1. business and industrial
2. manufacturing

THE END OF THE CHINA CYCLE?
How to successfully navigate the evolution
of low cost manufacturing
Our view on manufacturing footprint optimization
Detroit – December 2011
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
The China "low
"lo cost" manufacturing
man fact ring ccycle
cle is coming to an end,
end
raising questions on how to navigate the tumultuous evolution
Executive Summary
China has rapidly
p y ggrown to become the world leader in low cost manufacturingg and is poised
p
to
become the largest manufacturing in the world
Much of the rapid growth can be attributed to the abundance of low cost labor which attracted large
amounts of foreign direct investment and trade
The large investments led to China becoming the central hub to low end, labor intense, and low
value add product manufacturing
Right
g t now,
o , tthee value
a ue pproposition
opos t o for
o many
a y firmss in China
C a iss ddisappearing
sappea g as tthee co
competitive
pet t e cost
advantage is beginning to erode relative to other countries
In addition, government policy and social issues are further compounding the complexity of doing
business in China
Many firms are now questioning the future of low cost manufacturing in China, in result, looking to
define a new manufacturing footprint strategy
Source: Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
2
Contents
A
B
C
D
Page
THE PAST: Rapid rise of China as the world leader in
low cost manufacturing
4
THE PRESENT: Erosion of China's
China s cost advantage
9
THE FUTURE: How to successfully navigate the evolution of
low-cost manufacturing
18
Roland Berger
g Strategy
gy Consultants – Your experts
p
26
This document was created for our client. The client is entitled to use it for its own internal purposes. It must not be passed on to third parties except with the explicit prior consent of Roland Berger
Strategy Consultants. This document is not complete unless supported by the underlying detailed analyses and oral presentation.
© 2011 Roland Berger Strategy Consultants
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
3
A
THE PAST: Rapid rise of China as the world leader in
low-cost manufacturing
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
4
China will
ill be the second largest economy
econom bby 2025 with
ith regard to
nominal GDP
Nominal global GDP,
2025 [EUR bn]
Nominal global GDP/capita, 2025
[EUR '000]
CAGR 2000-2025 [%]
+2% 15,600
+8%
+1%
USA
China
7,600
4,100
20
Japan
56
57
+1%
2,900
Germany
+7%
2,600
India
+4%
1 500
1,500
Brazil
+4%
1,200
Russia
Source: EIU; Roland Berger
78
5
18
31
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
5
The key
ke pillars of growth
gro th have
ha e mainly
mainl been foreign direct
investment and trade while domestic demand continues to lag
China GDP development [indexed, 1990 = 100]
5 500
5,500
CAGR
5,000
4,500
2,500
2,000
WTO
(2001)
1,500
FDI Inflows
22%
Exports
18%
GDP
Gvt Consumption
HH Consumption
1,000
15%
14%
13%
> Joining WTO in 2001 has
been a key milestone that
dramatically reduced trade
barriers
> FDI has been vital to
China's development
> Recent investments into
China have been focused
on high value add
manufacturing
500
0
1990
WorldBank,
OECD
Source: Roland
Berger
1995
2000
2005
2010
COMMENTS
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
6
China has captured
capt red the lo
low-hanging
hanging frfruits
its of the global
manufacturing sector: low-end, labor-intense, and low-value add
Share in global output, 2010
China manufacturing
US manufacturing
Metallurgy Machinery and Casting
51%
8%
Computer and Office Machinery
45%
Apparel
37%
3%
Machinery for mining and equipment
32%
TV Radio equipment
30%
Wire Cables and Batteries
25%
Electrical Motors and Generators
22%
Machine-Tools
14%
Medical and Measuring Equipment
10%
5%
Low value add manufacturing
Source: Roland
IHS Global
Insight
Berger
17%
Aircrafts and Spacecrafts
14%
7%
10%
8%
16%
35%
45%
High value add manufacturing
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
7
Several
Se
eral industries
ind stries have
ha e established their footprint in China's
coastal regions - main focus on labor-intense activities
Major industry cluster development in China
BOHAI BAY ECONOMIC RIM
Industry clusters
YANGTZE RIVER DELTA
Industry clusters
Major cities
Major cities
> Shenyang
> Dalian
> Qinhuangdao
> Beijing
> Tianjin
> Yangzhou > Shanghai > Wenzhou
> Nanjing > Hangzhou > Shaoxing
> Suzhou > Ningbo
PEARL RIVER DELTA
Industry clusters
Major cities
> Dongguan
> Foshan
Source: Li & Fung Research Centre
> Zhongshan
> Jiangment
> Zhuhia
> Shenzhen
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8
B
THE PRESENT: Erosion of China's cost advantage
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
9
The Chinese government's
go ernment's continued
contin ed foc
focuss on economic
development has challenged the traditional low cost model
Recent quotes
"The days of ultra-cheap labor and little regulation are gone. As
manufacturers'
f t
' costs
t climb,
li b exportt prices
i
will
ill ffollow."
