China insight (manufacturing industry) – where the 90% of profit goes?

“China made” product is well known for two things – cheap and low quality. This is, of course, a generalised statement but it is the perception of many. There is a model presents how profits are distributed in manufacture industry in China – so-called “6 + 1”. 1 represents the actual manufacture, 6 represents

·     Product design

·     Procurement of ingredients

·     Transportation and storage

·     Order processing

·     Wholesale

·     Retail   

Manufacturing (the “1”) created 90% of value but only reaped 10% of profit and the “6” takes 90% of overall profit.

Why Chinese products are perceived as cheap and low quality – it is not because China can’t make good and quality products, it is because of the overhead in the overall value chain.

For example, if you are to order and sell a batch of tailed made suits, the overall Order to Cash cycle is a length process. i.e. find a factory, suit design (time consuming), procurement of raw materials, suit manufacturing, distribution to wholesalers, retail. The whole cycle is typically about 100 calendar days. It will be around 20 calendar days only if you are to do the same in Japan.