China: An Emerging Asian Power in Manufacturing Production Outsourcing

1 China: An Emerging Asian Power in Manufacturing Production Outsourcing Dr. Tiffany Jordan December 11, 2010

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3 Abstract Among companies in developed nations all over the world, the trend of outsourcing has been growing. Companies are looking for ways to gain a competitive advantage over their competition. Many companies seeking to capitalize on lowering cost of production and less organized labor unions, have outsourced jobs to overseas markets. China has become a national player in the field of manufacturing and more recently, software and Internet technology outsourcing as a popular location. China has been popular for some time now for outsourced manufacturing jobs. China s government has exerted its control and influence over conditions and has overcome obstacles to pave the way for success in outsourcing. This paper investigates the outsourcing trend to China and policies to attract foreign direct investment. Keywords: Outsourcing, Global Outsourcing, Trends in Outsourcing, China Outsourcing, Foreign Direct Investment or FDI

4 Table of Contents Introduction.. 3 Economical History......5 Foreign Domestic Investment& Outsourcing...7 Outsourcing in the Asian Market.. 9 China s Challenge.9 China s Strategic Plan...10 Summary... 11 References....12

5 Introduction China, a country located in Eastern Asia, is considered the fourth largest country in the world with a population of 1.3 billion. Due to the layout of the country, 94% of the population lives on the eastern portion of the country consequently, this section is the most economically developed. The People s Republic of China is a communist country who has always imposed a stronghold on the economy. All activities within the country were controlled by the State however in 1979 the country decided to reform its policies and allow economic competition and as a result China has seen tremendous growth. Politically China continues to maintain strict control on its population however, in the global market it is a competitor and has welcome foreign investors and has participated in outsourcing (National Geographic, 2010, p. 22). In this paper we will discuss China s economic history, its role in the global economy through Foreign Domestic Investment (FDI), outsourcing, as an emerging power and its plan for the future. Economical History China is considered to be a developing country, despite the various accomplishments that the nation has achieved. The number of illiterate people in the country is at staggering 20%. The country is also known for corruption and has been a source of difficulty for the Chinese government to control. The average hourly rate for workers who work in factories is only 44 cents (Velasquez, 2010, p.158) an hour. Prior to the nineteenth century, the Communist country boosted its advancement as a civilization. The advancements in industry and technology at that time were made strictly for the military. This situation changed after the Cultural Revolution of the sixties and as the Chinese people revolted, thereby causing a change in the government s attitude (Velasquez, 2010, p.158).

6 For the past three decades, China has experienced a tremendous growth economically. The reason for this growth is due in part from the manufacturing of clothes, toys and electronics to soar as a developing nation. Many migrant workers from the rural areas have chosen to work in factories, manufacturing products at a lower cost, attracting business from around the world to invest in the country (Huiyao, 2010, p.3). China has a long history of civilization, culture and history. When Deng Xiaoping came into power in 1976, he introduced economic reforms that would change the country. Xiaoping was able to identify that China s infrastructure was weak in the areas of management, technology and science (Velasquez, 2010, p.159). It was under this premise that Xiaoping allowed other countries to invest in China. Xiaoping instituted laws that required those that invested in the country to partner with local companies. In addition to the partnerships, they required that local managers and employees from China hold equal positions of managers and employees from the foreign investment partner country, thereby allowing them to learn from the foreign investor. This was truly a brilliant plan on the part of Xiaoping as this plan helped shape China s economy (Velasquez, 2010, p.159). Therefore, in China there are areas of the country where the major cities are thriving due to all of the foreign investments and other areas that are impoverished mainly with farmlands. Despite the plan that was instituted by Xiaoping, there still remained state owned companies. Due to the fact that many of these companies were located in rural areas, many were managed poorly and were unproductive. As a result, many closed down causing many Chinese workers to become unemployed thereby creating inequity in the country (Velasquez, 2010, p.159). In addition, financial institutions in China favor providing loans to State owned business rather than to privately own Chinese business, even though the private businesses showed more

7 stability. Hence, many privately owned companies would sell their businesses to foreign countries who capitalized on the opportunity (Huang, 2001, p. 182). The CIA Factbook estimates the population of China at 1.3 billion people in 2010, with a work force of an estimate 813 million people, in comparison the work force in the United States is only 154 million people (CIA, 2010). This is projected to be 1.6 billion in 2013. The industry and service sector make up nearly sixty percent of that work force, with 40% in the agricultural field. With such a high number of people in the work force, China faces the problem of maintaining enough job growth to offer both young professionals entering the labor force and farm workers that have migrated to the cities to look for more profitable work - some kind of gainful employment. 43% of the population lives in an urban setting with an annual increase in urban drift or urban migration of about 2.7 percent. In an effort to make more jobs available in higher demand industries the Chinese government has built educational centers and universities, where higher level technical disciplines can be learned (Plunket, 2009). Foreign Direct Investment & Outsourcing China has grown its economy through the manufacturing industry by providing lower labor cost which is attractive to foreign investors. In 2008, foreign direct investment (FDI) increased by 37% as compared to 2000. In 2008, the FDI was at $108 billion as compared to $40 billion in 2000. This growth in the economy has placed China in the position of the second largest in the world (Clouse, 2010, p. 22). Unfortunately, the low labor cost comes with a price for the employees as many of them were working long hours, in poor environmental and health conditions, and being paid low wages (Locke, Kochan, Romis, Qin, 2007, p.21). However, due to the popularity of the manufacturing industry, workers have been able to demand and receive better pay and working conditions, something that was unheard of in Communist China. In many