ll "
-- Bloomberg Businessweek
"Some hedge funds are betting the country's credit and growth levels
cannot be sustained.
sustained "
-- The Telegraph
"China lost its status as the world's cheapest country for manufacturing
some time ago.
ago."
-- Der Spiegel
" Flights to low-wage Asian countries are packed with executives
looking for alternatives to double-digit wage increases in China. "
-- International Herald Tribune
Source: Roland Berger, Press
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
10
Man companies are rethinking their China strateg
Many
strategy
Factors impacting China's advantage
EASE OF DOING BUSINESS
1
SOCIAL
Increasing risk for foreign
companies
> Economic redevelopment
> Incentives shift
2
>
>
>
>
COST
Workforce becoming
unstable
Shrinking workforce
Reduced migration to coast
Labor unrest and strikes
Labor laws revisions
3
>
>
>
>
China is losing cost
advantage
Rising wages
Increasing inflation
Exports
Rising production and
transportation cost
China is losing competitive advantage…
Source: Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
11
1
EASE OF DOING BUSINESS
Recent eexample:
ample The Pearl River
Ri er Delta redevelopment
rede elopment plan
includes "Relocating or Phasing out" non-core industries
Pearl River Delta economic redevelopment plan [2008 – 2020]
Promote overall competitiveness
> Phase-out low value add laborintense companies
> Encourage and foster investment on
potentially underperforming ventures
Deepen and organize urbanization
> Create one clustered megacity to
encourage integrated economy and
development.
> Improve infrastructure, including
power grid and transportation
network to world-class level
> Integrate environmental protection
Source: National Development and Reform Commission
REDEVELOPED
ECONOMY
The region's goals are
to be "A world-class
base for advanced
manufacturing and
modern service
industries," and a
"center for international
shipping, logistics,
t d conferences
trade,
f
andd
exhibitions and tourism."
Focus on promising sectors
> Advanced manufacturing
(e.g. power equipment, auto)
> Hi-Tech research and product
development
> Modern
M d service
i iindustries
d t i ((e.g.
financial services, information
services, logistics, tourism)
Enhance public services
> Education
> Health services
> Housing welfare system
> Employment and social insurance
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
12
2
SOCIAL
China is moving
mo ing towards
to ards a demographics problem – with
ith a rapidly
rapidl
aging and shrinking workforce
Population by age group [%]
Population
p
byy age
g g
group
p [[%]]
65+
1.3 bn
8%
50-64
14%
35-49
23%
1.4 bn
12%
<20
24%
22%
31%
25%
2005
2020
Source: The
Brooklyn
Roland
BergerInstitute, Roland Berger
> 1-child policy leads to
disproportional and
unbalanced age structure
1995
7.1 : 1
20%
21%
20 34
20-34
Retirement rate
2010
2025
2040
5.4 : 1
> One in everyy four ppeople
p
will be older than 60 by
2030
> Support for retirees will
increase
3.0 : 1
2.0 : 1
REDUCTION OF
WORKFORCE FROM
1 BN TO 900 M
IN 2030
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
13
2
SOCIAL
New labor la
Ne
lawss are trtrying
ing to address the social iss
issues
es in China however are creating additional complexity for business
This nationwide legislation significantly changed labor relations
CONTRACTS
DISMISSAL
> Written contracts rules are standardized and enforced
> Premium pay is mandatory for overtime and weekend
work
> Employees on probation are granted minimum wages
and duration limit
> Dismissal without cause are prohibited
> Senior employee benefit from a specific protection
> Unions
U i
formations
f
ti
are allowed
ll
d
EMPLOYEE
REPRESENT- > Companies are obligated to address employees
representative requests
ATION
SOCIAL
SECURITY
> Employers are required contribute to social security
account for every employees (including foreigners)
Source: Roland Berger, Invest in China, International labor rights forum
> In the year after China's
Labor Contract Law took
effect in early 2008 the
number of disputes
doubled
> Companies that had not
been in compliance with
earlier labor standards
faced a 33% average
increase in wages after
the law's implementation
> The legislation has raised
workers awareness of
their legal rights
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
14
3
COST
The culmination
c lmination of social issues
iss es is prompting do
double
ble digit wage
age
rate growth throughout China
Labor rate1) inflation development 2002-2009
2) 2002-2009 [[USD/hour]]
Hourlyy labor rates1) comparison
p
CAGR
20%
Henan
12%
Guangdong
14%
Shanghai
17%
China
8%
Philippines
1%
Mexico
10%
Poland
0.4
1.6
0.8
1.8
1.2
3.1
0.6
1.8
0.7
1.2
3.6
3.8
3.2
3.9
Henan
Shanghai
6.1
14%
Czech Republic
3%
USA
21.4
7%
Germany
21.0
9.5
2002
2009
1) Blue collar worker; 2) Including benefits, etc.
