The backlash against outsourcing to China is in full swing, but Colin Davidson argues it remains a good option.

A new China began to emerge towards the end of last year. After more than two decades of fairly predictable performance the China the business world knew so well disappeared. Foreign businesses were baffled and shocked by economic changes and governmental regulations. Around 80,000 factories failed to reopen after the Chinese New Year holiday last February.

So what caused these changes? First, inflation arrived and with it price increases for raw materials, freight, electricity and support services, all of which dramatically increased the costs of doing business.

New labour laws were enacted to protect the interests of Chinese workers and remove the abuses occurring throughout the country. As these began to take effect, the cost of Chinese labour increased by 30 to 40 per cent.

Export subsidies which for many years had granted rebates to Chinese manufacturers and encouraged overseas business, were sharply reduced in some industries and eliminated in others.

In 2007 the Chinese Yuan rose 10 per cent against the US dollar. So far in 2008 it has risen a further five per cent. Trade has traditionally been carried out in US dollars, so the currency moves have resulted in unavoidable increases and enormous strain on profits.

These transitions clearly indicate that a new set of economic rules have come into being in China.

For some foreign companies a sense of panic developed and they began moving business to lesser known destinations such as Vietnam, India, Thailand and Indonesia, seeking new and less expensive outsourcing opportunities.

This may have solved the problems for many firms. An underwear manufacturer simply has to find another low cost labour pool, fly in its sewing machines and within a few weeks have the plant up and running. But for engineering firms with considerably more sophisticated product lines, these new areas are not necessarily the answer.

In my opinion the new China remains an attractive, cost-efficient and competitive manufacturing resource.

Custom Asia, for example, has helped many UK companies source or manufacture their products in China. With every indication of greater economic hardship to come, carefully considered, cost effective purchases from China are becoming ever more important. Our clients recognise this and with our assistance, are responding carefully to the evolving situation.

Price is usually crucial and China remains competitive. The vast number of skilled and unskilled labourers, superior communications systems and small and large support vendors and service businesses are just some of the vital elements that make China one of the best outsourcing options for UK manufacturers today.

While it may sometimes be difficult to appreciate, Chinese business, labour and commercial regulations are well considered and enacted. The government knows overseas trade is important. The manufacturing sector's stability is vital, which works to the advantage of foreign companies.

This is a time of great change and uncertainty for Chinese manufacturing. While many of the influences are global and unavoidable, other national issues are having an effect.

The Olympics has been a massive drain on resources, in particular the demand for steel, but supply and prices should stabilise with the completion of building works.

Probably mindful of difficult times ahead, in the past few weeks the government has said it will reinstate some of the export subsidies that were abolished. Repeals are being introduced to some of the new labour laws to make them less onerous on employers.

At regional level, measures to drive out low-cost assembly work in favour of more value-added industries have been eased, and these mainstays of previous growth encouraged to stay.

The ground rules are changing, and it will be very interesting to see what type of industrial base emerges from the current turmoil.

In the new China, the environment is certainly challenging, but with the right approach, the outsourcing opportunities remain as exciting as they ever were.

Colin Davidson is the founder and managing director of Hong Kong-based Custom Asia