As China progresses from a low-cost manufacturer dependent on exports to a service-oriented economy driven more by domestic demand, wages there are rising. With increasing labor costs and an ageing workforce, China is losing its foothold as the world’s lowest cost manufacturer of consumer goods. Rising costs are forcing companies to take a closer look at new sourcing locations across Asia.
Southeast Asian sourcing locations like Bangladesh, India, Indonesia and Vietnam maturing as regional integration and preferential trade terms take hold. A number of countries in South and Southeast Asia are set to benefit from this recent shift.
This changing environment is forcing companies to reassess sourcing strategies. While no single country can match the scale of China, countries such as Bangladesh have large low-wage workforces that are now starting to be employed, while Southeast Asian countries are making moves to remove tariffs and customs restrictions.
Preferential trade terms have also boosted exports from Cambodia and Bangladesh to the European Union (and also to China due to recent agreements between Bangladesh and China), while Indonesia has tended to be a more popular sourcing destination for Japanese and North American buyers.
Cost alone is not the only factor driving some companies to source elsewhere. An ageing population and labor shortages in some regions in China are important factors for securing other sourcing destinations.
Consumer companies sourcing there, however, may need to consider new supply models or destinations in order to sustain productivity gains as costs such as labor continue to increase. The age and quality of a country’s workforce is important to understand its future potential. Hence there will still be good reason to invest more in younger and cheaper countries such as Bangladesh, Vietnam, Cambodia and Pakistan .
China ‘s infrastructure, the completeness of its supply chain, its speed to market and a growing presence in global shipping all mean that China will continue to be a preferred hub for sourcing. But Southeast Asian countries will increasingly present even more attractive sourcing opportunities as new preferential trade agreements. There is a clear opportunity for Southeast Asian producers who can benefit from more maturity in supporting services such as sampling, sourcing of inputs and logistics.
Currently China accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close, mainly due to increasing land prices, environmental and safety regulations and taxes and labour.
On an average, labour costs have surged by 15-25% pa for the past four years. China ‘s coastal provinces are losing their power to attract workers from the hinterland. This is apparent in diminishing figures of the migrant workers returning after they visit home during the Chinese New Year break.
If China ‘s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to import things from new locations across Asia or make things in North America as to make them in China and ship them there.
In reality, the convergence will probably be slower. But the trend is clear. Many manufacturers are looking to relocate out of China to low cost destinations in the region. Not all of the companies relocating to low labour cost regions are Western multinationals; in fact, many are Chinese firms. As salaries and spending power in China rise, the Chinese are importing more goods from the rest of Asia. At the same time, those rising salaries are forcing China to outsource more of its low-end manufacturing.