Engineering in China

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I had three interesting points of information on product development and engineering in China last week. My conclusion is that the strategy of shifting engineering work to China to reduce costs is no longer viable. At this point, the only reason for multinationals to create engineering centers in China is to develop products for the local market. The cost advantages are gone and the skills are marginal.

One of my clients has one hundred engineers in a development center in Shanghai. He can hire two engineers in China for the price of one in the US. There was a time when this ratio was closer to five to one. After a couple of years of trying to offload low-end work to this group, the company realized that the costs of rework and integration overwhelmed the labor cost advantages. They are now using this center to tackle end-to-end development projects for the Chinese market and enjoying more success.

I also work with another firm that develops products on a contract basis for large branded product companies in high tech and medical devices. Their strategy is to specialize on a single engineering discipline in China and develop products virtually on a global basis; electrical engineering in China, mechanical in the US, optics in Germany, and software in India. They have a global development platform that enables virtual collaboration across these sites and disciplines. This “center of excellence” strategy allowed them to take advantage of the cost savings that existed once upon a time. The company is now beginning to shift electrical work back to the United States.

The final data point was an article in the November 18th edition of Time magazine titled, “China Makes Everything. Why Can’t It Create Anything?” The article reinforces the points made above. Chinese labor is no longer cheap, and the higher up the skill ladder you go, the lower the labor cost advantage. Mid-level managers in China now make over $100,000 USD per year. The rest of the article points to structural and cultural barriers to innovation from a lack of investment in basic research to a paralyzing fear of failure that prevents risk taking on breakthrough technologies.

If you have, or are considering, an investment in China, you should know that the game is changing rapidly. There is a big market there, but if you are not developing for that market, I would question the need to be engineering in China.