When outsourcing, you generally want to keep costs to a minimum. This isn’t rocket science, as we all want bigger profit margins. However, there are some risks when you outsource to a low-cost country, like:
- Quality control remains one of the biggest challenges. Without robust quality management systems in place, you can face significant product defects and inconsistency between batches. I’ve seen cases where initial samples were perfect, but mass production quality dropped dramatically.
- Lead times are typically 30–45 days for ocean freight, plus production time. Add another 14–21 days for customs clearance and inland transportation. During peak seasons (like Chinese New Year), lead times can extend to 90+ days. This requires careful inventory planning and higher safety stock levels.
- Intellectual property protection is a serious concern. While China has strengthened its IP laws, enforcement remains inconsistent. Companies need to carefully structure their contracts and limit exposure of critical IP.
- Communication barriers create real operational challenges. Time zone differences (12-hour gap with the US East Coast) mean delayed responses to urgent issues. Language misunderstandings can lead to costly production errors.
- Supply chain visibility is often limited. Tracking order status, production progress, and shipment locations requires sophisticated systems and local personnel. Many suppliers still rely on manual processes and provide inconsistent updates.
- Regulatory compliance keeps getting more complex. Recent changes in labour laws, environmental regulations, and export requirements have caught many companies off guard. You need dedicated resources to stay compliant.
- Cost volatility is increasing. Labour costs in traditional manufacturing hubs like Guangdong have risen 10–15% annually. Raw material prices and freight rates can swing dramatically, affecting landed costs.
- Geopolitical tensions create business continuity risks. Recent trade disputes have shown how quickly tariffs can impact profitability. Many companies are now developing parallel supply sources in countries like Vietnam or India.
Why China Became Australia’s Factory
Several factors lie behind Australia’s industrial deference to overseas manufacturers. Let us look at some of the main ones:
1. Economic Benefits
With significant reductions in labour and capital investment expenditure, production costs can be slashed by some 20 to 40 per cent, and for labour-intensive products, up to 50 per cent and beyond. The main reason for these savings is the availability of cheaper labour — manufacturing labour costs in China average $5.50 (USD) per hour against the Australian average of $15 (USD) per hour.
An added factor is that Chinese companies produce in bulk for global consumer markets and therefore import raw materials — e.g. plastics and resins — in quantities so vast that they attract significant discounts from suppliers.
Even when other costs such as coordination, transport, and logistics are taken into account, it still makes sense for many companies to outsource to China, as onshore overall production costs would be much higher, a study of Australian manufacturing firms concludes.
2. Access to China’s Mass Consumer Market
A strategic consideration for many firms is that sourcing from China also offers them access to the ever-growing and ever-spending domestic Chinese consumer market.
3. Wealth of Professional Talent
China has a wealth of low-cost professional talent, including scientists and engineers, and boasts many superior technological capabilities.
4. Environmental and Regulatory Issues
Some companies have moved their manufacturing facilities to China because regulatory, environmental, and social restrictions are not as rigorously applied in that country as they are in Australia.
The main effect of this offshore flight? Manufacturing’s contribution to Australia’s GDP has fallen steadily from 16 per cent in 2008 to 5.7 per cent in 2019.
How Would Re-shored Manufacturing Impact Consumers?
Without doubt, the cost of goods currently imported from China — such as telecommunications and electrical equipment, toys and sports equipment, clothing, IT products, machinery, homewares, and furniture — will skyrocket.
Just by how much it is difficult to say, but we can deduce that if companies are cutting their production costs by 20 to 40 or even 50 per cent by using China as their factory, their costs will rise by at least that much if they bring manufacturing back onshore. That additional cost will be passed onto the consumer — there is no way around that reality.
Ali Baba and the $4 Pyjamas
This is no fairy tale, but an example of the cost challenges of manufacturing consumer products at home.
The owner of an Australian clothes maker explains in a blog concerning the price of manufacturing ethically onshore that it costs her around $23 (USD) to turn out a pair of women’s long pyjamas — that’s cost price, before any mark-up for profit.
The costs involved, she says, include importing yarn from India, knitting it into fabric, colouring and screen-printing the fabric, cut-to-trim fees to Australian seamstresses, and various overheads such as labelling, marketing, and graphic design fees.
By contrast, a pair of women’s long pyjamas can be ordered online from Chinese e-commerce giant Alibaba for just $3.99 (USD). The question is: will consumers be ready to pay higher prices for quality, made-in-Australia goods, or will they start ordering much cheaper offshore products online?
Whether you’re weighing the risks of offshore manufacturing or considering your options closer to home, an experienced procurement consultant can help you find the right balance between cost, quality, and supply chain resilience.
The cost is too high for the Australians. 200% of inflation in some products?
The CCP already won the war without firing one single shot.
Now Australia is 99% China dependent, and “developed” countries likewise.
Alergic to internal production and addicted to outsourcing.
I fear you are right. Though sourcing is changing a bit. Quite a few businesses are seeking alternative sourcing countries for at least part of their needs. But will Aussies pay double for their goods? Highly unlikely!