Everyone involved in trade is looking for arbitrage opportunities. This article puts the term into the economic context of absolute and relative advantage, which is crucial to understand when trying to take advantage of China’s current and future strengths.
Arbitrage trading refers to buying and selling assets to profit from the difference. This can relate to stocks, currency or particularly commodities. China continuously opening up to global trading, presents many arbitrage opportunities in China to take advantage of arbitrage in your home nation that otherwise would not have been available.
Arbitrage strategy is by far the most profitable business strategy. The cost of doing business in China is low as it does not require huge capital layout for starting, and with the right arbitrage strategy, can be growth-positive from the start. Not only can this arbitrage opportunity in China yield direct monetary results; it can also yield relative advantage over one’s competitors. It also allows small companies, staffed by only a few key personnel, to make large turnovers. From product sourcing to selling, arbitrage trading strategies offer a company the opportunity to only handle the product in a managerial role, outsourcing every aspect of the supply chain. Period inspections and more are still required however, ensuring that products remain up to specifications.
If you are the only company in your industry sourcing products or taking advantage of the arbitrage opportunity from doing business in China, you will gain an absolute advantage making your whole operation more efficient, allowing for higher profits compared to rivals even though you are more competitive on product pricing. This will likely not be the case, so the company finding the best manufacturer with the best pricing structure first, benefits the numerous advantages of doing business in China.
Shanghai is one of the most important gates to China allowing you to take
advantage of its competitive manufacturing industry.
Relative advantage, alternatively known as comparative advantage, refers to gains made not necessarily being expressed in terms of price, but in labor hours to produce an identical product. Utilizing Chinese firms allows you relative arbitrage opportunities in China by utilizing the lower opportunity cost they have for labor. Due to the Chinese way of doing business, a bigger labor force can thus be afforded, which translates to more products being made in the same time period.
The comparative advantages of outsourcing to China have allowed the country to expand their manufacturing industry, resulting in it becoming the biggest producer in the world. However, their continued reliance on los costs of outsourcing manufacturing to China is starting to decrease their advantage as other countries are starting to offer better value for labor, while more advanced countries are able to offer more expertise and skilled manufacturing. A more detailed description of the cost of doing business in China can be found in this article.
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Arbitrage trading is still an enticing business in China because the lower availability of high-tech manufacturing processes can often be offset by the increase in competitiveness when labor cost is part of the equation.
If done correctly, it creates an opportunity that can help improve business growth and take market share from direct competitors. There are, however, risks involved in trying to gain a favorable advantage of outsourcing to China that must be considered before you continue.
If a product is unique or made using protected patents, China has been known to infringe on intellectual property rights. Chinese manufacturers also traditionally have a reputation for producing goods of lower quality and engage in other questionable business practices. The risks, however, still do not outweigh the competitive advantage gained in most instances.
Another arbitrage strategy for a competitive edge comes from the behavior of Chinese manufacturers themselves. Since they also seek out profit, many of China’s manufacturing factories are starting to move inland, as the wage pressure is lower there and the migrant workforce increasingly wants to be closer to their family. The factories thus end up following the workforces, negating the need to offer increased wages. This development can offer new opportunities within China itself. However, some factories are still required to be located on the coast due to the intricate supply chains in place and availability of advanced infrastructure. These companies may not necessarily be able to benefit from a cheaper labor force, but by having direct access to ports may still offer them an advantage in some industries, especially industries needing high volume shipments.
On the other hand, it should be noted how many technology companies trust China. Apple and almost every other electronics company have their products manufactured there and benefit from the on-going advancement of technology reducing the level of labor required. The advancements are also improving the overall quality levels, whilst also reducing costs further. There are whole cities in China dominating the world market for specific products – the rising labor costs play a minor role there. Shenzhen is known to be the electronics manufacturing hub of the world. With such specialized technical know-how, China still provides a substantial relative advantage.
Business with Chinese companies is less and less just about cheap manufacturing.
When trying to take advantage of outsourcing to China, each scenario should be evaluated on its own merits. The advantages are well known, but when trying to gain a competitive advantage over your direct competitors, other countries that have some advantage with respect to China should be considered as well.
It is, however, true that a multitude of manufacturing strengths can be found in China, one should just find the correct factory. Once found, a good business partnership can be established. Not only will such a partnership ensure a reliable supply chain, but having good relations with your supplier would likely also set one up for even better opportunities.
Since arbitrage is as old as modern society itself, many price arbitrage strategies have existed in the past and will also exist in the future. Finding opportunities to leverage price for profit may not sound easy, but when importing many such opportunities exists.