Keeping an Eye on Technology Futures, No Hidden Agendas, New Attitudes, No Platitudes!
In the early 1990s, China was merely a low cost place to make labor-intensive products. Now the country with the world's largest population has become the most powerful force in manufacturing.
Prices for Chinese manufactured goods are typically half of comparable U.S. and European products, which gives China a strong competitive advantage. But here's something most people don't realize - it's not low-cost labor - it's low-ball pricing. China simply accepts much lower profit margins.
U.S. businesses develop products with 50-60% gross profit margins and 10-15% net profit. Developing countries (other than China) look for 30-35% gross-profit, or 5-10% net-profit. China accepts gross-profit margins of only 5-7%, with 0-2% net-profit. Therefore, even with comparable manufacturing costs, Chinese products are the cheapest.
Here's a simple example to illustrate the point: Let's say a product costs $40 to manufacture. In the US the target selling price will be $80; in other countries, typically $60.
The Chinese would sell that product for just $45, maybe even $ 40 (zero margin). This astounds most outside observers-how can a profit making enterprise survive (capital and cash flow) with no profit?
The answer: In China, short- and medium-term operating deficits are acceptable since the government manipulates and controls capital. Chinese planners recognize the demand for short-term profit as the Achilles' heel of Capitalism. Their own primary strategic objective is long-term global market share. The tactics: a/ High volume; b/ Fast response; c/ Immediate local employment; d/ High investment in automation and quality to maintain price leadership.
For America, the remedies require significant attitude shifts. Our short-term financial mind-set must change. Business needs to realize continual quarter-to-quarter increases in revenue and profits cannot continue on and on with work that is done elsewhere in the world.
It must be recognized that manufacturing and job creation are not just political or business manipulations, but the building blocks of society. To be competitive in global markets, it's important to keep investing in jobs, to upgrade factories. Entrepreneurship and talent must be encouraged and stimulated to thrive in the manufacturing sector.
