News and Views
 

- March 27, 2008 -

 

China Ain't So Cheap Anymore

 
  BrainTrust Panel Discussion Question: Are we witnessing the end of China as the world's dominant manufacturer?  How should suppliers (as well as retailers pursuing private label programs) address the rising costs coming out from China? What's the optimal sourcing strategy for today's economic environment?    
 

 

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Each business morning on RetailWire.com, retailing execs get plugged in to the latest industry news and issues with key insights from a "BrainTrust" of retail industry experts. Here are excerpts from one of these unique RetailWire online Discussions, along with results from RetailWire.com's Instant Polls.

 
       
 
 
     
 

By Tom Ryan, Managing Editor, RetailWire

Sourcing from China has become a lot more expensive, and seems to have caught some U.S. importers off guard. For some U.S. companies, the changes are squeezing margins, forcing price hikes, and leading many to scramble to find new ways to cut costs or locate new sourcing regions.

"Companies say that, all of a sudden it's not as competitive to make their product in China," and are looking at other locations, Patricia Mears, director of international commercial affairs for the National Association of Manufacturers, told the Minneapolis Star Tribune.

The higher costs are largely due to rising wages across China, as well as increased enforcement of existing labor laws within China. Some economists estimate that Chinese wages are rising about 15 percent per year.

Rising energy and raw material costs (e.g., steel, petroleum-based products) are impacting all sourcing regions. But rising oil prices have clearly hiked transportation costs for those shipping out of China. Also, U.S. companies have been hurt by a move by China to reduce exporter tax breaks, as well as the jump in the value of the yuan by 16 percent in 18 months.

Rampant inflation in China is also not helping. China's consumer price index jumped 8.7 percent year-on-year in February, rising at the highest pace since May 1996.

Chris McNally, China specialist for the East/West Center in Honolulu, said a few U.S. manufacturers such as Intel have moved factories into inner China to take advantage of cheaper land and local laborers who don't have to be fed and housed in corporate dormitories.

In some sectors, wages for high-skill professionals are doubling.

"I know companies that are paying $200,000 or more a year for a comptroller to oversee their business in China," Phil Mason, president of Asia Pacific and Latin American operations for Ecolab, a maker of cleaning products, told the Star Tribune. "The market has become extremely competitive...There is not a lot of difference today for us to be hiring somebody in China vs. putting in someone from the United States. That's for a high-level, skilled, experienced person going into a leadership position."

Discussion Question for the BrainTrust panel: Are we witnessing the end of China as the world's dominant manufacturer? How should suppliers (as well as retailers pursuing private label programs) address the rising costs coming out from China? What's the optimal sourcing strategy for today's economic environment?  

 

RetailWire Instant Poll Results:

 

RetailWire BrainTrust Comments:

This is no surprise to smart retailers. The ongoing problem of price inflation in China has motivated many manufacturers to partner with a Chinese company, look for alternative sourcing from India, Pakistan and Vietnam, among others and begin to engineer their products to maximize production capabilities while minimizing cost.

But don't worry, China will remain our number one Asian supplier, in the categories they excel in, for many years to come. Their manufacturing acumen, abundant work force and improving infrastructure will support significant growth although a higher price tag will be part of the result.

Peter Schaeffer, Partner, Carl Marks Advisory Group

Ryan Mathews, Founder, CEO, Black Monk Consulting Says:
The real problem isn't the Chinese--it's us, or more specifically, our apparently insatiable need for a constant flow of lower and lower cost consumer goods.

What do you say? Send us your comments here

China will continue in its #1 position but rising wages and inflated commodity prices will force manufacturers to consider options. However, it's hard to ignore the improvements in infrastructure over the past 20 years that keeps China at the front of the pack. The other consideration, especially for apparel vendors, is speed. As "fast fashion" becomes more important (to compete with specialists like H&M and Zara), the big national chains like Target and Kohl's will consider delivery time--not just price--as a key factor in their sourcing decisions.

Richard Seesel, Principal , Retailing In Focus LLC

This is no particular relief or bad news--depending on which side of the fence you are sitting. Just as Japan did decades ago, China will subcontract or open factories in the poorer countries of Southeast Asia or Africa. The race to the bottom is an endless enterprise.

Jerry Tutunjian, Editor, Canadian Grocer

I'd like to respectfully disagree a bit with Jerry Tutunjian. The "race to the bottom" isn't an endless enterprise. Even the most complex regression analysis finally has to get back to a single point of origin. Translated into commercial speak, that means one of these days we will run out of cheap production markets.

The real problem isn't the Chinese--it's us, or more specifically, our apparently insatiable need for a constant flow of lower and lower cost consumer goods. We can't have it both ways. Either we start lowering our demand and learn to live with less or we'll be forced to start paying more, which should have the predictable effect of forcing us to live with less. The result is the same. The only option is whether or not the process is voluntary.

Ryan Mathews, Founder, CEO, Black Monk Consulting

As wages and employment increase, fostered by an export-driven economy, manufacturers will find it increasingly difficult to maintain the value proposition of the products they sell and other countries will step in to fill that gap. In a way, the rise of China as the World's manufacturer is akin to the rise of Japan as the World's auto supplier beginning in the late 60s through the 70s, starting off as a low-cost alternative to more expensive western cars.

The difference is Japanese manufacturers tackled quality issues head-on through initiatives like Total Quality Management and in-house suggestion systems. China has yet to implement widespread quality management initiatives at the level the Japanese did (they have been making some changes following all the food contamination issues that came up over the past year) and only better quality can justify a higher price that they will need to charge to keep up with wage increases.

Joy V. Joseph, Director, Business & Consumer Insights, Information Resources Inc.

Read the entire story and RetailWire discussion at:

http://www.retailwire.com/Discussions/Sngl_Discussion.cfm/12831

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