A journalist asked me this question: “Is China over, as a sourcing destination?”
My response was no… but it might be a destination for a different type of sourcing projects.
- No in the very short term, because supply chains can’t be dismantled and relocated easily–especially with so many importers having set up local buying offices and trained local staff.
- No in the longer term (10 years), because China will still have an advantage when cost and speed are factored in.
I gave it some thought, and I see three trends for China in the next 10 years.
Trend 1: changing mix of products
The Chinese manufacturing sector is going through a painful transition, from high-labor-content products (e.g. textile, shoes, decoration, toys) to more complex technologies (e.g. industrial goods, cars, pharmaceuticals…).
I don’t mean that garments won’t be made in China any more, but that only high-quality garment factories will be competitive for export markets in 10 years. Others will be wiped out by the competition of other Asian countries, or will focus on the domestic market.
In the near future, China manufacturers will be competing against German exporters more often than against low-cost Vietnamese of Bangladeshi factories.
Trend 2: higher domestic consumption
China will consume a higher proportion of its industrial output. Many manufacturers have already noticed that margins are better when they sell on the domestic market. Young graduates don’t want to work in international trade as much as they used to.
The export business will not fall sharply, but it will slowly decline in proportion. Producing in China for selling in China will become more and more common, especially as local manufacturers develop their know-how and their technology, and as IP rights are better protected in local courts.
Trend 3: more factories in inner provinces
Chinese production base is slowly shifting to inland provinces, where labor, land, and electricity are cheaper. It will also become a necessity because the number of migrant workers willing to go to coastal areas is declining.
At the low- and medium-end, domestic consumers are very price-sensitive. There is no sense in producing for China’s market in places that are close to international ports, if costs are lower in less developed provinces.
It will also be a strategy to keep costs down and keep serving export customers. Manufacturers of components might relocate inland, while final assemblers will tend to stay along the coast.
Do you agree?
I cannot agree more with point 1. This is why I setup our company focusing at 95% on industrial and long lived goods from China. The trend is really there. China is already strong for infrastructure the emerging world (Russia, Brazil, Middle East). A year of so ago, I was at the Canton fair and visited the machinery areas. Most stands had Russian or Arabic character brochures and banners (https://www.procurasia.com/?sty=540).
I also agree with point 2. There are an increasing number of companies with strong success on the domestic market and an increasing portion of the population that can spend some money to consume, even in central and more Western China. But what is consumed in China is not the same as what is exported. So companies still tend to be either export oriented or domestic oriented.
For point 3, I am not sure. Maybe for low skill labor intensive products. Maybe these will be reallocated to domestic consumption. But moving inland increases your land transportation costs, which is not easy for low value goods.
For higher added value products, there is still plenty of spaces in the East. Not in Shenzhen or Shanghai, of course. Not in Suzhou or Hangzhou. But there are plenty of welcoming cities there between where real estate cost is not totally crazy and where people can have a easier life. I see a development of these at least at the same time as the inland areas.
Etienne
Etienne,
I always love your comments. Thanks for adding to the article. I think you are correct regarding trend 3 — about the development of cities like Huizhou or Quanzhou or Yantai, at least as much as the inland areas.
I know some manufacturers that moved from Yongkang to Quzhou in Zhejiang province. Probably to keep labor at low costs.
In the head of 98% of Chinese factory bosses, the only way to keep costs down is to relocate to places where labor, electricity, land etc. are cheaper. That’s all they focus on.