The image of Spanish residents burning shoes made in China is still in the minds of Chinese manufacturers. They had been happy about the advantage of price leadership. But now, the cost advantage has become a major source of blame. Because of the low price of shoes from the Chinese mainland, shoe manufacturers in Spain are not able to compete with their Chinese counterparts. Thousands of workers have been laid off and Spain has accused China of dumping goods. The US also is complaining about textile dumping from China. These countries may raise their quota to keep Chinese cheap products from flooding their markets.

Price leadership is the right strategy for Chinese manufacturers who are endowed with cheap labour and cheap resources. On the other hand, the cost of labour has been squeezed so much that these workers do not have adequate benefits such as medicare and insurance. There have been reports that workers, especially migrant workers, have voted by their feet to go back to their farm land. As for resources, strictly speaking, China is far from having abundant natural resources in light of its large population. Currently, manufacturers are exploiting the natural resources with very low efficiency. Neither of these two elements is sustainable. The absolute cost will be much higher than the relative cost we can see now.

Secondly, there is really not too much value at the production side. For instance, the profit for a lighter made in Wenzhou, Zhejiang Province, might be only a few cents while the product is priced at hundreds or thousands of times the OEM's cost. Yet the price will be still lower than those produced elsewhere. Chinese OEMs are blamed for the dumping while they are not making too much money and at the high cost of environment, etc. They are at the bottom of the value chain. At the beginning of China's opening to the outside world, manufacturing with foreign design and marketing and sales was adopted to attract overseas technology and capital. It definitely worked and created a dynamic economy in Guangdong and Zhejiang. However, on the value chain, the parts with higher margins are design, marketing and sales. For decades, the profit has been squeezed from Chinese manufacturers, who meanwhile gained a reputation for cheap products. Also, the brand owners can easily switch to an even cheaper producer once the cost of Chinese manufacturers starts increasing.

Japanese used to be known as the cheap-product maker, but they have changed their strategy and nobody even remembers that part of history.

How about China?

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