China’s First Steps Away From Low-Cost Manufacturing and What it Means For Your Company

In 2007, there was increasing chatter in manufacturing, sourcing, purchasing, and related circles regarding various forces in China causing price inflation.  The Chinese government’s move to discontinue export rebate taxes last summer in certain categories and industries was one of the first signs of the Central government’s desire to curb manufacturers’ role in the over-heated economy.  A weakening dollar and U.S. recession would soon come into play, as well as increasing labor costs and changing labor laws impacting China’s eastern manufacturing hubs.  There was even talk of many Chinese manufacturers closing up shop after this Chinese New Year holiday and the snow storms preventing mass numbers of workers from coming back to their jobs.  The chatter filtered over into blogs, and now I have friends and associates sending me newspaper articles that talk of companies looking to move more deeply into China’s interior, or source product from other countries altogether.

Almost a year ago, I did a series of posts entitled Offshore Sourcing: An Ever-Shifting Landscape, in which I discussed U.S. apparel companies who had moved their supply chains into Vietnam from China and got into hot water when threatened by a potential rift in trade regulations between the U.S. and Vietnam.   In the world of low-cost chasing companies, there’s no doubt that many execs will read stories like this in the SF Chronicle and ring up their purchasing manager immediately and ask what they’re doing about getting into Vietnam, India, Bangledesh, etc. 

I’d like to offer a few points to consider when thinking about the future of manufacturing in China, building supply chains in emerging low-cost destinations, and moving production from one destination to another:

• Reactionary strategies will most likely get you into trouble.  Don’t be like the guy who ran out and put his home on the real estate market when he ‘heard’ that the real estate market in the U.S. was in trouble.  Generally speaking, careful consideration of your own company’s needs, your manufacturer’s circumstances, and your competitive positioning in the marketplace will dictate far more in terms of where you should be sourcing, rather than what is being said to take place on a macroeconomic scale in your source country (unless massive civil unrest is taking place, a violent coup, or Starbucks is beginning to appear on every corner). 
• As the sourcing landscape can be "ever-shifting", nobody (at least, I haven’t met anyone with the gift of sourcing-clairvoyance yet) is quite sure of what exactly this all means yet.  Some suggest that supply lines will simply extend deeper into China to take advantage of the huge pool of low-cost labor that still resides there.  Others, emphasize that China will inevitably move up the value chain and low-cost manufacturing will indeed flee to lower-cost sources.  There are arguments for and against both.  It’s likely that a combination of both of these trends, along with some that no one is in a position to see, will emerge in the near future.  The only trend I would venture to say is imminent, is the ubiquity of Starbucks.
• This will impact industries, and companies of different sizes. very differently.  Apparel is much more likely to move from country to country.  Consumer electronics manufacturing is much less likely.  Corporations looking to stay on the good side of Wallstreet from quarter to quarter may be much more likely to see what lines of supply they can move in order to keep costs down.  Smaller companies may be better able to absorb increases in cost through a long-term strategy of seeking out ways to improve the value of their relationship with their current suppliers. 
• Don’t fall into some false hope that the challenges associated with manufacturing in China will be less prevalent in other low-cost countries.  Experience has shown the opposite to be true.
• Following on the last point, if you do plan to expand your supply chain into a  new country, take the appropriate steps in developing new suppliers and give your company time to troubleshoot and refine the relationship and process before relying heavily on then new source.

The bottomline is careful consideration of the circumstances of your company,  your supply chain, and industry will be far more important in determining where to source from in the short-term.  Understanding these issues will present a far better perspective to make decisions from regarding when and if to expand your supply chain into other countries when the macroeconomic writing is indeed on the wall.