8 cases, the government gave in to the demand in order to avoid the consequence of losing foreign investors (Clouse, 2010, p. 23). In addition to the opportunities that foreign investors have made, China itself has been able to invest in other countries within Asia. Its FDI investment totaled $43.3 billion in 2009. There is a movement within China among foreign companies already established, to expand its operations within the areas where wages remain low. In addition, the Chinese government has provided funding to build infrastructure within the country that would improve roads, railways, and airports. This would improve access within the region and allow for multinationals and Chinese companies to invest in lower cost manufacturing industry within China in its central and west coast (Clouse, 2010, p. 23). Due to the increasing rise in wages, China s multinationals are finding this a great opportunity to sell to the region. The three industries that have benefited are retail, automotive, and technology specifically, mobile and internet usage (Clouse, 2010, p. 24). As the Chinese people are exposed to the new technologies and fashion, consumption has increased making this an attractive proposition for foreign investors. China is known worldwide for its manufacturing capabilities rather than for innovation and creativity. The Chinese government has recognized this deficiency and has put a plan in place to correct (Huiyao, 2010, p. 2). One way the government is hoping to encourage research and development (R&D) within the country, is by providing inexpensive land and tax incentives for potential business investors. Microsoft is one company that is taking advantage of this opportunity and is building R&D centers in two of China s cities (Clause, 2010, p. 24). China has now become an excellent location for high tech manufacturing, Information Technologies, Communications and Finance (Ross, 2007). China has taken steps to ease

9 investors fears by increasing penalties for intellectual property rights violations, to include making it illegal to provide pirated goods over the internet (Chan, 2005) Outsourcing in the Asian Market One of the countries that have outsourced manufacturing and technology jobs to China is Japan and the United States (U.S.). Due to the proximities of the two countries they share many of the same cultures, language and philosophies; in addition, travel between both countries is quite convenient (Simeon, 2010, p. 25). In the area of technology China surpasses the United States as the top exporter of specific technological devices such as laptop computers. Japan accounts for 59% of the computer software products that is outsourced to China (Cooney, 2006, p.36). China has long had the reputation for being the country that produces inexpensive clothes, toys and electronics. However, many of the outsourcing for these products that were previously mentioned is being sent to other countries for example Vietnam and India where the labor cost is less. This is a threat to the economy of China that the government has identified (Huiyao, 2010, p. 3). China s Challenge China has some challenges to attracting outsourcing that are not uniquely theirs but are more prevalent when examining outsourcing of services than outsourcing manufacturing type jobs. In comparison, India has an advantage over China in the outsourcing of telecommunications and other services provided. India was a British colony for years, and many of the inhabitants still speak English albeit with an accent on most accounts. China on the other hand has Chinese, or more accurately Mandarin is the official language of the land, though there are about four other dialects of the language spoken in the nation (Eltschinger, 2007). Language barriers have been an issue for both countries in courting businesses. Furthermore, China is one

10 of the few remaining socialist republics left in the world. The law and policies governing the nation differ greatly from other nations. Some information is guarded and other information can be censored and inaccessible to the common public. Companies such as Google have run into this issue, having to censor content for residents of China, particularly, content related to Tiananmen Square. Their focus is on policies that help to generate a market economy, with increased penalties for violations of intellectual property laws. The outsourcing industry has the support of the government and government funded agencies that have helped in courting overseas investments (Eltschinger, 2007). China s Strategic Plan for the Future The Chinese government is facing a challenge, although the country has grown economically in the past 30 years; it is concern about its future sustainability. As a result of these concerns, the Chinese Government has put together a National Talent Plan. This plan was designed to put into action steps that will allow for the development of China from a position of manufacturing products to one of research, development and innovation (Huiyac, 2010, p.3). In order for the shift to occur investment must be placed in cultivating talent within the country. China has been one of the most popular countries in regards to FDI. In addition, its foreign reserve is amongst the highest in the world. Despite the various successes it has not been successful in retaining its talent. Over 1.6 million students since 1978 have been sent abroad to study in various respected institutes of higher learning and yet in 2010 only 497,000 have returned to China. The infrastructure for China needs to be built, specifically in research & development, public health, education, and other important systems (Huiyac, 2010, p.4). There are several areas and segments of the population that must be developed in order for China to meet its future needs. The government is committed to cultivating talent within businesses,

