Philips in China: Case Study - Essay Example

The main factors are one of the lowest wages in the world, availability of educated workforce, a steady exchange rate, and a growing economy. As it is expected that china would enter into WTO, the company has already declared that it would make China its base of exports around the world. At present, Philips has more than 25 % of its total production from China. The surprising fact is that Philips is just one among the many Western companies which reached China with the intention to exploit the existing suitable workforce.

According to reports, the two major Asians powers- China and India- possess more than 35% of the global workforce. That means it has become impossible for companies to keep these nations out of the equation. In the case of Philips, the lure came from China on which it depends for almost a third of its production. Factors that Make China Attractive According to the existing consensus (cited in Harney, 2008, p. 16), the companies that depend on Chinese labor are capable of reducing their labor by 30 to 80 percent.

The second attracting factor is the huge Chinese domestic market that gets accessible if production is from China. The third factor is its strategic location which is near to European and Asian markets. The remaining two points are the possibility of getting intermediate goods from downstream manufacturers and making use of the Chinese research and development. Though these are all points favoring Philips’ intention to solely depend on Chinese labor, there still is the need to look again into the decision to avoid its workforce in other nations.

Admittedly, ‘outsourcing’ is an effective way of competitive advantage. However, before deciding to go to a nation, there are various factors that need to be taken in to consideration. According to Porter (1998), they are costs and availability, time required to fill orders, issues of security including intellectual property, safety and transportation costs, infrastructure of the nation, political risk, market access, foreign exchange, technological capability (p.65). Now, it is necessary to look into these factors in China along with many other influencing factors.

Are wages really lower and will they be the same in future? Bill Powell of the Times Magazine reports that the price of labor in certain parts of China has gone up by as much as 50% in the last two years alone. Powell (2011) opines that with this rise in labor cost, many companies which depended on Chinese labor for decades have started to look for viable alternatives. That means the future will see a considerable rise in labor costs; the only factor that attracts companies to China labor. So, if Philips depends too heavily on Chinese labor by closing its manufacturing units in other nations, the company will lose its cost advantage when the labor cost goes up.

According to the reports from Venture Outsource (2012), while the United States witnessed a 19% rise in labor cost between 2002 and 2008, the growth was more than 100% in China in the same period. Thus, thinking that the labor cost in China will remain cheaper for longer times is just an irrational assumption. McCormack (2011) writes about the various hidden costs associated with Chinese production, which often go unnoticed. As McCormack points out, shifting production to China adds 24 percent to the product price; shipping adds another 17 percent; looking for a suitable Chinese vendor adds 1