The commercial centre Xujiahui (Source: Wikimedia Commons)
Ideas for Leaders #461

Buyers Beware: Costs for China Rising

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Key Concept

An extensive survey reveals new cost challenges for China-based suppliers, although the country maintains the strengths that it made it the go-to supply source in the first place.

Idea Summary

Founder and director of the China Supplier 1000 Project, Neale O’Connor, a former visiting associate professor at the National University of Singapore Business School, conducted face-to-face interviews with 1,000 suppliers in China and Hong Kong. Among the core lessons for buyers, Neale writes, is that China retains its strength vis-à-vis other countries, but is facing some new pressures on costs.

Among China’s strengths is the fact that no other emerging economy can match its manufacturing capacity and vertical supply chains. And most countries lack its developed infrastructure. As a result, using suppliers in other up-and-coming producing countries such as Cambodia, Bangladesh or even Hungary would require building a multi-country supply chain. (The easy access to the largest domestic market in the world also burnishes China’s appeal as a supply source.)

However, while suppliers in China continue to be in a good position, they are also facing some economic challenges. Wages are starting to increase (as they inevitably should in the growing economy); companies are facing a labour shortage, which will only be compounded in the future as the country’s population continues to become proportionally older; and the strength of China’s currency further puts it at a disadvantage compared to competing countries.

More than 50% of the Chinese and Hong Kong suppliers surveyed, recognizing the dangers ahead, said they were ready to take steps to improve and better manage operations. Their focus would be on improving production quality and efficiency, as well as R&D.

Because of the country’s advantages, China’s suppliers continue to have the upper hand. However, many nervous buyers are starting a China + 1 policy, in which they add suppliers from one lower-cost country to hedge their bets. Chinese suppliers are taking note — and taking steps to prevent any significant slippage in their competitive position.

Business Application

Buyers are paying close attention to the competitive and cost pressures faced by their Chinese suppliers. One concern is that suppliers might start to take nefarious cost-cutting measures, including cutting corners, reducing their workforces, or missing their delivery deadlines. Buyers might eventually find suppliers even refusing orders.

One response, already undertaken by some buyers, is to start a China + 1 policy, which is to source supplies from China but also to have a source in another of the emerging markets to hedge your bets.

Buyers must also carefully manage their relationships with suppliers, ensuring continued rigor in their operations.

Finally, buyers can go further and consider supporting their suppliers by investing in improving their production capabilities; some buyers, for example, have invested in machinery and tooling for their suppliers. Such a strategy may seem to defeat the purpose of outsourcing; however, if the alternative is acquiring or building fully owned production facilities in low-cost developing countries, with all the social and political problems such a move would entail, investing in the success of their suppliers will have an immeasurable ROI.

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Authors

Institutions

Source

Idea conceived

  • August 2014

Idea posted

  • November 2014

DOI number

10.13007/461

Subject

Real Time Analytics