Back in February, the world was watching the Far East (predominately China) as the onset of this Pandemic took hold of economies and lockdowns were implemented. Albeit over Chinese New Year, companies’ Asian supply chains were shut down and the return of workers remained an unknown.
Now to today, over the past 5 months, this virus has spread widely infecting some 13 million people globally. Moving from Asia to Europe, the Americas are now the epicentre. The number of infections has risen by 1 million in just 5 days. This has led Tedros Adhanom Ghebreyesus, Director General, WHO to comment, “too many countries are headed in the wrong direction”.
Whereas Asia is now operating relatively normally within their own borders (China has just announced GDP growth of 3.2% for the second quarter suggesting a V shape recovery), Western markets are hampered by lockdowns and a resultant shift in consumer behaviour. In addition, with borders shut, companies now find themselves locked out of their Asian supply chains. What does this now mean for Asia Sourcing strategies or specifically companies with no buying office in Asia?
The New Asia Sourcing
We have always said that being close to your suppliers is paramount, in whatever guise, to leverage the benefits of buying from Asia. Therefore, we thought it would be useful to run through some ideas of how to manage your suppliers in this current environment:
1. Sourcing new Factories
Should you need to identify new factories, then it is important to look to a local partner who you can collaborate with to visit the sites, engage with the owners and undertake the pre-screening work that you are not able to currently do. This will provide greater visibility and allow you to still go through an objective onboarding process.
2. Quality Control
More than ever, it will be important to use third parties to conduct inspections (inline and final) to ensure that the products being produced are to the quality standard you require. If you usually take TOP samples, make use of high resolution photos as a means to saving money in this tough business environment.
3. Use Technology
Technology, and its use at a corporate level, is something that this Pandemic has certainly accelerated. Certainly, using communication tools can help you get closer to your suppliers. Likewise, digitization of supply chains has been accelerated to better manage data and metrics particularly when access has been restricted.
4. Plan B
Should something go wrong with a particular production, it would be advisable to have an option (“Plan B”) of getting people to the factory to work through and resolve any issues. Again, a local QC house, or Sourcing company may be able to help. Trying to address a matter at arm’s length may end up causing more issues than solving the problem.
5. Limit Risk Exposure
Given that budgets are currently restricted, where possible, identify the suppliers and products that carry the most risk. This may be around the value of an order, the strategic importance for your client, the type of product or even the terms (upfront terms) but it will ensure that you are allocating what resource is available as best as you can.
Virtual Buying Trips
As part of our commitment to our clients, we are already working with our clients on Virtual Buying Trips. Depending on your time zone, we have been setting up and managing meetings with clients’ factories. Also, we are taking clients to new factories via Zoom and Teams. Our staff are on-site and walk you through the production as well as play an integral part in the discussions with the factory management. No more long journeys or waiting for your train and all from the comfort of your own home!
Summary
We hope that this Pandemic will be brought under control in the shortest possible time. The new normal for Asia sourcing needs to rely on an upstream capability being put in place as well as use technology to take you to the factory gates. For all your sourcing needs, please contact us at unlockAsia@et2cint.com
The coronavirus pandemic has firmly cast the spotlight on the fashion industry. As countries and markets have gone into lockdown worldwide, the fashion industry from trade shows to retailers has been impacted.
Digital platforms have become the norm now across many aspects of our daily lives. Even fashion shows in Shanghai, Tokyo and Moscow all followed suit and went digital. Some of the upcoming collections at the largest fashion capitals might be projected through a screen in this new Covid-existence.
The impact on fast fashion
Likewise, the global pandemic had a dramatic impact on fast fashion at a retail level. Consumption has declined as stores have been shuttered. Consumers have thought twice about buying clothes given the limit to the amount of socializing we have been experiencing.
Undoubtedly, we are reconsidering our past behaviours; how we spend our money. We have discussed before the impact that the fashion industry has on the environment, but has this pandemic accelerated this change?
A Shifting Manufacturing Landscape
One glaring point this pandemic has highlighted as markets went into lockdown was the dramatic and visible drop in greenhouse gases as factories were forced to shut their gates (appreciate this is not solely to do with manufacturing, or the garment sector specifically, but still serves to make the point). The United Nationals Alliance for Sustainable Fashion estimates that the fashion industry accounts for 8-10% of the world’s greenhouse gas emissions. We can visibly see our impact as consumers on the environment across global media outlets.
Challenges or opportunities?
From a product perspective, if one looks back up the supply chain, the Garment industry since the 1970s has largely been manufacturing where cheap labour can be found. Western Brands looked to scale their offering using low cost labour. These markets, the manufacturers and (importantly) their workers now sit idle. We have previously used the example of Bangladesh. Its garment manufacturing industry (84% of all exports) decimated during this pandemic. This demand shock has caused an economic tsunami. Can some of the medium size operators continue to survive? Will they want to take on orders for clients that caused them significant financial losses? The likely outcome, in the absence of any consequential local Government intervention in these Asian markets, is consolidation across the garment manufacturing sector. It may be therefore that with less competition and greater power with the suppliers (around client selection) costs start on an upward trend.
