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Outsourcing & Offshoring Boom in China Challenged by Rising Wages, Employee Demands and Regulation, Business and Industry Trends Analysis

While India has become the leading outsourcing center for services like back-office tasks, China has become the world’s top offshore manufacturing center. China is clearly a leader in offshore manufacturing of apparel and footwear. It also excels in the manufacture of computer components, such as motherboards and hard drives. Its telecommunications equipment companies, such as ZTE and Huawei, have become world-class competitors, and Chinese firms have developed expertise in such high-ticket items as medical imaging equipment. China recently became the world’s leading retail car market as well, and has established a mammoth automotive manufacturing industry, along with a significant presence in aircraft and railroad equipment. Meanwhile, it is likely to take over the lead in utilization and perhaps development of advanced nuclear power plant technology, since it has formal plans in place for the construction of dozens of new nuclear generating facilities. The country is also a world leader in the manufacture of solar cells and wind turbines.
China is one of the world’s few remaining communist countries (joining Vietnam, Laos, Cuba and North Korea in that regard). Nonetheless, it is striving to encourage entrepreneurism, and its entry into the World Trade Organization (WTO) as well as its status as host of the 2008 Olympics moved it into a strong position on the world stage. However, in 2014, its real GDP growth slowed again, falling to 7.4%, and growth may slip further to about 7.0% for 2015. 
One key to China’s slow but steady evolution into a technological powerhouse is its higher education system. While many of China’s massive number of universities are far below Western standards, China has also developed some world-class academic institutions, such as Tsinghua University in Beijing, where technical disciplines are taught at the highest level. Likewise, China has built technology research and development parks near its major universities. Over the mid-term, the result will be a heightened level of Chinese competition in the technical marketplace.
However, China is facing rising costs and increased competition from other countries. Chinese firms in many cities have been facing worker shortages, while strikes and worker unrest have forced employers to boost wages by significant amounts.
In 2013, minimum wages in major Chinese manufacturing centers rose from 13% to 22%. Beijing raised its minimum monthly wage by 11.4% in January 2014, to 1,560 yuan, or about $250 monthly. Shanghai raised its minimum wage by 12.3% to 1,820 yuan, and the port city of Tianjin raised its minimum 12.0% to 1,680 yuan. In 2015, the Ministry of Human Resources and Social Security reported an all-time high average minimum wage of 2,020 yuan per month for China as a whole. According to the country’s latest five-year plan, average official minimum wages must increase by 13% each year. Workers have also seen increases in benefits along with improvements in working conditions. Many Chinese factory workers put in long hours of overtime at higher pay rates. Meanwhile, new Chinese government regulations regarding labor practices, pollution and other issues are also raising employment costs.
China is not alone in this regard. Wages have been rising in other nations nearby, including Thailand, Cambodia, Sri Lanka and Indonesia. However, wages in these countries are still significantly lower than in China. For example, labor costs roughly 40% less in Vietnam and 60% less in Bangladesh. 
In a dramatic shift, many large manufacturers have been moving production inland, where labor is cheaper but still relatively plentiful compared to the highly developed coastal cities. The fact that new railroad lines, airports and highways have been built in more remote areas will support the need to transport materials to inland factories and ship completed products out to coastal harbors.
China will continue to evolve from a manufacturer of low-value goods such as apparel to a maker of more complex high-value items such as automobiles, consumer electronics, communications equipment and medical devices. Lower-end, less-skilled manufacturing will, to a growing extent, move to nations that are less mature than China, where wage rates are much less expensive. For example, substantial apparel and textile exports to the U.S. are now shipping from Vietnam and Indonesia.

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