China Sourcing 2016 – Is it cost-effective?

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china-sourcing-under-the-microscopeOver 22% of Australian imports come from China. (ABS statistics here.) Hardly surprising, since China accounts for almost a quarter of global manufacturing. Yet recent news reports raise questions about China.

  • Rising wages.
  • Devaluation of the renminbi.
  • Turmoil in the Chinese stock markets.
  • And of course long-standing concerns about product quality.

Even with the China Australia Free Trade Agreement reducing many import tariffs, you might wonder. Is China sourcing worth it?

At Hornet, we believe it is. To explain why, let’s look in more detail.

Rising wages do not make China sourcing uncompetitive.

china-sourcing-2016-wage-comparisonLabour costs in China have certainly risen in recent years. But they started from a very low base.

Compare average wages in Chinese manufacturing to those for local Australian labour. Despite increases, labour costs are still less than one fifth of local wages!

Or you might compare China sourcing to offshore manufacturing in other countries, such as India or Indonesia or Vietnam. Wages are lower, it’s true, but there are other issues to consider.

Productivity

If your order takes 5 days to manufacture in China, but 8 days in India, daily wage costs are note a good comparison. Look at the total labour cost of your order instead. China’s productivity is higher than many low-cost countries. And it’s getting better all the time.

McKinsey found that China’s productivity increased by 11% per annum from 2007 to 2012. That compared with 8% in Thailand and 7% in Indonesia. Plus, with increasing use of robotics, there’s more productivity increases to some.

Infrastructure

china-sourcing-2016-new-silk-road-mapBasic infrastructure like roads, ports and reliable power support manufacturing. China has developed infrastructure already, and continues to invest.
Plans for a ‘New Silk Road‘ are part of a government strategy to open up markets and make trade easy.

It’s not just trade agreements. Transport infrastructure, including freight rail, will make China sourcing more affordable and reliable.

That transport investment is also opening up the centre of China for export-based manufacturing. And wages in inland China are lower than in the coastal regions.

Supplier clusters

In Australia, we know well that the loss of major automotive manufacturers will cause hardship for many parts suppliers. In China, major manufacturers have attracted similar second tier suppliers, who are located close by. So all the parts required are readily available. In addition, competition keeps component prices down.

A devalued renminbi will help keep China export competitive.

For Australians looking to import, the falling Aussie dollar can seem like a big hurdle. But remember, the USD-AUD exchange rate only matters if your contract is in US dollars!

china-sourcing-renminbi-puzzle

With our own offices in China, Hornet routinely negotiate contracts in renminbi. And the renminbi is falling against the US dollar. At least as fast as the Aussie dollar is.

So the AUD-CNY (China yen, or renminbi) exchange rate is unaffected.

As China moves onto the world stage and relaxes restrictions on its currency, the renminbi is likely to fall further still. So Chinese manufacturing will become even more cost-effective.

Chinese stock market turmoil

Chinese stocks tumbled in mid-late 2015. They fell again early this month, triggering a trading halt.

But the Chinese stock market is not as closely linked to the country’s economy as Westerners might expect.

The ABC reports, ‘at best only around seven per cent of China’s population engages with the stock market. Those who do buy stocks can be less likely to trade based on solid reasoning and more likely to simply follow others.

‘More likely to follow others’ means a panic herd reaction is only to be expected.

What’s more, the Chinese government has historically intervened to keep the stock market stable. This January, it appears they didn’t.  ‘There’s been a lot of surprise in the market that China hasn’t slowed this decline,‘ says a Barcalys representative.

While the stock market drops make headlines, they’re really an overdue adjustment. And possibly a sign that Chinese economic management is becoming more like the West.

China sourcing does not mean low quality goods.

We’ve written many times about China sourcing and quality. There’s one key point to make, so let’s make it again.

China sourcing doesn’t cause quality issues. Poor sourcing practice causes quality issues.

Major multinationals (Caterpillar, Apple, Nike, Ford…) manufacture in China. These companies invest in quality control and get quality product from China. (Most of the time! There are some mistakes, like this Panadol syringe.)

Ensuring on-the-ground quality control can be difficult for smaller companies. It’s not always easy to justify international travel, let alone someone full-time in China.  And you might not have staff with relevant experience. Hornet’s services resolve this problem. You can opt for an end-to-end sourcing service, or just ask for help with quality control.

ChAFTA (China Australia Free Trade Agreement

China-australia-free-trade-tariff-reductionsWe’ve written about this previously. It’s good news for China sourcing.

Import tariffs are gradually reducing on items including clothes, footwear, household electronics and cars.

The first tariff reductions occurred on 1 January this year.  The correct documentation is required. More information here.

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In summary, sourcing from China remains a reliable and cost-effective option for many Australian businesses. But it pays to investigate the options for your business. You may want to do everything yourself – in which case you’ll need to invest in regular travel, plus have strong quality control systems, a great deal of patience and good attention to detail. Or you may want to work with a partner like Hornet, with expertise on the ground in China.

Whether you’re sourcing retail items, industrial goods, spare parts or packaging, there are factories in China who can supply you. If you’d like to discuss your needs further, just call or email us at any time.

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Other useful articles from the Hornet blog

Why use a sourcing agency?

Manufacturing Map of China

China Sourcing vs India Sourcing

Impact of the China Australia Free Trade Agreement for Importers

ChAFTA Update

Sources:

http://www.tradingeconomics.com/china/wages-in-manufacturing.

http://www.tradingeconomics.com/australia/wages-in-manufacturing.

http://www.economist.com/news/briefing/21646180-rising-chinese-wages-will-only-strengthen-asias-hold-manufacturing-tightening-grip.

http://www.economist.com/news/leaders/21646204-asias-dominance-manufacturing-will-endure-will-make-development-harder-others-made.

http://www.abc.net.au/news/2015-08-01/a-look-inside-the-strange-world-of-chinas-stock/6665964

http://www.wsj.com/articles/china-market-plunge-has-investors-wondering-about-more-turmoil-1451919595

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January 21st 2016