China’s Sourcing Advantages
From “Buy Cheap” to “Buy Well”
That China remains a manufacturing powerhouse despite its rising costs shouldn’t be surprising. Sourcing is more than just chasing cheap costs, and this statement is only becoming truer. Competitiveness is increasingly driven by other considerations. While China may not be the cheap sourcing paradise it once was, it has gained an edge by enabling faster, better supply chains.
E-commerce and the internet have accelerated the pace at which trends spread and vanish, and the rate at which products are copied, turning speed-to-market into a rising priority. China’s integrated supply chains are a key advantage when it comes to fast-tracking your supply chain. Its production ecosystems offer a hard-to-match concentration of input suppliers, assembly factories, skilled workers, and service providers — all at a massive scale and for a broad range of low-tech, mid-tech, and even high-tech products.
According to a European Commission report, China adds 76% of the value of the goods it exports on average (close to the EU’s 87%) which shows how little it depends on imported inputs. This explains why the production of goods requiring several components, such as electrical ones, has largely remained in China.
Speed alone is not desirable if you’re just getting faster at sourcing the wrong goods. To unlock profitability, what counts is reacting quickly to consumers’ preferences, e.g., making your purchasing and production more demand-led to minimise inventory problems and maximise your return on investment. Thanks to its manufacturing maturity, it’s easier to find suppliers who offer agile production setups and smaller batch-sizes in China than in other low-cost countries.
Another option for unlocking agility is near-shoring: bringing production geographically closer to end-consumers. Until now, this has meant moving out of China and closer to Europe or the US. But the world’s consumption epicentre is shifting to the East. By 2025, 40% of apparel sales will take place in Asia, according to McKinsey. More and more companies will thus see China as a near-shoring, rather than an off-shoring, location.
Consumers’ growing demands for ethically made goods, and the internet’s power to make or break a brand’s reputation overnight, are turning social and environmental responsibility into an imperative for sourcing teams.
China’s mature exports industry makes it relatively easy to find inspection agencies and suppliers experienced in meeting international compliance standards. However, corruption among inspectors and factories is still a widespread challenge, and when it comes to social responsibility, improvements in China have been limited. Unlike in Vietnam, Indonesia and other countries, Chinese workers don’t have the right to strike to demand better labour conditions.
But on the environmental front, China is making headway. Since 2017, the government’s anti-pollution crackdown has boosted investment in green tech and has driven out thousands of highly polluting players. Beijing alone has shut down or relocated close to 2,500 manufacturers. This green shift has, of course, caused supply chain disruptions. But it is also turning China into a competitive destination for sustainable production and sourcing.
Even as other considerations gain relevance, finding good value at a reasonable cost remains a sourcing priority. China is at a stage where rising productivity and quality gains are high enough to partly offset the effects of its rising labour, property, and compliance costs.
Fast-paced automation is a key driver behind China’s rising productivity. In 2011, US carmakers deployed three times as many industrial robots as Chinese factories, but China reached parity in just five years, according to a Boston Consulting Group report.
Government-led investment in skills, infrastructure, and industrial upgrading has also contributed to China’s efficiency gains. Improvements have concentrated in China’s coastal regions, but this is changing. Since 2012, the government has pumped US$550b into transportation and utilities in western provinces, and boosted incentives for factories to “go west”. Sichuan already produces 1/5 of Chinese-made computers and Chongqing is becoming an important tech and automotive hub. China’s interior is emerging as a lower cost, efficient alternative for manufacturing.
Until a decade ago, China was the place to be for sourcing teams eager to “buy cheap”; now, it offers growing opportunities to those looking to “buy well”.
3 KEY QUESTIONS FOR LEADERS
|Fiducia supports sourcing teams with strategy advice, supplier management, tailored ERP solutions, and other outsourced services to help take their China-based supply chain to the next level.|