Is it the end of China’s low-cost production?

Sourcing New SuppliersYesterday I wrote about orders that were canceled by importers because of escalating costs in China. But does it mean other Asian countries such as Vietnam or India will become the lowest-cost producers?

The China Sourcing Information Center just published an interesting article (Reports of China’s death as a sourcing destination are highly exaggerated) written by Mike Bellamy. His thesis is that importers will still find low-cost products in China for at least the next ten years, and that the average quality level will tend to go up. And he backs it up with his own experience:

We source raw materials and components pan-China and have found that by getting quotes from the whole country, there are still plenty of suppliers to meet our targets. So it is not like China is drying up as a source. Plus, thanks to the slightly higher wages on the coast, suppliers are finally getting rid of the “throw more bodies at it” mentality of production and starting to think about efficient work place set up and efficient use of labor.

So the interior provinces will attract more and more manufacturers. But it will not make financial sense for all producers:

I have done my research first hand visiting other areas of China to check out rents/wages/tax policy and realize I could save 15-20% by moving operations to a place like Hunan, but I am not moving any time soon as I would lose 20% thanks to increased logistics and have a much harder time finding trained middle and upper management for my operation. Top level managers don’t want to leave nice places like Shanghai and Shenzhen and move to the gritty interior.

I tend to agree. In many product lines, China has a huge advance over other Asian countries (where, by the way, costs often go up, too). And, as noted previously, it will take time for global buyers to re-adjust their strategies.

However, the demographic trends dictate that the situation will be very different after 2020. I don’t think Chinese producers will be the lowest-price providers in many industries in 2025.