Have you opted for low cost sourcing from China? When did you last look at other options? The time is fast approaching when China may no longer be the obvious answer.
A New Balance Of Factors
For more than two decades, China has been the “Factory of the World”. So much so that most low cost sourcing did not even bother to consider other countries in the category. China was the start and finish of the search. It was simply assumed that it would be the cheapest. And with a vast selection of cheap and not-so-cheap options, it was the natural source for product to reduce your bottom line and enable you to undercut your competition.
The downside to China’s success has been that the supply and demand scale has begun to tilt heavily; so heavily that demand has exceeded reliable supply in terms of dependable factories and factory labour. This lead to an internal wage war in which factories have not only had mandated wage increases but skills and demand-based pay rates above minimum wage.
Different Labour Costs Evolution
The graph below shows that the minimum monthly wage in Shanghai has gone from ¥840 in 2008 to ¥2420 in 2018 – a massive 188% increase.
At the same time, surrounding low cost countries such as Thailand have increased their minimum wage by a significantly lower percentage.
Trade Tariffs Have Accelerated Cost Changes
The increase in costs is also compounded by factors such as the USA-China trade war, which has seen the current US administration impose tariffs ranging from 10% to as high as 30% on Chinese imports. As a result, US customers are looking at other, non-targeted, LCC sources. Simultaneously Chinese investors have sought to circumvent high Chinese labour rates and trade tariffs. Hence they are establishing and growing facilities in neighbouring countries such as Thailand and Vietnam. In truth, this was always going to happen; it’s just that the trade tariffs have accelerated the change.
As a result, China mainland manufacturing is rapidly becoming a legacy option. Those who remain are companies with too much investment in equipment and infrastructure to justify a move abroad. And the pressure from both local costs and foreign tariffs increases – including aluminium extrusion anti-dumping tariffs recently introduced in Australia. So there will eventually come a point where investment no longer justifies the cost.
The Implications For Your Low Cost Sourcing Policy
If you are sourcing from China, the implications are obvious: Once the reflex response was, “Just buy it from China and rake in the profits”. Now the philosophy is increasingly likely to turn to a new question: “How can we save ourselves from the myriad of traps that the new Global Sourcing Industry presents?”
Your sourcing policy needs to consider a wide range of factors beyond the total landed cost, such as:
- impact on working capital;
- minimum order quantities;
- factory capacity and dependability,
- and more
The new model also needs to consider existing and potential tariffs and historical increases in costs such as labour in order to make an informed decision on the viability and longevity of your current solution.
This is not to say that the market and need for Low Cost Sourcing will disappear, despite these complicating factors. What it does suggest is this: The opportunity is once again opening up for local manufacturing to offer a simple no stress solution to sourcing needs.
Wherever the current maturity of your domestic and LCC sourcing process currently sits, it is probably time for a re-assessment in light of the current and upcoming international sourcing challenges.
EQP Optimisation Solutions provides International Sourcing and Manufacturing Mentoring, Transitioning and Training. Our purpose is to assist businesses in
- Ensuring that their current process delivers optimal value to their Supply Chain
- And arming internal staff with the capabilities to effectively manage the relationship.
Get in touch here or call Brian on 0433 687 545 to arrange a confidential discussion and tailored plan to make the most of available opportunities for your business.