China Moves Up the Value Chain

Includes: FXI, JCP
by: The Operations Room

by Martin Lariviere

Much has been written lately about rising labor costs in China. Some firms have reacted by moving to less developed part of the country, hoping to find cheaper workers inland. Others have explored moving at least some operations to other Asian nations. Now the New York Times reports on a third alternative, add more value (China Shifts Away From Low-Cost Factories, Sept 15).

The TAL Group, which operates an immense garment-making plant in this coastal boom town, is moving beyond piecework by helping J. C. Penney electronically manage its inventory of dress shirts, from factory floor to retail shelves as far away as Connecticut. …

And after years of assembling vacuum cleaners and rechargeable toothbrushes for Philips and other Western companies, Kwonnie Electrical Products is planning its own line of home appliances.

“We want to do more original design and build our own brand,” Benjamin Kwok, a company founder, said during a recent tour of a sprawling factory complex that has 3,000 workers, a huge warehouse and labs for testing juice makers, vacuum cleaners and other appliances.

This certainly makes sense. For TAL Group customers, supply chain services can provide a lot of value and they would have to think twice before switching to a firm in a lower cost location just to save a little on each shirt. For Kwonnie, doing more design work and building one’s own brand allows them to capture more value for what they spend on labor. That again allows them to survive in a location with relatively high wages. As the article notes, this is generally good for the Chinese economy by supporting higher wages and helping to spread the benefits of the country’s economic growth.

The ironic thing is that these moves echo what American companies have been doing over the last few decades to keep work in the States. Hanging on to design and providing value added services have been the basic playbook for surviving against cheaper foreign competition.