Most importers are worried of “putting all their eggs in one basket” (i.e. buying solely from China), and try to have sources in other countries too. That’s the “China plus one” strategy.
Conventional wisdom would suggest that, as costs rise in China and as other Asian countries build up manufacturing muscle and infrastructure, it should be easier and easier to work with suppliers in Vietnam, Indonesia, India, and so on.
Unfortunately,this is not what I see. And I am not the only one. As Dan Harris writes, “Countries like Vietnam and India are far more difficult than China and that fact should go into any cost-benefit analysis on diversifying.”
I thought of a few cases I either heard of (from people directly involved) or that I worked on, and 5 themes became clear.
1. The problem of the sub-suppliers
A large British multinational that sources all sorts of hardware products asked Indian suppliers where they get their screws — the response? China. Their best sources of competitive suppliers are China, Turkey, and Eastern Europe.
A large American bag importer studied their options in several South-East Asian countries. They found many cut & sew factories, but prices and timing were not as good as in China. The reason? Most accessories and even fabrics still have to be made in China.
As the two above cases show, the ability to sources components locally plays a major role, and it is one of the main advantages of China.
Note that a free trade agreement between the ten ASEAN countries (Indonesia, Malaysia, Vietnam, Cambodia, Philippines…) and China is slowly getting in place. Will it make the sourcing of Chinese components easier/cheaper? I am not sure.
2. China’s mass
In many product lines, China has a near monopoly. It has the trained workforce, the sub-suppliers (this point is definitely related to the first one), and the understanding of export markets.
When you look for power tools, consumer electronics, or home appliances, you will have a hard time finding manufacturers in Indonesia or in Pakistan. And those few happy candidates are probably still learning the ropes — it will take them years to reach China’s quality level and know-how.
Foxconn might set up a large facility in Indonesia, and Samsung one in Vietnam. And many sub-suppliers will naturally follow, to capture their business. But this is big-business-only logic.
3. Complexity and speed issues
For complex technical/industrial products such as machines, China’s main competition in Asia is Taiwan. There is simply no low-cost competition.
And complexity plays a role in many industries. Even in apparel! Try to have complex jackets made in Bangladesh, and you will have a hard time finding an interested and capable manufacturer.
Similarly, speed is what keeps many buyers in China. I am not implying that Indian factories can’t turn out containers of fast-fashion products in three weeks, but I can bet that Chinese factories are much better at it.
4. Lower wages do not always mean lower total costs
Many garment importers have been searching for the “cheapest needle” in Bangladesh, Burma, and so on. They have learned that longer-term planning and excellent knowledge of the local business fabric become more important in those countries.
I would venture that only large companies, and a few smaller companies that had exactly the right approach, find it worthwhile to source in those countries. Again, it is much, much easier for big importers.
For example, VF Corp. (a huge American apparel company) has “reserved” several buildings in a Korean complex in Chittagong, Bangladesh. They have the volumes and the clarity of vision for that kind of commitment. Meanwhile, smaller importers can only approach lower-grade manufacturers and need to fight every week against late shipments and quality issues.
5. Low-cost competition is often outside of Asia
For an American company purchasing machined metal parts, a “China plus one” strategy would probably involve a few Chinese suppliers as well as an American supplier. And the American supplier is probably the cheapest one for delivery in areas far away from the major ports.
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I could mention other factors such as reliable roads and ports, established trade shows, legacy sourcing offices in China/HK, and others. This is a complex issue.
Is China real estate overvalued? Sure. Would it be easy for China to slip into a serious economic crisis? Yes. But are China manufacturers losing competitiveness across the board? Certainly not.
What do you think?
The main issue here is the infrastructure vs. wage dynamic. China’s (generally, but not exclusively, especially inland where it starts to get ragged) is relatively good. So you have an infrastructure benefit that reduces costs. But this is now being offset by higher China wages. A worker in Guangdong now earns 3 times more than a worker in Ho Chi Minh City and 5 times more than a worker in Mumbai. So when does the infrastructure gap minus the wage costs make other locations worthwhile?
Our clients – and we have offices throughout China, India, Vietnam and the rest of ASEAN – dictate that typically, if they can get their production elsewhere up to 70% of that which can be achieved in China, then it makes economic sense to put that manufacturing capacity in that alternative Asian location – despite the lower productivity.
And two other things are continuing to happen to bear in mind – that infrastructure gap is narrowing, and Chinese wages are still increasing.
I agree that this issue can be boiled to infrastructure/network of sub-suppliers/productivity/maturity on the one hand, and wages on the other hand.
But these issues are so complex, I prefer to start from the micro (the individual cases I observe) and deduct some macro trends, rather than looking at what seem like macro trends in the news. This 70% ratio that you cite is interesting, though.
Just passing on what our own manufacturing clients are saying and the justification for their moving production capacity away from China. It varies from industry to industry somewhat but the 70% figure seems pretty consistent when they are doing the math.
China isn’t leeching huge amounts of existing capacity, although there have been some closures, especially in Guangdong. But new capacity build is being put into ASEAN and India, we have offices there so we see it. Hot spots: Vietnam, Philippines, Malaysia & Indonesia in ASEAN. Then Bangladesh and India, although the latter is also about the Indian domestic market, a rather different dynamic.
Thanks for the clarification!