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What Are the Supply Chain Implications for a High Cost China?Thursday, September 16, 2010 > 10:49:38
(Transport Intelligence – John Manners-Bell)
One dominant theme emerging from the World Economic Forum event in Tianjin is the anticipated rise of Chinese manufacturing costs and its implication for supply chains.
The last twenty years have seen China develop into the world's foremost manufacturing location. Multinationals have developed global supply chains to supply the world's rich consumer markets in the West, with production underpinned by low cost labour strategies.
However these strategies are likely to become increasingly unsustainable as costs in China rise, compounded by uncertainty over the prospects of the renminbi. Policy makers in China have consequently seen the necessity to re-focus its economic development policy around technological innovation which will see labour costs become less important.
This is obviously a pragmatic response by the Chinese government and follows the well trodden path of many other formerly developing nations. It is also part of China's new assertiveness on the world stage as it moves from component supplier to Original Equipment Manufacturer in its own right. This has involved the development of global brands which to date have been lacking (with the possible exceptions of Lenovo and Haier).
Even so it is unclear where a rising cost environment in China will leave global manufacturers. The response of some of the participants at the WEF event to this conundrum has been sanguine. For many of the higher value manufacturers, low cost labour is just part of the reason for being present in the Chinese market – there are more significant, strategic reasons for their presence.
However for most consumer goods producers it is a real problem. If they continue to manufacturer goods in the Yangtse or Pearl River Deltas their cost base will rise (not only through labour costs – regulation is increasing as well). They can either export this inflation to Western consumers, or look for production locations elsewhere.
The question is, where? Indonesia and Vietnam are the obvious suggestions, but in terms of scale, transport infrastructure and also their respective governments' ability to 'get things done' they are many years, if not decades, behind China.
This leaves locating elsewhere in China itself. The opening up of the interior has been talked about for many years, and infrastructure is indeed being built to exploit new low cost labour markets. However from a logistics point of view manufacturing many days inland from the main gateway ports is less than optimal in terms of cost and time.
The weakness of this option has been shown up this summer by the 'monster' traffic jams experienced on routes to the west of the country. A railway network which is unfit for purpose has not been able to cope with the huge volumes of coal being shipped to the main urban areas. The migration of coal shipments onto the road network has had a critical impact on the movement of people and goods around the country causing huge economic losses. Many manufacturers will seek reassurance that transport infrastructure is considerably improved before they risk moving production inland.
The likely upshot is that most manufacturers will develop sourcing strategies which involve a combination of new and existing markets. Vietnam and others will take up some of the slack; near-sourcing of some products from market such as Mexico and North Africa will become more widespread (especially for those products which have high transport costs or where extended supply chains prove too much of a risk); the Chinese interior will be opened up and the established industrial regions in Shanghai, Shenzhen, Tianjin etc will continue to produce quantities of goods, albeit higher value than they are now.
There will also be other structural changes to distribution flows. The Chinese market has become a final destination in its own right, especially with the growth of its consumer market and the increasing urbanisation of its population. This present manufacturers and their logistics suppliers with a whole new set of challenges and opportunities.
What is clear from this debate is that logistics companies need to be highly responsive to these anticipated developments. They will no longer be able to rely on a few, very large transpacific or Asia-Europe trade lanes. Flows of goods will reverse; new ports and airports will need to be served and customers themselves may change as Chinese companies become more assertive in the supply chain.