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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global Supply Chain & Logistics
 

From SCDigest's On-Target e-Magazine

- July 30, 2013 -

 

Global Supply Chain News: As Chinese Manufacturing Advantage Wanes, Which are the 16 Countries Poised to Fill the Void?


New Analysis Says Chinese Era Coming to An End, as it Always Does; The Post-China 16

 

SCDigest Editorial Staff

 

It's no secret that while still low, Chinese manufacturing wages have been rising rapidly over the past few years, to the point where several studied have found that the most expensive areas in China will be on par with the least expensive areas of the US by 2015 or so, when factoring in productivity. (See New Study from Boston Consulting Finds China Manufacturing Cost Advantage Over US to Disappear by 2015.)

A new study from the analysts at Stratfor Global Intelligence sees it even more sharply: China's days as a low cost manufacturing magnet are over. That does not mean China's will move into decline, says Stratfor's George Friedman, but it does mean the world will see the emergence of a whole new cast of low cost countries to which labor-intensive manufacturing work will increasing flow.

SCDigest Says:

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If true, this evolution will obviously have significant supply chain implications.

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China's almost 30-year position as low cost offshoring leader is unusually long as these things go, Friedman says. But while the country could still prosper by switching economic strategies, "this era of Chinese development -- pyramiding on low wages to conquer global markets -- is ending simply because there are now other nations with even lower wages and other advantages. China will have to behave differently from the way it does now, and thus other countries are poised to take its place," Friedman provocatively writes.

He notes, for example, how in the 1960s, Japan was notorious for cheap, often low quality exports to Western markets. Soon, its cost advantages declined and then disappeared altogether, forcing Japan in the 1990s to make at successful leap to high quality electronics and autos to keep its export engine going, even as it now has one of the highest labor costs in the world (the Japanese electronics market of course has been pummeled recently by Apple, Samsung, and others).

In fact, Friedman says such a process is almost always experienced in developing counrties, and is happening right now in China. First, traditional, rural-oriented life is upended as huge numbers of often young people head to new factories and more urban areas to make goods for Western markets. The culture is fundamentally changed, in part as the population sees a path to a better life for themselves and their children.

"As the process matures, low wages rise -- producing simple products for the world market is not as profitable as producing more sophisticated products -- and the rate of growth slows down in favor of more predictable profits from more complex goods and services," Friedman says.

He believes, however, that for a variety of reasons, China will have more trouble navigating this transition that say Japan did.

Friedman adds that "China is at the fringes of its low-wage, high-growth era. Other countries will replace it. The international system opens the door to low-wage countries with appropriate infrastructure and sufficient order to do business. Low-wage countries seize the opportunity and climb upon the escalator of the international system, and with them come the political and business elite and the poor, for whom even the brutality of early industrialism is a relief."


(Global Supply Chain Article Continued Below)

 
CATEGORY SPONSOR: SOFTEON

 
 

"So what countries will emerge to fill the void? Stratfor has wittily come up with the concept of the Post-China 16, the countries that are most likely and in many cases already have taken low cost manufacturing work away from China.

These PC-16 countries are shown in the graphic below.


 

Source: Stratfor Global Intelligence

 

Friedman says that in In general, Strafor is already seeing a continual flow of companies leaving China, or choosing not to invest in China, and going to these 16 countries - and that this flow is now quickening, especially in the areas of apparel, footwear and mobile phone assembly. A move of these industries to new locations can be seen as an "early indicator" of more significant moves across other sector a few years later.

"The first impetus is the desire of global entrepreneurs, usually fairly small businesses themselves, to escape the increasingly non-competitive wages and business environment of the previous growth giant," Friedman adds. "Large, complex enterprises can't move fast and can't use the labor force of the emerging countries because it is untrained in every way. The businesses that make the move are smaller, with small amounts capital involved and therefore lower risk."

SCDigest will note that even though they are often large business, the apparel and soft goods sector requires relatively little investment to set-up shop in new sourcing locations, and has been used to doing this type of change for decades.

The inclusion of four African countries in the list - 25% of the total - seems especially interesting.

If true, this evolution will obviously have significant supply chain implications, not only in terms of potentially moving sourcing locations to these new countries, but also relative to a potential change in mindset and investment from one that has recently been very China-centric to something else.

But this change is really going to happen, Friedman says.

"The parabola of economic development dictates that what has not yet risen will rise and eventually fall," he writes. "The process unleashed in the Industrial Revolution does not seem to be stoppable. In our view, this is the next turning of the wheel."


Do you agree China is losing its position as favorite low cost country sourcing location? How rapidly will this transition be? Let us know your thoughts at the Feedback button (email) or section (web form) below.



 

Recent Feedback

Well, I am sure that China is losing the manufacturing battle because the 16 emerging low cost economies are Chinese manufacturing plants.

