Several factors are pushing the prices of made-in-China products up: the rise of the RMB against the US dollar, the factory labor shortage (because of demographic changes but also of alternative options for young workers), and the increases in raw materials prices.
It seems the writing is on the wall: cheap manufacturing will have to relocate to other countries such as Vietnam, India, Bangladesh, etc.
The question is, when?
Many journalists are quick to jump to conclusions. Which pushed Richard Brubaker to write a thought-provoking article (It’s Not of the China Price. It’s the End of Cheap Crap) on his All Roads blog.
He affirms that “(1) China is, and will be for a very long time, the lowest cost producer globally for the vast majority of what is currently being produced here and (2) That it is actually the “Cheap crap” price that is actually disappearing“.
My feeling is that we have another 10 years of really cheap manufacturing for export markets in China. Not only because other countries are not ready to take the relay, but also for China-specific reasons.
In the comments section, Richard went further in his analysis:
In 2020, I think the picture could be either completely different (i.e. no more crap made in China) or the exact same (people talking about Vietnam and India).
There are a couple of trends than lean towards the first, or at least catalyze movement, in that China’s workforce is going to be older and its’ economy presumably more mature and infrastructure investments in India and Vietnam will open up more of those countries.
However, in my mind, the biggest issue pushing against this is the simple fact that China has mass, and that with many of the investments in China still far from paid off, and may investments made with accessing China’s markets in mind, executives are going to resist moving without a compelling reason. Even if China costs a few points more.
I very much agree. I would add that too many purchasers are used to coming to the Canton Fair, eating Hainan chickens, having massages, and using the same good old negotiating tactics (and jokes). Changing their habits will take time.
Let’s not overlook the convenience of sourcing so many products at the same time and consolidating shipments. And the ease of doing business with experienced exporters who have been trained up to your requirements (compared with the difficulty of starting a new supply chain from scratch). Isn’t it worth paying an extra 10% on the FOB price?
Of course, the rate of change will differ from industry to industry:
- Production of cheap and simple apparel is already leaving China (but, interestingly, the fabric is still purchased in China in most cases).
- On the other extreme, electronics will take a very long time to relocate to another base. Many specialized and high-performance components are sourced from other Asian countries, but it is just too easy to assemble and ship it all from China.
What do you think?