Being Realistic about Savings
The first myth about doing business in China is that manufacturers will save tons of money on labor costs. The average wage of Chinese factory workers is a fraction of the wage of their Western counterparts, but remember the following:
| ✓ | Wages depend on the industry, of course, but even in the West, labor is a small portion of per-unit costs of many products. |
| ✓ | You often find a skills gap between the Chinese and Western workers, so companies may have to throw more workers at a given task in China than they do in the West. |
| ✓ | Manufacturing in China also has a lot of hidden costs, such as electricity shortages and high labor turnover. |
Most manufacturers overestimate how much money they’ll make initially. You can reasonably expect that during the first two to three years, your company’s per unit costs will be the same as in the West.
So why bother? Understand that you can manufacture a lot cheaper in China than in the West but for different reasons:
| ✓ | Utilities, rent, land, and other operating costs are usually a good deal less than in the West. |
| ✓ | Because you don’t have “legacy” manufacturing models in China, you can use newer and more efficient manufacturing methods there. |
| ✓ | Construction costs in China are also much lower than in the West. |
| ✓ | The high concentration of suppliers in certain parts of China helps keep costs down, too (see Chapter 12 for info on suppliers). |
Some companies get so fixated on reducing costs that they do the following (it’s illegal, and you shouldn’t do it): They import fully-depreciated machinery, spruce it up a bit, and declare it at inflated values. They then use the inflated-value machinery as registered capital contributions (see Chapter 7), which reduces how much they need to contribute and makes getting loans easier. Perhaps most importantly, they get the tax benefit of re-depreciating the equipment. Watch out if somebody tries to talk you into doing something illegal.