11 amongst various professionals, political leaders, and with agriculture. The Government is in need of these various professionals. The National Talent Plan is a development plan that will be worked on from 2010-2020. In this plan there is a hope that within 10 years the government would have been successful in obtaining the internal talent it needed and for nationals to work within the rural areas of the country (Huiyac, 2010, p.4). Research and Development is another key area where talent is needed. In the technology world this is a definite requirement especially as China hopes to reach into areas such as information technology, and biotechnology (Huiyac, 2010, p.7).in addition, China is lacking in Chief Executive Officers that can be placed in top positions as it continues its moves into the global market. The areas with greatest needs for this leadership are in the State owned companies (Huiyac, 2010, p.9). In an effort to solve the problem currently China has tried to recruit talent nationally to run these companies. Their desires are for the State owned companies to function as Fortune 500 organizations. In an effort to recruit these high level executives Chinese citizenship is no longer required (Huiyac, 2010, p.9). Also China has organized its tax laws to be more in line with international standards (Ng, 2010, p. 55). A final part of the national plan is to encourage foreign students to study in China. By promoting this strategy, they hope that students would be able to stay in China and obtain work permits. Currently, there is no immigration department in China, however, there are policies in place that allows for immigrants to obtain permits that allow them to work (Huiyac, 2010, p.10). Summary To conclude, China is an emerging Asian power that has opened its markets and country to the world. Many organizations have taken advantage of this opportunity, particularly in the areas of manufacturing arena. With the growth of the Chinese economy and foreign investment,

12 the population within China has become disproportionate. Recently, there has been much unrest as workers are demanding better working conditions. With the opportunity of obtaining personal technology such as cell phones and the internet, the population as a whole is more aware of their rights (Richburg, 2010, p. 1). The Chinese government understands that in order to be selfsustaining in the future, it will need to make special effort to move the country from manufacturing products to creating them, and the first step has been taken by the development of the National Talent Plan. China is playing an important role in globalization and will have tremendous impact on the world s economy. Growing urbanization and quickly rising inflation may require the Chinese government to make changes in policy that could impact its current standing, as a popular place for manufacturing and Internet technologies outsourcing. For now the strong Chinese government has done a lot to foster and create an environment both conducive and encouraging to foreign investors to outsource to. By establishing higher education centers and fostering national growth in the Internet Technologies, China has set the stage to overtake India as the best place to outsource software design and Internet technologies.

13 References Chan, S. (2005) IT Outsourcing in China: How China s Five Emerging Drivers Are Changing the Technology Landscape and IT Industry. Retrieved from http://www.outsourcing.com/china_trends/pdf/it_outsourcing_china.pdf Clause, T. (2010, September 24). Trading Up. Global Finance, pp. 22-24. Cooney, M. (2006, May 29). Can you trust China for outsourcing. Network World, p. 36. Eltschinger, C. (2007) Source Code China: The New Global Hub of IT (Information Technology) Outsourcing, 1st edition. Hoboken, New Jersey. John Wiley & Sons, Inc Huang, Y. (2001). The Role of Foreign-invested Enterprises in the Chinese Economy: An Institutional Foundation. In Y. Huang, China, The United States and the Global Economy (pp. 147-187). Santa Monica, California: Rand. Huiyao, W. (2010, November 23). China's National Talent Plan: Key Measures and Objectives. Retrieved from Brookings Education: http://www.brookings.edu/tropics/demographics.aspx Locke, R., Kochan, T., & Romis, M. (2007). Beyond corporate codes of conduct; Work organization and labour standards at Nike Suppliers. International Labour Review, 21-31. National Geographics. (2010). National Geographic. Retrieved from China Facts, China Flag National Geographic: http://travel.nationalgeographic.com/travel/countries/china-facts/ Ng, C. Y. (2010). The New Transfer Pricing Rules and Regulations in China-Impact on Foreign Investors. International Tax Journal, 49-56. Plunkett, J. (2009) Plunkett s Outsourcing and Offshoring Industry Almanac. Houston, TX. Plunkett Research Ltd. Richburg, K. (2010, June 17). Washington Post. Retrieved from Washington Post: http:www.washingtonpost.com/wpdyn/content/article/2010/06/06/ar2010060603295.html Simeon, R. (2010). Evaluating the Strategic Implications of Japanese IT Offshore Outsourcing in China and India. International Journal of Management and Information Systems, 25-36. Velasquez, M. (2009). Development,Justice and Technology Transfer in China: The Case of HP and Legend. Journal of Business Ethics, 157-166.

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