Guangzhou, Pearl River

China – still a viable sourcing market? Yes!

In categories: China, manufacturing, Thoughts Factory

29. Oktober 2012

China as the workbench of the world, producing anything and everything for everyone. This description of China’s economy and its integration into the global economy seemed as if it would last for some time to come. But then of course came the financial crisis and if anything the structure of the Chinese economy is shifting rapidly. The question is if China then is still a good market for sourcing? I think yes and will try to explain in the next few paragraphs. Mostly this article will be talking about consumer electronics and labour intensive product sourcing, but I think it also contains some general points useful to everyone.

Factories are closing down

The situation in manufacturing land of China is not the paradise as it used to be just a few years ago. Media and pundits increasingly turn to the imagery of empty manufacturing towns suchs as Zhangmutou in Dongguan City, factory closures and strikes. Karaoke bars are doing less business with factory owners, property moguls have taken their seats. Local public debt is sky high, tax revenue from company profits us in free fall. Labour is in short supply and moving back home to work closer to family and friends. Compounded by labour shortages and the central governments’s determination to effectively double income for blue collar workers is straining most factories already thin profit base. Of course this cannot go on forever so most businesses are either closing down or raising prices. How else to add to the bottom line. Price rises on the factory side, however, inevitably have a knock-on effect sending buyers elsewhere, say Vietnam or India. The newspapers in China and Hong Kong publish reports every other day about businessmen closing down factories or projecting the end-of-business-as-we-know-it within five years. Its true.
An example: Denny, an owner of a textile factory just six years ago was making excellent business with buyers from overseas. The large brands all bought from his factory, known for excellent quality at acceptable prices with good delivery. He was thinking about expanding. Today, there is no more such talk. Denny closed down the factory and offers designs which he manufacturers at contract factories. “There is simply no other way I could do it now, the cost of running the factory is much higher for me. So I let somebody else produce for me nowadays.”

Denny, though is still in business. And that is because he is able to offer service above the simple textile manufacturing. It is exactly this added-value that has become a key factor for most of my customers when we start the sourcing exercise.

So the picture is not so one-sided. Firstly, China has been part of the global sourcing system for some time, and therefore most manufacturers are well-accustomed to social audit standards, quality requirements among other things. Sourcing from such factories poses less risk on the safety side of things. Secondly expertise clusters of manufacturing networks have formed which are not that easy to relocate. For instance, Guangdong province is especially well-known for audio products. In Shenzhen there is an entire business district dedicated to writing firmware for iPad docking devices, bluetooth speakers, MP3 players and other CE gadgets. Their productivity and expertise is invaluable for most product developments which I have managed. The proximity of such a network to any factory located just a few hours away is another advantage for buyers, even if they have to pay a slightly higher price than say a few years ago. I have still plenty of viable projects on my table which can only be realized in this unique combination of factories, project managers and some ‘guanxi’ relationships.

And lastly, the international situation also favors China. While Vietnam and Cambodia or places such as Indonesia are doing well substituting the mainland in textiles and shoes, wages are also on the increase in these Asian Tiger states of the second generation, with hikes of more than 100% in some cases. Any comparative advantage will also diminish over time, long before any higher value industry has moved there, at least that is my opinion.

In general it seems to me that the sourcing ‘game’ has run out of space to move on to, and buyers will have to accept higher prices from familiar Chinese sources. This is not the end of the world but just a re-alignment coming naturally. Sourcing products, industrial items remains a great strength of the Chinese economy, and Guangdong for that matter. Indeed as more and more quality factories and service providers survive you can expect better value and higher quality from the beginning, streamlining the process and time it takes to get a product out of the door. The density of manufacturers and solution providers is unparalleled in this world – and just what medium sized companies require if they are seeking to ship new products on time and with half the budget it would cost in Europe.

If anything China’s current manufacturing crisis is the crisis of the western world, especially the USA which used to absorb the bulk of China’s exports. With the western hemisphere suffering there is bound to be some fallout in its main trading partners.

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