China’s real manufacturing cost advantage? 10-30%, says study

The study, conducted by Independent Project Analysis Inc. (IPA; Ashburn, VA), found that many manufacturing projects started by Western firms in China are not delivering the savings expected, primarily, concludes IPA, because the companies involved do not have a full understanding of the practices necessary to deliver projects in China. IPA is a consultancy in project evaluation and in project system benchmarking, specializing in quantitative analysis of project management systems; the study was not a China-bashing exercise but an attempt to help Western companies do a better job with their investments.  

IPA based its study on data from more than 120 capital projects executed by 37 American and European companies in China. Evaluated was project performance based on scope-for-scope comparisons between projects in China and comparable ones on the U.S. Gulf Coast (USGC). According to IPA, there is a persistent and common belief that processing facilities can be built in China at a cost that is 30-50% cheaper than if they were built in the United States or Europe.

The study found that the true figure is about a 10-30% cost advantage for the sites in China when these are designed to meet Western quality, operability, and safety standards, and are resourced to protect the owner company’s intellectual property. Further, the study found that the costs to execute projects in China have been steadily rising over the last several years, and outpacing the costs elsewhere, so that the savings potential is shrinking. 

According to IPA some 50% of the projects it studied in China could be considered failures, based on the expectations for these facilities. The study highlighted a number of practices that lead to better project outcomes, including the use of local content, procurement practices, and contracting strategies for working with Chinese design institutes and construction companies. The IPA study also quantified the cost and schedule impact of the efforts by Western companies to protect intellectual property for their projects.

The study is part of IPA’s continuing effort to help companies improve capital project effectiveness in China. A current effort is underway to assess performance of China-based small capital projects in order to provide a basis for businesses and plant managers to improve performance in maintaining and improving their company’s Chinese assets. —[email protected]