The Nagerian-chinese free trade zone in Lagos appears to be missing on the map.


john paul
MD
iCognitive
Aug, 06 2013

I don't think it moves as fast as you predict in this article. I am Chinese and active in the manufacturing area and have been working between the factories, buying agents and the end buyers abroad. Right now, yes you are right that the price gap between exwork and the end buyers (I mean the wholesalers in say the USA) become narrower and narrower but still big enough for the buying agents that help the end buyers operate sourcing in China to get the products made in Chinese factories and ship to the end buyers with the acceptable prices, at least as of today. In other words I will say China sourcing will be able to work in the coming two or three, or even more years for most products. I don't object to your thread that there will be a trend that more and more buyers are going to the above mentioned 16 countries to look for the new increasing points for their competition however replacing China, the manufacturing base of the world formed with so many years in full range of industries takes time. Let alone the buying agents "grab" a considerable profit in between. The end buyers are going to go direct to the factories by getting rid of the middle agents before they really fail to survive for the cost.

The other reason why I don't fully agree with your point is that Chinese people are known as flexible, that means they are good at self-adjustment. I don't think most of the family factories will be able to improve their capability of processing high tech products in a timely manner as they survive by labor-intensive advantage, many of them are still doing the same as were they in the beginning. As more and more low class products processing move to the 16 countries, Chinese family factories will smell it in the first place and they are bound to generate their self-adjusting system to get the cost fit the market demand, or they will die.

That is going to be the situation and be happening by that time, but not now. No one is happy to give away their property until it is sure it is going to fade away...

Thank you for your time.


Wei Zhang
MD
Good Ally International, Ltd.
Aug, 15 2013

 I was in China for seven weeks this winter; my sense is that the coastal cities must move sharply up in industrial sophistication - and they will. As the central government gradually moves the economy closer to a consumer based economy, Chinese companies will be able to sell more in China. I expect that they will move manufacturing to low cost areas in China, not to areas outside China. The lost cost areas will supply domestic manufacturers and export through the major ports. Therefore, an international shift to other low wage countries may not disrupt the Chinese growth pattern while distributing the benefits of international trade to more countries. In short, I do not see a 'hard landing' coming for China due to this, and I do see a potential benefit for other countries. The inclusion of the East African countries is a truly hopeful sign. It is interesting that the Arab countries are notably not listed.


Peter McCann
Consultant
McCann Corporate Consulting Associates
Aug, 21 2013

I was in China for seven weeks this winter; my sense is that the coastal cities must move sharply up in industrial sophistication - and they will. As the central government gradually moves the economy closer to a consumer based economy, Chinese companies will be able to sell more in China. I expect that they will move manufacturing to low cost areas in China, not to areas outside China. The lost cost areas will supply domestic manufacturers and export through the majot ports. Therefore, an international shift to other low wage countries may not disrupt the Chinese growth pattern while distributing the benefits of international trade to more countries. In short, I do not see a 'hard landing' coming for China due to this, and I do see a potential benefit for other countries. The inclusion of the East African countries is a truly hopeful sign. Intetersting that the Arab countries are notably not listed.


Peter McCann
Consultant
McCann Corporate Consulting Associates
Aug, 21 2013

China is the most successful nation in economic development in last three decades. Though, this is mostly attributed to its low cost labour and other congenial manufacturing factors, the truth is far from these factors only. Firstly, the political set up in China, though is not very freedom friendly, its focus on economic development is highly concentrated. To my belief, the Chinese experiment is an example for the countries groping in darkness in the name of democracy. Step by step China is also moving towards a democratic set up. When democracy is established in China, the country will have adequate economic and educational growth to protect the democratic values without misusing them. The current one party governance system aided by other political parties is a unique experiment providing stability and single minded adherence to the national objectives.  

Now coming to the tenet of this article; though I partially agree about the rising manufacturing cost in China, thereby not making it a very attractive offshore centre for manufacturing,  I have some pertinent observations on this count. Firstly, the countries, such as some east African countries, which can provide low cost manufacturing environment are still not adequately geared up to be lucrative to the foreign investors. These countries have very little development in infrastructure-- basic infrastructure requirements like roads and railways, international connectivity, port facilities are seriously lacking in these nations. Further, after being in foreign subjugation for a few centuries, their new found freedom has made them enamoured with democracy and popular government. These countries are very corrupt and have not grown proper culture of business and business ethics. In my opinion, it will take them at least four to five decades or more to develop proactive business milieu. Again many of these nations are politically very volatile and the insurgency is also quite a common phenomenon.

I am reasonably sure that China with its massively developed infrastructure, the industrial outlook inculcated by the people, and its large domestic market will always outweigh many other nations as a conducive nation for attracting foreign investors, despite growing labour costs. This trend cannot be stopped for a few more decades, despite all statistical observations





Taraprasad
Mishra
Interact India
Aug, 30 2013
 
 
   
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