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McKinsey Says China Manufacturing Must Adapt to New Realities

A new report from consulting firm McKinsey & Company indicates that China may have hit an inflection. With manufacturing growth slowing and the landscape evolving, the country has to adapt if it wants to stay strong in the increasingly competitive international landscape. The days of China, first last and only, are over.

“China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demand,” writes Karel Eloot, Alan Huang, and Martin Lehnich, authors of the McKinsey report. “Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China as it gets richer.”

The report, titled, “A new era for manufacturing in China,” outlines four main stumbling blocks for manufacturing, many of which have already impacted the apparel sector: rising costs of labor and raw materials; increased consumer sophistication; greater complexity in the value-china, and recently heightened global volatility.

“For years, China’s low salaries, strong supply base, high investment in port, road, and rail infrastructure, and solid engineering and technical skills provided a strong platform for manufacturing exports,” according to the report. “Meanwhile, a vast domestic market helped fuel China’s continuing transition to a consumption-based economy. Today’s outlook is more mixed.”

China’s status as an increasingly wealthy upper-middle income country demands change and innovation. A recent tumble on the Chinese stock exchange, following an overnight credit crunch, highlighted the hard limits of China’s growth strategy, which relies on heavily amounts of capital investment, massive state-owned enterprises, and insatiable demand from the developed world.

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To keep their manufacturing competitive, China’s sector needs to improve in several ways. First, the individual firms need to improve their quality. China’s manufacturing “brand” is continuously beset with scandals involving toxic toys and medicine, and cheap and faulty goods. Yet many high quality goods come out of China, indicating that the nation does have the capacity to produce excellence.

The rapid push for development by the Chinese government, which prizes social stability and delivers it through economic expansion, has exacerbated cultural difficulties in the workplace and an inefficient value chain. This has hindered efforts to improve quality and consistency.

Additionally, China’s manufacturing needs to heighten investment in research and development. This will help them become more innovative and bring more of their own products to market.

“For industries reliant on innovation, the triple whammy of rising costs, complexity, and competitive pressure means that the old ways of developing products in China now risk becoming liabilities,” according to the report. “Staying competitive will require domestic companies and multinationals alike to change, starting with the mind-sets and attitudes that have pervaded product development actives in China,” it continued.

The third need for China is to simplify its supply chain, the report said. Factories must become more flexible in meeting demands, allowing them to anticipate changing consumer tastes and needs.

“While the effects of a value-chain complexity vary by manufacturing sub sector, most Chinese consumers are changing faster than supply chains are adapting. Indeed, supply chains in the country- both multinational and domestic – are generally set up for a low-labor-cost environment that is quickly disappearing.”