Industry Week Magazine recently posted an article, Is China Too Expensive, penned by the CEO and two other consultants of Alaris Consulting. While consultants do not generally tend to complement the written content of other consultants, I must admit that this particular article brought out some excellent points regarding today’s challenges related to sourcing strategies within China.
The article acknowledges that labor shortages, rising wage inflation to as much as 15%, and the appreciation of the Chinese Renminbi are driving some to conclude that China’s heyday as the premiere global manufacturing center may be over. More importantly, the authors accurately point out that an argument based solely on cost comparison misses the larger strategic issue, which is namely access to China’s huge domestic market.
While leading the Low-Cost Manufacturing in China advisory practice at industry analyst firm IDC Manufacturing Insights, I often counseled clients to differentiate their supply chain sourcing strategies among two strategic alternatives. Manufacturers source suppliers and/or production for purely lowest-cost advantage, which we termed as a “net production strategy”. In industries where labor or production costs have a significant impact on margin, a lowest-cost sourcing strategy may indeed be overriding.
In contrast, one can also source from a strategy where access to a key strategic market is the long-term objective, which we termed as a “net consumption strategy”. The term consumption was purposely selected to denote that the supply chain strategy was directed at developing a supply chain network to eventually fulfill requirements of the selected market, in this case China. Some manufacturers have the choice of exercising both strategies, while others may have to eventually differentiate.
The authors of the Industry Week article further make the point that profit-optimizing strategies have not run dry, and that the majority of foreign manufacturers neglect to fully apply international best practices such as optimization and lean techniques. I can agree with this premise up to a point, the point being that certain business practices within China itself are in need of obvious reform, as witnessed by the constant litany of quality and product contamination problems originating within China’s supply chains.
My takeaway from all of these observations is to maintain a very clear and well-understood focus to your firm’s China sourcing strategies. If lowest-cost is your sole driver, than alternative strategies or near-shoring should be in consideration. If access and/or distribution within China’s huge market is the ultimate strategy, than staying the course with high diligence, patience, and transparency to processes and management needs should be your perspective.