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Key trends for SME’s sourcing strategies in Asia

Jul 14th 2015 at 7:15 PM

If you source from China you have unavoidably heard your suppliers mentioning the rising labor costs. This factor as the most direct impact on the cost of labor- intensive industries. As a matter of fact wages of migrant workers have kept rising around 15 to 20% per year in China.

What does it mean for your sourcing strategy? And what are the other factors to consider before shifting to other regions or countries?

Importers tend to think that the recent drop of oil prices and oil-based products should compensate the rises of wages. In the most petrol intensive industries like plastic injection the raw materials cost have dropped 20%, which should mean a 20% price reduction for buyers.  Unfortunately in most industries the drop of raw materials is marginal compare to the long-term trend of rising wages.

China’s aging population and the increasing difficulties factories owners have to employ a young labor force is another significant long-term trend. Recent political decisions in China have encouraged many migrating workers to stay in their native regions. This becomes particularly noticeable around Chinese New Year.

On these 2 aspects countries such as Vietnam, Bangladesh, Indonesia or Cambodia appear very competitive. Daily workers wages in these countries are only one third to one fifth of China’s average and they are unlikely to face a shortage of workforce for the decades to come.

However, for middle sized or small importers it is essential to also consider the following factors:

-Infrastructures : China inland’s infrastructure is still far more efficient than low-wages south east Asian countries. Consequences on lead time and supply chains are not to underestimate

-Local clusters & suppliers network : Clearly one of China’s major strength that translates in efficiency and reactivity in manufacturing and supply chain capabilities.

-Industrial maturity & education level : Theses factors will directly impact the level of Quality and R&D capabilities. Nothing can replace decades of industrial experience.

-Political risks: Presently this is particularly important when considering to move out of Asian countries to other low-cost regions such as Africa.

-Cost of Raw materials & Energy, administrative and taxation systems, IP and ethical policies should also be studied carefully as they differ largely from one Asian country to the other and can translate in significant hidden costs or risks.

The alternative countries are much more appealing for large corporations such as Nike or Foxconn. These large corporations have the resources to cope with administrative burdens and the investments required. On the other hand SMEs may have a very tough time there. It is possible to use large manufacturers that have been accompanied and monitored by big retailers there. These types of factories will likely be fairly well organized and professional enough. However, the immediate challenge then is the level of authority the SME’s can apply knowing that their business only represents a very little percentage compare to the manufacturers core clients.

If most of your suppliers’ base is in coastal China, you may want to consider Inland suppliers first. The government’s taxations incentives system will continue to transform coastal industries towards more high technology, which will accelerate the loss of price competitiveness in Eastern China.

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