Source: Roland
NationalBerger
Bureau of Statistics of China, US Bureau of Labor Statistics
Guangdong
26.2
34.8
12-15% p.a.
15-18% p.a.
>18% p.a.
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
15
3
COST
China's competiti
competitiveness
eness on lo
low cost man
manufacturing
fact ring is starting to
erode as production price increase faster than other countries
Production Prices index1) in Manufacturing for selected countries [indexed; 2000=100%]
280
> China's
China s production prices growth is
accelerating: the 2010-2015 period is
expected to experience a 75% growth,
comparable with the 2000-2010 period
240
200
> Unlike every other countries,
countries China
prices did not decrease during the
2008 crisis
160
> Prices in neighboring Vietnam
g
y over the pperiod
decreased significantly
2000-2010 and are expected to slightly
increase by 2015
120
80
2000
2005
2010
Mexico
Germany
Vietnam
United States
China
Malaysia
2015
Philippines
1) Production price index measures the change in the prices of goods and services either
as they leave their place of production or as they enter the production process.
Source: IHS Global Insight, OECD
> Prices in Germany increased by 70%
over the period 2000-2008 following the
Euro currency increase over the US
Dollar
COMMENTS
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16
As a result,
res lt China has passed the tipping point for specific
industries – The Cycle is moving on…
> We anticipate the decline in
market share of China in specific
industries
> The rate of this loss will depend on
i t
internal
l andd external
t
l ffactors
t
– Internal: the effectiveness at
which China will develop in new
industries and the pressure to
f th ease social
further
i l tensions
t i
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
TIPPING POINT
Textiles
Source: Roland Berger
Computer and Office Machinery
– External: the success of
competing countries in
fostering a change of sourcing
b
base
(e.g.
(
iincentives,
ti
workforce)
kf
)
COMMENTS
Semiconductors, Circuit boards, LCD
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
17
C
THE FUTURE: How to successfully navigate the
evolution of low-cost manufacturing
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
18
What's next?
ne t? Companies need to rethink their man
manufacturing
fact ring
footprint strategy to avoid the downside effects of the cycle
China's manufacturing environment is in flux with a major shift from low-end high-labor
content to high-value add manufacturing
Many players are already significantly shifting their production inland or abroad while
industries in line with economic plans can further expand
Companies need to carefully evaluate their risk and adjust their manufacturing footprint
accordingly
It's an opportunity right now to rethink manufacturing – but this window is closing
quickly… ACT NOW!
Source: Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
19
China man
manufacturing
fact ring is in a transition mode with
ith upgrade
pgrade to high
value add manufacturing
Major announcements of representative companies and industries
1
February 2nd, 2010
Xi'an
Xi
an high
high-tech
tech zone,
zone Micron Technology,
Technology Inc
Inc. and the United
States sign new project investment and cooperation agreement
totaling USD 300 m
2
October 12th, 2010
Vestas, leader in wind energy,
gy invests USD 50 m in Technology
gy
R&D center in Beijing
3
January 27th, 2011
Pegatron Corporation, Acer supplier, announces investment of
USD 49 m to set up a new laptop plant in Chongqing
4
April 26th, 2011
BYD Co. announces it will invest USD 1.5 bn over the next three
years to increase annual capacity in Shenzhen and supply
batteries for 500,000 vehicles
5
June 22nd, 2011
Bayer announces the third phase of expansion of its Polymer
Research & Development Center in Shanghai part of a
USD 1.4 bn investment plan announced in Dec 2010
2
1
5
3
4
Source: Roland Berger,
Berger Press
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
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Who is affected? Companies need to carefully
caref ll eevaluate
al ate their
specific situation to determine the path forward
Framework to reconsider manufacturing strategy
KEY FACTORS
Market focus: Is the product for local demand or export?