Fast Fashion & The Consumer
The process of making one cotton shirt emits approximately 5 kilograms of carbon dioxide and 1,750 litres of water. The vast majority of consumers are not aware of this nor would it have any impact on past buying decisions. Price has always been a key element of any purchasing decision. But it also impacts how a particular garment is treated in the future. When a shirt costs $5, it is quickly seen as disposable. This combined with the Fast Fashion industry that sells billions of garments each year to provide their consumers with the latest trends from the fanfare and glamour of the catwalks, promotes the idea that clothes are disposable and encourage excessive waste.
Sustainability and more sustainable behaviour have been forced in front of even the most unwilling consumers. We know that Sustainability comes at a cost and this has long been the balance that Brands have struggled to manage. And with each step back to normality, consumer mindsets and shopping habits will change.
A Sustainable Future
This pandemic, for all the pain and suffering, has potentially put the breaks on the beast of consumerism, which has been guzzling up the world’s resources at an unsustainable rate over the past 30 years. This is not to say that Fashion does not have a future. Certainly, we have always looked to express ourselves and clothing is fundamental to this. But, perhaps this has given fashion retailers the opportunity they needed to invest more in sustainable (more expensive) practices like upcycling and the use of more sustainable materials such as Pinatex (made from waste Pineapple leaf). Sustainability reports are already a central part of large retailers’ annual reports and one would now expect some of their ambitions to be accelerated.
Help from the Fashion Industry
Whilst we wait for lockdowns to be relaxed, it is notable that fashion houses and retailers are doing their bit to help prevent the spread of this virus. Prophetically, Burberry already had face masks on their catwalk towards the end of 2019, but the face mask has begun integrating itself into mainstream culture. Also, a lot of fashion houses are now making and selling versions of cloth masks for this new Covid-19 reality. Let’s hope that this is not a trend that needs to remain for the long term.
At ET2C, we are here to help our clients across multiple categories and markets. For example, we are currently producing a range of Cloth Masks to meet the world’s needs and to combat this deadly virus. For all enquiries, please contact us for more information at contact@et2cint.com.
The internet has been an incredible enabler when it comes to sourcing new factories. In a few clicks, you can find a whole smorgasbord of suppliers ‘able’ to manufacture and deliver what you need. However, understanding the risks when outsourcing production and the risk mitigation strategies to address these is integral to avoiding any potential pitfalls. Asia, in particular, presents a greater challenge due to a more complex business environment that is overlaid with more marked cultural, language and regulatory differences.
With two decades of experience operating in Asia, we have honed our approach to vetting and onboarding suppliers to deliver on time and against specification. Below we have pulled together some key points to help with this end of the process.
When selecting a supplier, you should ultimately be sure that your interests are shared, or at least aligned. Success for you needs to mean success for your supplier. There is simply no point in today’s environment with short-termism and lop-sided relationships in which the supplier is suffering on price, payment terms, short delivery times etc. There will only be one ultimate loser, and that is invariably the buyer. When first identifying the right supplier for your needs, make you address the points below:
1. Understand their business
Take an ‘under-the-hood’ approach, which means developing an understanding of the facility (how many production lines, people, seasonality, size, turnover etc.), their history, other clients (third party references if possible) and where their expertise lies.
2. Ask for their registration documents
We do this as a matter of course. Although often in a foreign language, be sure that the supplier is who they say they are and not an imposter! For example, an export agent and not the ultimate manufacturer as this may lead to additional costs and possible contractual complexities in the case of any disputes.
3. Check any quality certifications
As independent verification of standards, these are useful but make sure that these are still within the validity period, they are verifiable by the governing bodies (not fakes) and are evident on any visits.
4. Visit the site and meet the management
Sounds simple, but we have seen many businesses pay suppliers without visiting the site and spending long enough with the management team. Understand their product expertise and manufacturing capability and what drives the management team (for example, is ethics important).
A lot of these can be addressed by having some kind of local presence on the ground, with staff who can speak the language and visit the factory to make sure that all is in order. We have seen factories change the signs on the side of the building as soon as the potential client leaves! Not a good omen.
Onboarding a Supplier
This is where we see a number of companies making mistakes when implementing a direct sourcing strategy. Any risk mitigation strategy has to be underpinned by law. This is complex where legal systems are less robust or less developed than in the West. Some key points to consider in this regard:
a. Legal Jurisdiction
In some Countries it is difficult to enforce a contract that has been breached. For example, it is not easy to enforce a purchase agreement against a Chinese factory governed by US law. And even when there is enforceability present, some legal systems are less than effective when it comes to claiming for any breach of contract. Make sure you take legal advice in this regard*.
b. Non-Disclosure Agreements
These are commonly used to ensure that there is protection against any company IP being shared or used. However, the best protection is to make sure that any NDA covers off Non-use, Non-disclosure and non-circumvention. These are commonly referred to as NNN agreements.
c. Communication Requirements
At the outset, be clear as to the expectations. Set up a critical path with key milestones and agree with your supplier what is expected of them as part of the management of the information flow. For example, make sure that there is a clear specification sheet that provides product details, colourways, packaging requirements etc. This eliminates the risk of timing issues or mistakes executing the product quality.
