Logisticstoday Com Global Markets Josh Green 200

Beyond China: How to Navigate the New World

Oct. 25, 2010
There is no “next China” so supply chain professionals need to adjust to a tougher global marketplace

American sourcing executives have been riding high on the China wave for nearly two decades now. Buoyed by a trio of irresistible attributes—including the Chinese government’s pro-trade policy, a solid infrastructure and an enormous underemployed labor pool—U.S. companies believed they had discovered their manufacturing Nirvana. And they thought it just might last forever—until now, that is.

In the past year, several events have served to dampen America’s love affair with China. Once a stronghold for rock-bottom costs and a seemingly inexhaustible supply of cheap labor, China is changing its game—swiftly, and most likely, permanently.

The Fall and Rise of China’s Prices
It is China’s huge labor pool that has kept manufacturing costs so low for so long. Typically, as demand for product and workers increases, wages rise accordingly. With millions of Chinese men and women needing jobs, however, American companies and their manufacturers could always find people willing to work for little pay. But that scenario is changing.

Now, workers’ wages are rising, even doubling in some cases. After a string of employee suicides at its southern China campus and a spate of harsh criticism surrounding its labor practices, Foxconn (which makes electronic components for Apple, Dell and Hewlett-Packard), doubled the salaries of many of its 800,000 workers. In a similar move in response to multiple strikes that forced factory shutdowns, Japanese automaker Honda agreed to give 1,900 plant employees substantial raises.

Adding fuel to the fire, Beijing announced it would boost the city’s minimum monthly wage by 20%; other cities are expected to follow suit. Also, within the past five years, workers have become emboldened and empowered, as newly introduced labor laws have taken effect. Employees are enjoying rights they never had before. For example, fired workers can now sue their employers for contractual disputes.

And, of course, the Chinese government’s recent announcement to adopt a more flexible currency has implications as well. While good for China and healthy for the global economy over the long haul, this move will further bump up the costs of Chinese exports, ranging from apparel and shoes to computers and smartphones.

That translates into higher price tags here in the U.S. and a litany of headaches for American sourcing teams, who have long been considered heroes for their ability to deliver low-cost goods. For years, their quest for value was a relative no-brainer: Just go to China.

Where is the “Next China”?
With all this foreboding news nipping at their heels, sourcing executives are sweating it out and frantically asking themselves, “Where is the next China?”

The answer is: There is no “next China.” Unfortunately, that means major grief for America’s sourcing professionals. But with one door closing, as the saying goes, another opens. Logistics providers should be standing there, ready to help their clients navigate the murky new waters. More on that soon but first, let’s explore why the “next China” is so elusive.

“Next China” Wannabes
The speed of China’s ascent and the scope of its manufacturing dominance has been staggering. But China is not the first “Alpha Dog” of manufacturing. England once ruled the manufacturing kingdom, followed by (in chronological order) the United States, Japan, Taiwan and South Korea. However, no other nation can boast the perfect trio—those three keys to success that have made China so tantalizing to American and other foreign companies: pro-trade government policy, solid infrastructure, and a huge, underemployed labor pool.

India comes close, and frankly, should inherit the “next China” baton. In fact, India should have been China before China was even China. Only India can compete from an underemployed-population standpoint. However, the country lacks pro-trade government policies and is woefully deficient in infrastructure. There are no signs that either of these will be remedied in the near future, leaving India out of contention for “next China” status.

The United States and most of Europe have superb infrastructure and pro-trade policies, but they lack an underemployed work pool, resulting in high wages, and therefore, high manufacturing costs.

Smaller Asian nations like Vietnam, Bangladesh, Thailand and Indonesia are low-cost alternatives to China, and many U.S. sourcing professionals have succeeded in finding inexpensive goods there. Vietnam was a manufacturing paradise for a few years, until prices soared. However, none of these countries has the large, underemployed population necessary to keep wages low if companies pour in for as long, and in such numbers, as they did in China. Therefore, any gains made from transitioning to new geographies are likely to be short lived.

With the growing number of wage hikes in China and the resulting rise in manufacturing costs, U.S. companies have few alternatives than to cope and pass the pain on to consumers, who will bear the burden of higher-priced goods. While this turn of events is tough to stomach, it is possible to survive and even thrive in the new, “no next China” world.

But there’s no question about it: Sourcing executives are feeling the burn—and their lives just got a whole lot more complicated.

What’s in Store for Sourcing Professionals?
The first thing sourcing executives must do is spill the beans and let their colleagues know that manufacturing-cost increases are inevitably on the horizon. This is not a pleasant task: Sourcing professionals are revered for reliably delivering low manufacturing costs, and there is no easy way to sugarcoat the bad news. However, the only thing worse than rising costs is being surprised by rising costs. So sharing information is critical and will help everyone prepare for this strange new world.

Second, in order to keep cost increases to a minimum, organizations need to learn to work differently. Instead of putting all their eggs in one basket—the China basket—cutting-edge companies must prepare to be nimble, sourcing across a variety of geographies to find the best products at the best prices.

Theoretically, Indonesia may be the hot spot this year, Cambodia the next and Bangladesh the next. Forward-thinking sourcing professionals will be open to these shifts, ready to seize opportunities as they come along and jump to new frontiers when—and as often as—it makes economic sense.

How Logistics Providers Can Help
While manufacturers are making these tough transitions, logistics providers should look at several ways they can help smooth the process:

Logistics providers should span multiple geographies. If logistics providers are embedded in just one country, it’s time for them to sprout wings. With sourcing executives hungry for goods outside China, they’ll need assistance moving product from multiple overseas destinations to the U.S. market. Logistics providers who can’t function across a wide range of geographies may find themselves at a disadvantage, sidelined and alone. Those that don’t have the means to go multi-national should form alliances with other providers who do.

Logistics providers should become geography experts. To a large degree, sourcing professionals are venturing into the unknown. Having relied on China for so long—where contacts, factories, customs and logistics are as familiar as a pair of comfortable old shoes—they are now in uncharted territory. Logistics providers now need to educate their customers on what to expect in the countries they’re exploring: costs, transportation time, logistical issues, cultural barriers and specific problems or roadblocks they may encounter.

Logistics providers should play the matchmaker. Those logistics companies working across multiple geographies already know the big “players” in the countries they service. They should share their contacts with sourcing professionals who may be staring at a blank Rolodex, and make introductions whenever possible. Matching customers with the appropriate partners will go a long way toward building trust and strengthening supply chain relationships.

Logistics providers may not be doctors, but they can play a huge role in alleviating the headaches sourcing executives will face in the months and years to come. Supply chain professionals should seek logistics providers who can be flexible, be generous with information and be clear about how they can help. Do these things, and you—and your supply chain partners—will excel in a “no next China” world.

Josh Green is CEO of Panjiva, an intelligence service for sourcing executives.