Cost of Production in China

These days, two nations, namely China and the United States, are battling for supremacy in the global construction arena. China’s manufacturing capability has continued to expand in the twenty-first century, transforming it into a global powerhouse with a GDP of around $13.2 trillion in 2018.

China, compared to the US, has a low-cost workforce and offers its consumers a large vendor market. Moreover, some of the world’s largest corporations have moved their manufacturing activities to Chinese plants in the last few decades.

The Cost of Production

A cost that is incurred by a company when a product is made or when a service is provided is referred to as a production cost. It also provides revenue in the form of raw materials, consumable manufacturing supplies, labour, and general overhead. 

The cost of production, also known as the cost price or production expenses, is computed by adding all of a manufacturing unit’s direct and indirect costs. The formula for computing manufacturing costs is:

Total production cost = the price of labour, the cost of raw materials, i.e. manufacturing overhead expenditures.

A motor vehicle’s tire manufacturing costs, for example, may include charges such as rubber, labour, and numerous manufacturing supplies. The material costs of supplying the service, and the labour expenses paid to staff tasked with providing the service, may be included in the costs of production in the service industry.

Types of Cost

Here are some types of production costs which apply to all countries:

Fixed Cost 

Fixed cost refers to the cost that remains constant without changing the quantity of output produced. This means the costs stay constant even when there is no output or when the business has reached its full production capability. 

Variable Cost

Variable cost refers to cost that is changed when there is a change in the course of production, that is, it increases as the volume of output increases and decreases as the volume of production declines. There are no variable costs if the manufacturing volume is zero. Sales commissions, electricity prices, raw materials, and direct labour costs are all examples of variable costs.

Total Cost 

Most of the time, the total cost is calculated by combining variable and fixed costs. It accounts for all expenditures incurred during the manufacturing process, or when providing a service.

Average Cost

The cost that is obtained by dividing the total production cost by the number of units produced is known as the average cost. It can also be estimated by combining the average variable and fixed costs. Average costs are used by the management to determine how to price things for maximum revenue or profit.

Marginal Cost

Marginal cost refers to the cost incurred in producing an additional unit in the course of production. It depicts the rise in total cost due to the production of an additional product unit. Because fixed costs remain constant regardless of output, increases in variable costs have the greatest impact on marginal cost. A company’s management uses marginal costing to make resource allocation decisions, with the goal of allocating production resources in the most lucrative way possible.

China’s Manufacturing Advantages

Reduced Production Costs 

American companies can save money if their goods are manufactured in Chinese factories, whose production costs are lower than in American factories.

Greater Output in Reduced Time 

While American factories are typically constrained in capacity and are unable to get things going rapidly, this is not the case with Chinese companies, which can achieve targets faster and at a lower labour cost.

Large Sales Market  

Manufacturing in China provides access to China’s vast market. Selling items in China can result in significant earnings and cost reductions for manufacturers, which are unavailable anywhere else around the globe.

Manufacturing in China has its Drawbacks

Locating a Manufacturer 

Locating a factory in China that is suitable is not always straightforward. It is a priority to build relationships with facilities, and to do this, it may be necessary to make multiple trips to China to network and attend trade exhibitions.

Language Barrier 

It is challenging to communicate effectively when two people do not speak the same language. Many people in China can communicate in English, but most companies must pay interpreters, which makes discussing intricate production details difficult.

Quality Issues 

Products branded “Made in China” may be regarded by some as inferior to products with the “Made in the USA” label. This is not the case in all circumstances, but it is worth considering.

Conclusion

Each company must consider the benefits and drawbacks of manufacturing as well as the costs of production, which are equally important in China and the United States. The Chinese government has taken steps to attract and maintain international industries, despite constantly changing circumstances. Manufacturing operations moving to China have resulted in substantial cost savings for Western consumers. 

Since the Trump administration in the US became aware of the US-China trade disparity, many levies have been imposed on Chinese products entering the United States, making them much more expensive. Apart from that, American corporations are looking for new locations to manufacture their products.