The China Addiction
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Headlines everywhere proclaim that China has lost its star power among United States sourcing executives. Gone, they say, are the days of cheap labor, rock-bottom costs and a stable yuan. So with the fizzling of a decades’ long, China-centric era, American manufacturers would logically jump ship in search of more desirable geographies -- Cambodia or Bangladesh, perhaps -- where low wages are still the norm.
Despite all the chatter about moving beyond China, however, the portended exodus is more of a trickle. And Chinese exports have not waned. To the contrary, the country’s exports surged 20 percent in the first half of 2011 over the same period last year. Here in the United States, the trade deficit with China has only widened, suggesting that Americans are more shackled to China than ever.
So what is going on? Are sourcing executives really clinging to China? If so, why? And what are the implications for the apparel industry?
For years, China has been a manufacturing nirvana for American companies. Now, as economic realities change, sourcing executives are being forced to make a decision: stay or go?
Data reveals that the answer boils down to industry. Lower-end industries such as apparel are moving beyond China. Higher-end, high-technology industries such as electronics and computers are choosing to remain -- and production in these sectors is booming. China’s cell phone exports alone skyrocketed nearly 57 percent from first quarter 2010 to first quarter 2011.
But things are not so rosy for China when it comes to apparel.
The Apparel Migration
Though it still retains a massive one-third of the U.S. import market in the apparel sector, China’s market share decreased 1.7 percentage points in the most recent three-month period for which data is available. Other lower-end, labor-intensive sectors such as toys are seeing similar shifts.
Where are these companies headed? Bangladesh’s low labor costs have made it a desirable alternative for textile and clothing manufacturers. In the fiscal year ending June 30, 2011, its garment exports soared 43 percent to nearly $18 billion. Four countries in the western hemisphere -- specifically Mexico, Guatemala, Honduras, and the Dominican Republic -- also gained market share this past year.
China’s grip on footwear is loosening as well. Although the nation supplies nearly half the shoes on the planet -- and three out of four shoes exported to the United States -- other geographies are gaining ground. In the year ending April 2011, China’s shoe exports to the United States crept up just 12 percent from the previous 12-month period. By contrast, Indonesia’s surged 33 percent, Vietnam’s jumped 29 percent and Mexico’s rose 15 percent. If China continues to lose footing, its share of U.S. shoe exports could shrink this year for the first time in more than a decade. Products such as knit and woven apparel, bedding and other household textiles are following suit, as sourcing executives scout out countries with cheaper labor.
Though the apparel world is clearly diversifying beyond China, sourcing executives are moving slowly, and the transition will take time. Why? Because diversifying beyond China is difficult.
Moving: Easier Said Than Done
Realizing they can no longer put all their eggs in the China basket, apparel sourcing executives have been looking to other areas for inexpensive labor. The problem, however, is that no other country has a labor pool the size of China’s, and therefore, wages will not remain low for long in any geography that a large number of sourcing executives target. The new reality is that there is no “next China” on the horizon, and American companies will have to source in a multi-geography world.
But the process of diversification is proving difficult for several reasons:
1. China has well-established supply chains and an excellent infrastructure that other geographies can’t match. What good are lower wage rates, if you can’t get your goods out of the country in a timely manner?
2. China has enviable expertise in making products. Thanks to its long history as the world’s go-to manufacturer, China has erected entire towns devoted to fabricating socks and fashioning handbags, allowing them to achieve an extremely high level of productivity. Such proficiency is not readily found elsewhere, and few American companies have the patience or ability to train workers in other geographies. What they might be gaining in the form of lower wages, therefore, may be cancelled out by a reduction in productivity.
3. China continues to dominate in the production of raw materials that are so vital to the manufacturing of soft finished goods. In industries such as apparel and home textiles, where companies want to be geographically close to the raw materials crucial to their supply chains, sourcing executives are reluctant to leave.
4. There simply isn’t enough manufacturing capacity across other geographies to absorb the massive amount of volume China is churning out. Circumstances may change over the years as other countries get up to speed, but for now, China’s manufacturing capacity is unparalleled.
Three Key Capabilities for the New World
However, these advantages will become less pronounced over time, and it’s the pace of change that’s in question -- not whether change will occur. While some industries are taking a wait-and-see approach, others – such as apparel, textiles, and footwear -- are already trying to adapt to a post-China world.
What does it take to successfully adapt? As I noted in a previous column, there are three key capabilities that your organization will need in order to succeed in a post-China sourcing world.
1. Country Analysis
When exploring new geographies, your team will need to be able to thoroughly analyze and assess prospective regions. Very important in this process is gauging your sensitivities; for example, are you more sensitive to cost or risk?
*If you’re cost sensitive -- You’ll need to be able to look at factors such as manufacturing costs, wage levels, productivity levels, transportations expenses and duties.
*If you’re risk sensitive --You’ll need to be able to evaluate the risks of doing business in this country as they relate to wage rates, exchange rates and trade policies; then you will need to be able to make considered decisions about whether you’re willing to take those risks.
Your team will also need to be able to prepare a short list of manufacturers that meet your needs -- regardless of geography. An efficient way to scrutinize prospects is by using the “Four C’s” criteria:
- Customers – who are the company’s past and present customers?
- Capabilities – do they produce what you need, and do it well?
- Certifications – which ones do they hold?
- Credit – is the company financially stable?
Because your team likely doesn’t have connections in every single country, consider investing in growing your referral network or in search tools that can help you target the right prospects using the Four C’s.
3. Due Diligence
Finally, there is no substitute for heavy-duty, on-the-ground research. Your team will need to be able visit prospective sites, tour plants and mills, conduct factory inspections and network with locals in a wide variety of countries. If you don’t have teams in all the places where you want to do business, you will need to partner with a reliable organization that can perform the necessary due diligence around the world.
Companies that invest in these capabilities and learn to be nimble, flexible and resourceful will find themselves well ahead of the competition, allowing them to survive -- and thrive -- in a post-China sourcing world.
Josh Green is CEO of Panjiva, an intelligence service for sourcing executives.