The bloom is off the rose

The American Chamber of Commerce reported earlier this week that U.S. manufacturing companies are beginning to pull out of China because of rising labor costs, increased raw materials prices and inflating real estate values. One of the reasons all this is happening? “Increasing competition,” says the AmCham.

This is no surprise to those of us hat have been watching the migration to China for some years now. Business pundits have been predicting these effects as the Chinese economy catches up with the rest of the world. U.S. companies, in fact, have helped adjust wages and working standards in Chinese factories upward.

What hasn’t changed are the fundamental reasons doing business in China has been so difficult for U.S. companies in the first place. Human resources constraints, inconsistent regulatory interpretation, unclear regulations, lack of transparency and bureaucracy are picked as the top five business challenges in China, according to the AmCham. Companies that braved this red tape solely in pursuit of low-cost labor are naïve: smart companies realized some time ago that the only justification for opening operations in China was access to the growing Chinese market. Although China makes it hard for foreign companies to sell in its domestic market, the same competition that increased prices will eventually force the easing of trade restrictions within China's borders.

Some might interpret the antipathy toward China as good news. It’s not:  AmCham also reported that companies pulling out of China are now pursuing low-cost labor in countries such as Vietnam and India. U.S. manufacturers continue to chase the perceived benefits of low-cost labor around the world.

If there is an upside for U.S. business, it’s this: I’d be seriously looking askance at any partner that bases business decisions on what amounts to the labor flavor-of-the-month. The better choice would be a partner that is working to remain competitive in regions where it already exists. If you are running such a business, now is a good time to start knocking on doors of potential customers that have partners in Asia. You might find a warmer reception than you did five years ago.