Where once the mosaic patchworks of paddy fields and sugar crops dominated the landscape of Central Java, now sit a swathe of vast garment factories which produce apparel for leading retailers and brands. Similarly, 4,970 miles to the West, across the Indian ocean, rising out of the flat and baron plains of Ethiopia are large industrial parks (Special Economic Zones) likewise pumping out thousands of garments for international companies. These emerging industries are gaining ground on China, so long the factory of the world, and taking market share.
Of course, there has been the natural progression of China’s manufacturing sector up the value chain. This has allowed wage and margin growth but has increasingly forced the lower value add end of the manufacturing spectrum (particularly soft goods, and ‘cut & sew’) to look beyond China’s sprawling boundaries. However, there have been some sourcing trends in 2019 that have further exacerbated this movement out of China. In this context, what are the current China sourcing trends and how will China fit into any sourcing strategy going into 2020?
Sourcing Trends in 2019
‘Uncertainty’ and ‘Consumerism’ are broadly the two main drivers of these trends. However, with more choice of where products can be manufactured, there has been a trend to ‘de-risk China’. In essence, not put ‘all your eggs in one basket’ and with the Chinese economy slowing down it makes sense where possible to have alternate locations to manufacture your products (albeit this may bring additional challenges in some cases).
Uncertainty
Clearly, the highlight of this past year has been the US/China trade war. The unpredictability of the discussions and the imposition of punitive tariffs has led to US companies scrambling for alternate supplier-hubs. China is out as far as Trump is concerned in his high stakes game of poker with his Chinese counterpart. Undoubtedly, there have been Chinese moves on currency and slack on price with incumbent Chinese suppliers to mitigate the impact. But other markets around South East Asia have certainly been willing beneficiaries of American dollars. Conversely, should a deal be done later on this year as is anticipated (in some guise), expect this trend to at least slow down rather than stop altogether.
There has also been uncertainty in most retail markets as the threat of recession has led Buyers to lower volumes but work through quicker reordering cycles. This has been further compounded in the UK with the quagmire of ‘Brexit’.
Consumerism
We have previously discussed at length the impact that the new generation of consumers is already having on incumbent supply chains. One of the main consequences has been the need for more agile and flexible production. Therefore, having an ability to manufacture products closer to your local market (“Near Sourcing”) has been one solution to address this need, particularly when complemented with larger volumes from Asia.
Customisation and personalisation have been sourcing trends in 2019 that continue to enhance the level of engagement with customers. Whether it be a mix of colours, some embroidery or a label, the capability to in some way personalise the product to an individual or business provides a unique proposition. Suppliers are therefore needing to invest in technology and stock planning to make this a possibility.
Lastly, and one trend that has been increasingly prevalent this past year, is the need for sustainability. There’s a growing movement of Brands across the retail spectrum looking for sustainable stories around their suppliers, products and packaging. There may be varying degrees of engagement with this piece depending on the ultimate consumer and their needs. But there is little doubt that it is changing the sourcing landscape for the better with the imposition of high ethical standards on many factory sites and also driving innovation through the products and packaging to meet company and consumer expectations.
Where Does China Fit in Then?
Yes, the outsource manufacturing sector is in a state of flux. China has certainly lost its almost complete dominance in manufacturing that it wielded some 15 years ago. Wage inflation and currency appreciation have reduced its competitive edge. But taking a step back and looking at the facts paints a slightly different picture.
Clothing and footwear
To take clothing and footwear – the industries most impacted by domestic cost increases – over the past five years, China has only lost 6.6% of the relative share of global exports. The main beneficiary has been Vietnam at 5.1% growth, followed by Bangladesh at 0.9% growth. China still makes 57.5% of global shoe production and the US makes over 80% of its shoes (even with the tariffs already in place) in China’s factories. There is a trend away from China. However, capacity and scale cannot be ignored or replicated that easily.
Furniture and household
Away from soft goods, another example is furniture and household fixtures. In fact in these sectors, China has gained 1.6% relative market share of global exports over the past 5 years. It still sits in a strong position even when you include alternate markets that can compete but perhaps do not have the capacity currently to take a significant share of exports. In addition, manufacturing wage gains in the lower-cost countries (albeit from a lower base). One just has to look at some of the protests in countries like Cambodia and Bangladesh around minimum wage demands.
Automation
Lastly, China is automating its manufacturing base and the rest of Asia is slow to follow. That does not mean there are not some excellent new factories being across South East Asia that have state of the art machines in situ and are well placed to address ethical standards. The difference with China the Government drives in part this investment in the lead up to ‘Made in China 2025’.
As a global producer, China will maintain its relevance for the foreseeable future.
China Sourcing Trends – Our Key Takeaways
There is no doubt that the sourcing trends in 2019 have eroded China’s dominance as the factory of the world. But, China’s current size and breadth of capability still present a significant advantage of some of its smaller neighbours. Some of the key points are:
- A China + 1 sourcing strategy (invariably Vietnam) is still a compelling sourcing strategy
- Other market opportunities will be dependent on product category, company and sales market
- Look for China to ramp up investment in smart manufacturing
- Partner with suppliers over the medium term to allow them to invest in delivering value
- Flexibility & Agility will be key to identifying opportunities in new markets
- US/China tariffs to likely drop off by end of the year
At ET2C, we look to partner with our clients to deliver sourcing solutions that work for them. With offices across Asia, we are well placed to help you identify the right suppliers and deliver value through to your bottom line. For more enquiries, please contact us on contact@et2cint.com.
