I recently came across a report from business network CNBC that had the eye-gripping title; Why US Manufacturers are Nixing the US for China. The premise of this report was that the combination of applied robotics and the devalued yuan are now lowering manufacturing costs for the global manufacturing hub. This was not the only report we have seen that suddenly trumps the new attractiveness for sourcing in China.  However, industry sourcing teams need to be cautious and thorough in their positioning and weighting of manufacturing sourcing decisions.

The argument seems compelling. Chinese factories are cutting prices because their costs are going down as a result of devaluation of China’s currency, not to mention that the current downswing impacting China’s economy has motivated many manufacturers to become more aggressive in preserving existing business or seeking additional customers.

The other compelling force noted was the offset of raising direct labor costs by the shift to more automated manufacturing enabled by robotics. However, a recent posting by China Tech provides a different picture or reality, with the headline: The manufacturing boom in Guangdong is over’: Industrial robot makers the latest to get swallowed up by China’s economic slowdown.  A senior salesperson of a leading Chinese robotics firm predicts that only 5 percent of current robotics producers will survive in the next two years because manufacturers do not have the available capital to invest in automation.  Apparently many Chinese robotic manufacturers set overly aggressive sales targets and did not factor an economic downturn. Declaring that the export-led boom in coastal region Guangdong is over, exports continue to decline every month.

The specific geography of Guangdong is a key since this was the former lower cost direct labor manufacturing region for apparel, footwear, toys and electronics that can benefit from the application of robotics and automation.  Instead, manufacturing has shifted to more interior regions of China, seeking lower direct labor costs.

A separate recent article states that the world’s largest contract manufacturer Foxconn, has throttled back its robotics targets to target 30 percent automation in its factories by 2020. Previous reports had cited a 70 percent target. This report indicates that Foxconn’s Chinese factories, including those in Shenzhen, have 50,000 fully functional robots currently operating. Replicating human tasks in high volumes is not as easy as it seems.

While both outlined factors, the devaluation of Chinese currency and the promise of increased automation to offset increasing direct labor costs would appear to be a compelling argument to once again consider China for manufacturing sourcing, we advise caution for manufacturers and retailers.

The primary lesson learned from the initial wave of strategic sourcing decisions that favored China so many years ago was the one-dimensional view that weighted so many industry sourcing decisions. That sole weighting was the attractive cost of direct labor.

Industries have since learned that intellectual property protection, added logistics and transportation costs and the risks inherent within China and across global distribution networks are all added factors.  The same holds true for current decisions, but the assumptions have somewhat changed.

More and more manufacturing has moved to the interior regions of China, requiring added logistics and transportation factors. The global transportation industry has its own set of problems.  Ocean container carriers are in a race of survival of the fittest, those with the biggest ships, lowest costs and highest revenue potential. Air freight capacity has been dramatically reduced, and existing air service comes with a premium. Last year’s massive disruption involving U.S. West Coast ports provided a lesson in overburdened port infrastructure and increased transportation risks. Supply chain teams must now balance their transportation risks among both U.S. East and West Coast port entries.  For Europe based firms, a massive overcapacity of ocean container vessels on the China to Europe segment has yet to shake out as to which multi-carrier network will garner the most leverage in shipping rates.

China’s leaders are desperately trying to move the economy to one of consumption-based vs. the prior export led, and that will drive capital availability. A consumption-based economy places the priority on China’s own manufacturers and service providers to fuel job growth and compete for business within China.  The government has identified strategic industries that will fuel China’s economic growth over the next five years and they will have access to advanced research and needed capital. If you happen to compete in these industries, your business risks are magnified, especially if you source within China.  Consider the recent challenges of Western brands competing within China, as their supply chains came under attack for poor quality or sub-standard practices.

Technology is a new imperative, particularly in gaining end-to-end and multi-tiered supply chain visibility across global supply networks.

The takeaway of our commentary is to not be swayed by a singular trend or singular factors.  Sourcing decisions continue to require a holistic analysis that not only includes the cost of manufacturing, but the various other factors related to landed costs, inventory investment, security of information and added supply chain risks.

A given in today’s increasingly competitive global economy is that change is a constant, and assumptions prevalent today will be different in the not too distant future.

Industry supply chain teams have hopefully learned that strategic sourcing decisions need to stand the test of landed costs, market access, supply chain resiliency and risk mitigation. While China will remain an important and meaningful source of manufacturing and value-chain capability, industry supply chain teams will require a balanced global approach in sourcing, one that spans cost, technology capabilities, IP protection and risk mitigation.

Bob Ferrari