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.
Low cost country sourcing advantages : Speed
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
China sourcing : Reactivity
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.
Sourcing from China : Sustainability
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 (check our page about tax and accounting services in China).
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.
Cost-Value
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 (all about China executive search).
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”.
Manufacturing accounted for 60 percent of China’s GDP growth over the past decade. Multinationals set up operations there, and domestic companies expanded to make goods for export and to sell products and services to multinationals doing business in the country. But that was just the start of the boom.
Even though Ford Motor and General Motors have considerably beefed up their supply lines from China during the past few years, for example, those goods constitute only a fraction of the components used in their vehicles. If the two automakers sourced half of their basic parts (such as carpets, castings, electronics, tires, and wiring) from China, they could together save more than $10 billion a year. Both say that they expect to increase their purchases of Chinese-made parts vastly.
Companies in other sectors are also racing up the Chinese sourcing curve. Wal-Mart bought about $10 billion to $15 billion worth of goods from China in 2003 and hopes to almost double that amount by 2007. Other retailers, including Best Buy, Carrefour, and Tesco, have equally ambitious plans.
The potential is impressive, but so are the difficulties, ranging from intellectual-property infringements and customs delays to poor communication between headquarters and suppliers. Ford reportedly did not meet its target of sourcing $1 billion worth of components from China last year, largely because the job of evaluating suppliers and establishing supply chain connections was bigger than the company had thought. But these hurdles, while daunting, can be overcome.can be resolved later.
China is the number one sourcing location in the world. It has become the world wide GIANT in manufacturing and therefore in many cases the country where sources end up. See data: Manufacturing, value added (current US$) – China, Vietnam, Thailand, Myanmar, Indonesia, Malaysia, United States, India, Germany, France, Turkey
Fundamentally different
China as a country and culture is fundamentally different from the rest of the world. It has its own unique and strong culture which is fundamentally different from the I would call “Western model”. Causing a totally different business culture, business mentality and more importantly a “playing field that seem the look like the western model but is totally not what it looks like”.
The China sourcing stories are true
Sourcing in China therefore is needed in many cases, but problems and uncommon situations will arise. The stories of big financial losses and difficulties in management of sourcing and production are all true. To work with China is a craft of experience. Many companies start on 0 in China, even if their business already have been successful.
Awareness of the Chinese model
The Chinese model is so different from the western model that when sourcing in China, many companies and people actually have no clue if they do things right or wrong. This is understandable, as how can you be aware of the Chinese model if you only know the Western thinking and business model?
Improving sourcing results
It is handy to prepare yourself with knowledge about sourcing to make sure you gain the most profit and effective result out of your sourcing activities and sourcing trips to China. Improving sourcing results will go hand in hand with learning from experts, gaining experience and a healthy dose of willingness to discover China and its hidden cultural secrets. Read upfront information and for example a Sourcing trip Mindmap to prepare yourself well.