Is There an Alternative to Depending on China's Supply of Goods?

Watching the emergence this year of labor unrest in China, you have to wonder what the long-term implications are for decisions on where to source goods for developed nations. It’s hardly an academic question. Labor unrest leads to higher costs as well as uncertainty, as we are seeing, changing the calculation for thousands of firms that for years have relied on a dependable, competitive supply of goods from China to feed their extended supply chains.

That calculation is under review at many companies, and we can soon expect to see new studies analyzing the implications for supply chains in general. But if some conclude that the economics of relying on traditional suppliers in China is starting to make less sense, what is the alternative? That’s the bigger question that must be addressed.

  China is far and away the largest supplier of manufactured goods to developed economies. Mainland China, not including Hong Kong, accounted for 48 percent of global containerized imports into the U.S. last year, according to PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce. It was 43 percent in 2005, showing that dependence on China’s factories, labor force and infrastructure has only increased.
The next highest ranked suppliers — South Korea, Japan, Hong Kong, Taiwan and Vietnam — each hold a 3 percent share. Other countries whose “Made In” labels appear on garments and other goods, such as Thailand, Indonesia, India and the Philippines, hold even smaller shares of the U.S. import market.
Looking at the pie chart (left), it is difficult to imagine any large-scale shift away from — or even within — China because the vast majority of China’s production remains in the developed coastal regions. It would be like trying to divert the Mississippi River down a bayou.

Of course, there’s little question that profound changes to China’s labor market are under way, forcing retailers and other companies to re-evaluate their sourcing strategies. As China has modernized and emerged as a world power in the minds of its people, if not in reality, sweatshop conditions far from workers’ homes are becoming less acceptable.

Migrant workers who left the coast during the global recession are not returning in the same numbers, accentuating a labor shortage and delaying the ramping up of production across many industries as demand resumes. (This has been seen, for example, in the slow restoration of container manufacturing capacity, which is partly to blame for the global container shortage.)

Sourcing and logistics experts often point out that apparel and other labor-intensive manufacturers are the first to seek lower-cost labor markets. But even there, the process isn’t easy because China’s grip on supply remains overwhelming. China supplied 77 percent of U.S. containerized footwear imports last year, according to PIERS. Vietnam, the fastest-growing source for U.S. footwear imports, accounted for only 7 percent, and even getting to that level has been a huge challenge, with traffic congestion and marine terminal construction lagging far behind demand.

In women’s and infant wear, another industry demanding low-cost labor, mainland China’s market share grew from 31 to 40 percent between 2005 and 2009, according to PIERS.
One alternative for many companies will be to remain in China but to move into the country’s interior. Apple announced last week that some of the goods produced by its supplier, Foxconn, would move to North China in search of lower wages.

“Some manufacturers who are reluctant to leave China will consider first moving from the coast to the interior of China before considering going to a Southeast Asian location, simply because the infrastructure and the logistics in China are greater than in other low-cost producers,” PIERS economist Mario Moreno said. “Wages are certainly a very important cost for any manufacturer but you also need to think about your supply chain.”

Stephen Roach, the retiring chairman of Morgan Stanley Asia, says the labor costs simply are not rising enough to make a material difference in supply chains that stretch across vast areas of geography and economics.

“I think the labor cost issue is overblown as a disruptive development to China’s export competitiveness,” he said. “While minimum wages for those at the low end of the pay scale are going up around 20 percent, the increases in total wage bills are somewhat smaller. Annualized productivity gains of 12 to 15 percent are offsetting most of the wage adjustments — limiting gains in unit labor costs.

“Foxconn is clearly a high-profile exception, but the company is large enough — and flexible enough — to shift production away from Shenzhen toward lower wage platforms in northern (Tianjin) and central (Henan) China,” he said. “China still has scale and infrastructure that is sorely lacking elsewhere in Asia. Fears of labor-related export disruptions are being exaggerated.”The idea that costs in China are increasing with no clear alternatives means the global economy could be in for a sustained period of price increase for manufactured goods.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at ptirschwell@joc.com and follow him on Twitter at PeterTirschwell.
 

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