s located just 120 kilometers away from Tianjin, one of the biggest in China with around 14 million people. You can travel between the cities in as little as 30 minutes by high-speed train.

Beijing is a major producer of metallurgy, electronics, automobiles, chemicals, machinery, textiles, garments, and household appliances. Being the cultural and political center of China, you can also find many banks here, as well as embassies.

Examples of companies that have offices in Beijing include ABB, Siemens, Schneider Electric, Volkswagen, Nestle, Philips, and Daimler.

Shenzhen

Shenzhen is sometimes referred to as “The World’s Factory” due to its large production of electronics. With a population of 18 million, it’s strategically located close to Hong Kong, Guangzhou, and Dongguan.

Shenzhen is primarily famous for its innovative and entrepreneurial culture, serving as the country’s tech hub and called “China’s Silicon Valley”. The high-tech, finance, and logistics industries are its major pillars.

According to Inc., 90% of all electronics are produced in Shenzhen, Dongguan, and Guangzhou globally. If you plan to manufacture electronics in China, Shenzhen will most likely be one of your top choices.

Shenzhen Free Trade Zone area

Qianhai is one of the biggest and most well-known Free Trade Zones in China, covering 28 square kilometers. Main business areas include finance, logistics, and IT.

Guangzhou

With a population of more than 15 million, Guangzhou is one of the biggest cities in China and is located a mere 30-minute train ride away from Shenzhen. The city is a major manufacturer of automobiles, electronics, and petrochemicals and contributes to more than 55% of the city’s GDP.

Guangzhou Free Trade Zone area

Nansha is famous for its vast manufacturing activities. The zone covers 28 sq.km. and primarily serves companies in logistics, finance, international trade, and commerce, as well as high-end manufacturing.

Dongguan

Dongguan is wedged between Shenzhen and Guangzhou and one of the most important cities for electronics manufacturing in China.

Samsung, DuPont, and the likes all have factories in Dongguan and it served as China’s most important export hub from the mid 80s. It’s the fourth biggest export region after Shanghai, Shenzhen, and Suzhou.

Summary

China has maintained its position as the world’s manufacturing hub for decades. This has allowed the country to build up superior supply chains and a business eco-system that is hard to relocate elsewhere.

Companies strongly rely on its efficient logistics network and massive amount of sub-suppliers.

While we see a new trend with nearshoring and diversification through the China Plus One strategy, China will remain a highly important manufacturing hub. Being one of the biggest consumer markets globally, increasingly more companies want to profit from the market.

By keeping production in China, companies have an advantage thanks to the avoidance of tariffs and long shipping lead times. Besides, these companies build up a knowledge of the market and local connections, which in turn gives them more advantages.

Issues to overcome in the short term include long freight lead times, as well as freight costs that have gone through the roof. The ongoing trade war with the US is also a roadblock that will stay for the unforeseen future.

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