Facilities location and focus: Is it in a redevelopment
zone or technology cluster? Does it have integrated R&D
capabilities?
Scale efficiency: What is the minimum size of a plant? Is
this an opportunity for consolidation?
Product type: How much value is added during
production? Is it high or "green" tech?
Cost structure: What is the relative weight of
transportation and wages on overall product cost?
Source: Roland Berger
STRATEGIC CONSIDERATION
Move further inland
> Is there an industry park where I can gain access to
specific resources and incentives?
> Can I foster my access to the local market?
> Will transportation cost increase be offset by other
savings?
>…
Move out of China/offshoring
> Do I need to manufacture in China (e.g. access to
market)?
> Are there trial activities that I can offshore?
> Are the incentives in potential new countries sustainable?
>…
Expand in coastal areas
> Can I develop higher value added activities in the region ?
> Will I bbe able
bl tto offset
ff t costs
t ffrom rising
i i wages??
> Are there any incentives to help grow my business?
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
21
Companies foc
focused
sed on lo
low value
al e add man
manufacturing
fact ring and eexports
ports
will be first organizations impacted by the changes in China
Assessment of companies in the Pearl River Delta
EXPORT
LOW
VALUE
ADD
HIGH
VALUE
ADD
LOCAL MARKET
Source: Press, Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
22
Many industries
Man
ind stries are already
alread leaving
lea ing China transforming "Made in
China" to "Made in Vietnam"
> A broad range
g of pproducts
are being relocated in
Vietnam
> Intel opened an assembly
and testing facility in 2010
naming workforce and
government support
among major reasons
> In 2009, Li & Fung, the
supply chain expert,
highlighted customer
pressure to trade down
and shift production to
Vietnam
COMMENTS
Source: Roland Berger
Berger, Li & Fung
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
23
Not all industries
ind stries are affected to the same extent,
e tent local demand
can drive expansion of production
Example automotive industry: OEMs establishments in China over 2010-2012 period
(2012, 200)
(2010, 150)
(2010, 200 LCV)
NORTHEAST
(2013, 30)
Changchun
Shenyang
y g
Beijing
(2012 200)
(2012,
NORTH Hebei
(2012, 150)
(2013, 200
i i
)
mini-vans)
(2012, 300)
(2011, 100)
Wuhan
Zhuzhou
Changsha
Chengdu
Guangzhou
Huadu
Shenzhen
Sh h
(2011, 240)
SOUTH
(2012, 200)
Dalian
CENTRAL
SOUTHWEST
(2011, 100)
(2011, 200
mini-vans)
Shanghai
EAST
(2012 150)
(2012,
(2011, 250)
(?,300)
(2012, 200)
Legend [SOP, Capacity in ‘000]
Source: Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
24
It's an opport
opportunity
nit right no
now – however,
ho e er the window
indo is closing
quickly ACT NOW!
The Chinese business environment is fundamentally changing –
once again!
Many players are already reacting, building their competitive
advantage
Now is the perfect time to review the Chinese footprint and
lead in the next manufacturing landscape
Getting an early start will maximize the likelihood of success
Source: Roland Berger
11-12-01-DTW-RBI-MNO Evolution-SHORT-F1.pptx
25
D
Roland Berger Strategy Consultants – Your experts
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Strategy Consultants
Cons ltants is a leading global cons
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lting
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EXCELLENCE
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measure to face "The
China Challenge"
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PRODUCTION
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th i
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SURVEY
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eral
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SELECT CLIENTS
TOPICS
> Optimize manufacturing footprints of multiple sites
> Evaluate product categories to determine make or
buy strategy
> Develop optimized manufacturing footprint
> Design new logistics strategy and redefine the
functions of existing logistics branches
> Evaluate production relocation opportunities
> Design a client-driven distribution network
> Design low cost country manufacturing strategy
> Conduct supplier selection and negotiation based
on footprint location recommendation
> Conduct detailed site location analysis
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Phone +1 248 729-5000
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Source: Roland Berger
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