How Manufacturing in China Saves Money

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In order to remain competitive in today's global economy, companies are always looking for ways to save money. One of the most popular and effective ways to do this is by manufacturing products in China. You must wonder, "How does manufacturing in China save money?". But hold on, let's first look at some important things to know about China's economy and its impact on the world.

"China is now the world's second-largest economy with a GDP of $17.07 trillion in 2021. It is also the world's largest exporter ($3.364 trillion) and importer ($2.687 trillion) of goods. The country has been growing at a rapid pace over the past few decades and is expected to continue doing so in the future."

By the end of this blog post, you'll understand why manufacturing in China is so cheap and how it can benefit your business. For your convenience, we will also discuss in which cases it might not be the best idea to go for the cheapest option.

So, without further ado, let's get started!

How Manufacturing in China Saves Money – Reality or Myth?

It is no secret that manufacturing costs are lower in China than in developed countries such as the United States, Germany, or Japan. But most of them, like the US, have now started offering lower manufacturing rates to attract foreign clients.

In fact, according to a study by the Boston Consulting Group, the manufacturing cost in China is only 5% lower than in the US.

The answer is - Yes!

You must be thinking the 5% difference is not that big. But when we compare it with the overall cost, the difference is significant.

For example - The production cost of a widget in the US is $2.5 while the same widget costs only $2 in China.

Now, if a company manufactures 10,000 widgets in the US, the cost would be $25,000. But if the same company manufactures the same number of widgets in China, the cost would be only $20,000 - That's a saving of $5,000!

Depending on the product you want to manufacture, you will also find diversity in cost. For some products, the difference in cost may be as high as 20%, while for others, it may be only 5%.

You might see two similar products and wonder why one is cheaper than the other. The answer lies in the difference in production quality. Only China can produce such products according to the client's budget - that's the real secret!

Let's look at some reasons to understand why manufacturing in China is so cheap.

6 Top Reasons Why Is It Cheaper To Manufacture in China

Firstly, let us clarify something - cheaper does not mean inferior quality. When we use the term 'cheap,' we simply mean getting your product at an affordable price without compromising quality.

Now that we have that out of the way, let's look at some reasons for China's low cost of manufacturing.

1. Cheaper Labor:

Yes, it's true - labor is cheaper in China. But that doesn't mean the workers are paid poorly or treated badly. In fact, the minimum wage in China is higher than in many developing countries.

However, in recent years Chinese labor costs have been on the rise. The emergence of a vast middle class and a shrinking labor pool has pushed wages in many parts of China.

Okay - but how does labor cost vary between different professions?

Let us tell you in detail.

Products like clothes (which require much of the stitching to be done by hand) can be considered a high labor content product with up to 70% of the total cost. At the same time, products like plastic toys (made using industrial techniques like injection molding) are considered less labor-intensive, with labor costs in the range of 20-30% of the total cost.

Depending on where your product falls on this spectrum, you can save anywhere from 20% to 50% of the labor cost by manufacturing in China.

But that's not the only reason - let's jump to the next one!

2. Established Supply Chains:

The manufacturing sector in China is highly developed and organized. This gives rise to well-established supply chains, which are necessary to bring down the cost of production.

For example, many small businesses specialize in manufacturing plastic toys. These businesses have well-developed supply chains for raw materials, molding, painting, etc.

This division of labor ensures that each business can focus on what it does best and produce a high-quality product at a lower cost.

3. Economies of Scale:

Being a business owner or manager, you must be well aware of the term economies of scale. It simply means that the larger the production, the lower the cost per unit.

This is because, with large productions, fixed costs like rent and salaries are spread out over larger units.

For example - If a company manufactures 10,000 widgets, the cost per widget would be lower than if the company manufactured only 1,000 widgets.

This has helped China lead the world not just in labor-intensive products but also capital-intensive ones – everything from Frisbees to iPhones.

4. Tax Exemption:

The Chinese government offers a host of tax exemptions and subsidies to businesses that set up manufacturing operations in China to export products - A dream come true for any business owner!

These subsidies can be in the form of reduced corporate income tax, value-added tax (VAT), or land-use taxes. However, goods made for export are exempt from taxation, and the Chinese government refunds the VAT for products exported from the country. Needless to say, all these tax savings go directly into your pocket!

5. Reduces Your In-house Production Cost:

You know well how in-house production eventually leads to an increase in labor costs. By manufacturing your products in China, you can avoid this overhead cost.

Moreover, the need for extra space and machinery also gets eliminated. As a result, the cost of maintaining an in-house production unit is also saved - isn't it a feasible option?

It also helps you keep your team lean and focused only on the tasks you do best while relying on seasoned professionals for manufacturing.

Now, you must have an important question in your mind -

How much cheaper is it to manufacture in China?

But don't worry, we will also answer this question in our article - stay tuned!

6. Access to Emerging International Markets:

Producing your goods in China can be of great value if you intend to sell these products in the fast-growing emerging Asian markets. Geographic proximity and well-established logistics and shipping systems deliver significant savings on selling your goods in these countries.

Not only this, but China is also aggressively pursuing free trade agreements with countries worldwide. This gives businesses even more opportunities to sell their products in new markets without worrying about tariffs and other trade barriers.

Now that you know the reasons for cheap manufacturing in China, it's time to answer your prime question - Cost vs. Quality!

Will Cheaper Price Affects the Product Quality – Let’s Figure Out

This is the most frequently asked question when it comes to offshore manufacturing in China.

And, the truth is - it depends!

You see, in China, you can find a single product with different quality levels. It all depends on your budget and requirements.

For example:

Company X needs 1000 phone cases at $5 each, and Company Y needs the same number of phone cases but at the price of $10 each.

Now, the beauty is that both companies will get what they need!

The quality of the products depends ultimately on the client's budget.

So, we can say you will get the highest quality product possible in your budget range.