01 | 2015 msg systems study

Insights on China’s Economic Situation and its Repercussion on Global Sourcing
As the Chinese economy evolves, its economic growth is somewhat stagnating
with recent growth rates beneath the past decade. The repercussion of growth
decline on labor markets has so far been relatively small due to the changes of
economic activity into labor-intensive service sectors; as drivers of economic
growth keep shifting from manufacturing to services on the supply side and
from investment to consumption on the demand side, and as actions to curb
the rapid aggregation of credit were implemented (The World Bank, 2014).
China is no longer simply a low cost country but a sourcing region with firstclass
infrastructure, a highly skilled workforce and high-end technology in
regards to a lot of industry sectors. Wage levels in China have risen increasingly
during the past decades as the economy expands and the private
sector creates new business and employment opportunities. Figure 3 shows
the development of China’s average yearly wages over the past decade.
The cost of manufacturing in China is constantly increasing and this is directing
companies to search for alternative sources of supply, particularly if
they are producing low-priced goods such as garments. Popular destinations
for those companies are countries in Southeast Asia; usually specializing in
one single product. Globalization has given the opportunity for companies to
explore cost arbitrage around the world; the low cost countries phenomenon
induces foreign direct investment flows away from developed to developing
countries offering more attractive cost advantage. Although average labor
cost is surely lower in these low cost countries, it is very important to take
into account many other factors when selecting another sourcing destination.
UK
Singapore
Brazil
Canada
Hong Kong
BVI (British Virgin Island)
Russia
China
United States of America
0 20 40 60 80 100 120 140 160 180
2 | Largest Recipients of GLOBAL FDI Inflows in 2013 (Source: Morrison, 2014)
12