Should we still source from China..??
Should we still source from China..?? If you are wondering why such a question, well, since the time China opened up for global trade circa 1980, became an economic superpower in the 2000s, up until now, China has come a long way in terms of global trade..
China’s growth in the last 30 odd years has however been marred by allegations by many customers in different countries claiming that they were cheated or defrauded by Chinese exporter, trader or company.. There have been complaints that some Chinese exporters or traders are fraudsters and scam artists.. All of this have created a notoriety for the Chinese traders within the global trading community..
Even on this blog, there have been a few real-life examples and case studies from readers not happy about the way some Chinese companies/people have conducted business with them..
Kevin Lee, the Co-founder of Asianconn a China-based sourcing agency explains the current situation relating to China based on which you can make up your mind..
If you have any insights, views, opinions to share, pls feel free to comment in the comments area..
China “The World’s Factory”: history, facts, current situation
China is not only a country filled with history and sights to see it is a country that became “The World’s Factory”. The Chinese government made huge strides towards developing the country and growing its GDP. It was partially achievable due to the new policies that the country has implemented, mainly opening up to the rest of the world in 1979. After that, a combination of factors made it possible for China to grow to number two largest economy in the world (2010). What are those factors and what effect will they have on the future of China’s manufacturing sector? More importantly, what will you experience as people who are already sourcing from China or just considering it?
To understand this, we first need to quickly look through the factors that made China The World’s Factory. The first factor was the cheap cost of labour that emerged due to the oversupply of labour in general. You have a lot of people applying for the same position, this, in turn, drives salaries down because it is so easy to find someone to fill in the position.
Secondly, China saw a huge growth in FTZ’s (Free Trade Zones) as well as other industrial and economic zones which allow you tax-free production and many other perks. Though I do have to mention that mostly larger corporations (e.g. HP, Samsung, Apple) can take advantage of such zones. However, in recent years you see a lot of startups being given the opportunity to set up in FTZ. Not only there is cooperation between the companies but governments as well. For example, Singapore invests heavily in China with USD 5.8 billion in 2015 in over 700 projects (International Enterprise Singapore, 2015). All of this helps to build businesses, cut costs and build more reliable cooperation
Thirdly, China doesn’t have a double taxation policy. What they do have these days is VAT refund policy. Meaning whatever is being exported VAT can be claimed back (usually up to 17%) by the manufacturers. This of course, in turn, lowers the costs for the manufacturers and leads towards a better business environment.
Another interesting and advantageous circumstance that makes China “The World Factory” is actually the current supply chain that exists within the country. What you need to keep in mind is that to build a supply chain that actually works in an efficient and productive way you need cooperation on a large scale from a lot of manufacturers.
What I mean here is that your factory can get you pretty much anything you want (that is related to your product). Not only that, the supplier can get it at the fraction of the cost for a very simple reason, they don’t need to import any parts from other countries pretty much everything is available from within China. And to put a bow on this reason I can also mention that efficiency in this case rises which will decrease your production time.
To sum up, China opened up its gates and was supported by factors mentioned above, a combination of which made it The World’s Factory. Now the question comes as the country has been developing things started to change: minimum wage is up, environmental laws enforced, material costs are going up. So is it still worth it for you to source from China? If you want to know, I suggest you keep reading
Does China have competition?
Well, truth be told it would be funny if China didn’t have any current competition. There are enough developing countries in SEA (South East Asia) and Asia that not only compete with China but are actually used by China for sourcing purposes.
Let us start with India, the country is growing like it is on steroids. A Large population of 1,311 billion (2015) with a good mix of high and low-quality skilled labour. Which basically means there are a lot of engineers to look after the production line and perform quality control, come up with innovation as well as workers who can perform manual labour at the factory. Labour costs in India are lower than in China that is why even some of Chinese name brands are transferring their manufacturing facilities to India, let’s take Huawei for example. They will grow the production capacity (for smartphones) to 3 million units by the end of 2017 (Huawei, 2016) in their India located factory.
India’s government is making sure the environment is favourable for manufacturing development. In 2014 “Make in India” program was launched that encourages companies to manufacture their products in India (Make In India, 2014), this, in turn, increased foreign direct investment making the country more attractive for smaller buyers as well.
Let us move on to Vietnam and Indonesia. First things first, labour costs in both of the countries are much lower than in China, and they have enough capacity for production. There are some government initiatives for opening up the market even more for foreign investment. For example in Indonesia, you can find a lot of palm tree plantations (for palm oil production) where a lot of major investments come from Singapore. In Vietnam money come from China directly, where manufacturers invest into porcelain production that in China became too expensive and not as profitable.
Malaysia and Thailand are not mentioned above because they differ a bit, as in they focus on more on technological and mid-range to high-range advances. They do produce food, chemicals and clothing but they are more expensive than India, Vietnam and Indonesia and they are trying to stay in that range.
Should you continue sourcing from China?
There are up and coming countries that are trying to take China’s place and get a “piece” of that development that PRC received starting from the early 80s. The question is if you are a small or medium level buyer who already sourced from China before or just started thinking about it what should you do and where should you buy from?
For now, the one major advantage India, Vietnam and Indonesia have is cheaper labour, but that’s pretty much it. I say for now, at least for another 10 years, stick with China. Chinese manufacturers by now have extensive experience of working in an international business arena, they know how to deal with foreigners, and they are experienced, simply put most of the issues you might face have already presented themselves in the past and were dealt with and resolved in China.
Manufacturing community in China has been formed for years, and all the factories have their Guan Xi (close business/friendly relationships and contacts) and know where and how to get anything that you need.
The transportation system is a huge plus point for China. You want to ship well by anything, and it is available in China. You want to get your products in 1 week, no problem. You want to have a cheaper shipping method, which will take longer but will save you a lot of money, you are the boss. Transport, logistics, agents, brokers anyone and anything related to shipping can be all worked out within a day.
Innovation is the happening scene in China. In cities like Shenzhen, you can find start-up hubs that come up with new ideas every day and make those ideas come true within weeks. You do not even need to ask your suppliers for ideas for example for an Amazon PL product. Your supplier will send you huge catalogues that will be updated every month.
Time to recap
China is still the way to go! Especially if you are a small or medium-sized buyer who is trying to develop the business with as little issues on the way as possible. China is becoming more expensive, and sometimes suppliers can be a bit rude, but at the end of the day, they pretty much have everything worked out. If you want to you don’t need to do anything except two things.
First, you find an agent who will do everything for you and second you tell that agent what product do you want, and he/she will arrange for everything afterwards. Of course, most of us prefer to be more involved because we want to have the best for the money we pay and in China it is possible.
Second, SEA (South East Asia) is large and has a tremendous potential in growth especially in the countries I have mentioned above. However, at the moment we can see that some basic issues have to be resolved. The ones that are important to mention are infrastructure development, workers training, supply chain development.
It is hard to predict future and identify how the market will split between the countries. Maybe, even better, the economies will unite to form something similar to EU which will benefit all the participants.
For now, we just have to wait and see. At the end of the day when people unite they can achieve more than when they are standing on the opposite sides and I hope SEA and China will make the right choices.
I hope this information is somewhat helpful to you and will make the process of setting up your sourcing a lot easier. Please help us spread the word and reach businesses all over the globe.