Making sure that you understand the formal relationship that you are entering into and the fact that in a lot of cases it is a very alien business environment will put you in good stead. In addition, a lot of companies use commercial levers (like payment terms) to provide protection should something go wrong. Working with a company that has experience on the ground can help you manage such risks.
Summary
Over the years, we have been told and likewise heard of some production runs gone badly wrong. Being able to develop a relationship will define how easy it is to work with an overseas supplier. In Asia, relationships are of particular importance and leveraging this can help you benefit from the broad manufacturing base. Look at your suppliers as ‘Partners’, who can actually help you deliver the products you want, help drive innovation and sync with your own procurement technology rather than look simply over a short term horizon.
In the main, having some kind of local presence will only help enhance these relationships whether it be your own office, a sourcing company or some other third party presence. If you were manufacturing 30miles up the road from your head-office, you’d be visiting the facility on a regular basis. The same principle should stand true if the equivalent spend is put to work 6,000 miles away.
At ET2C, we provide our clients with the transparency needed to best manage their suppliers across Asia and help with any risk mitigation strategy. For more information on how we can help you, please contact us at contact@et2cint.com.
*None of the comments in this article should be construed as legal advice. Should you have any queries, you should seek legal advice relevant to your own individual circumstances
Even with the rise of the internet and platforms, such as Alibaba, dramatically reducing distances and opening up markets, when it comes to identifying the best sourcing partner in Asia, it is always a good idea to ask yourself some pertinent questions. This will ensure that you select the BEST Asia Sourcing Company for your business. To help, we have researched and selected the TOP questions you should consider when looking for the right partner.
Question #1: How established is your sourcing partner?
This is probably one of the most important questions to consider for a few reasons. First of all, understanding current and past clients, as well as the evolution of the business, will aid any decision. This is particularly true where you are able to get third-party client references that underpin any views considered. If you find a company that has been in good standing in the region for over a decade, chances are you have a good contender for helping your business source manufacturers in Asia.
Of course, with longevity comes, a level of experience and expertise. Operationally, the necessary familiarity of sourcing throughout Asia despite volatile and increasingly fluid geopolitical climates. Companies like ET2C, for example, with over 20 years of experience throughout Asia as well as other countries, have consistently been a frontrunner for clients’ Asian sourcing needs.
Question #2: What are the company’s ethical standards?
In general, this is an important element when choosing to do business with any company. Moreover, this becomes essential when working overseas. There, local laws may allow or create a climate for unethical business practices and non-compliance. Ask key-questions to establish that you are dealing with a sourcing company that provides the following:
What are their views on ethical practices within their supplier base?
Do they have their own Code of Conduct when it comes to dealing with the supplier base?
Do they have any process around bribery and corruption?
Undoubtedly, there are some excellent factories across Asia that are producing high-quality products in a fair and ethical way. It is up to your Asia sourcing company to make sure that you are selecting the correct suppliers. Furthermore, it is paramount for you to get the level of visibility required. Examples like the terrible collapse of Rana Plaza in Bangladesh some years ago are a reminder of where certain companies have lost control of their supply chains and are indirectly profiteering from unethical business practices.
A common theme that is consumer-led over the past few years has been the rise and rise of Sustainability. In particular, what this means for companies engaged in product manufacture. With ongoing concerns about the environment, fair practices and material waste, a sourcing company in Asia should be aware of the impact this movement has on supplier selection, product development, and quality standards.
Question #3: Who are the People?
Particularly true of any company operating out in Asia, relationships and people matter. Having clear sight of who you are dealing with will be a key part of any successful relationship. It sounds simple. In an ideal world, it would be but based on our research it is something that should not be underestimated.
You need to get an ‘under the hood’ perspective who the founders are, who your contact is and what they understand about your business. At the end of the day, you want a team in place that not only understands your key drivers but is one that is willing to do everything in their power to deliver the product, leverage in-house expertise and provide a high level of visibility. The best sourcing Asia company will have a team that really cares. Briefly, make sure that the team is aligned with needs. This will pay off over the course of the relationship.
Trust, integrity, and accountability are core values that are reliant on the team in place. In Asia, you can identify these elements as a key success factor. Often market research (asking third parties such as logistics, specialist quality labs about reputation) and client references (word of mouth) can be the best way of getting this level of insight.
Find the Best Asia Sourcing Company.
Don’t skip any of these important questions if you really want to find the BEST Asia Sourcing Company. Having a great partner in manufacturing that understands your needs, is people-oriented and provides a high level of visibility in everything that it does will make a tremendous difference to your sourcing requirements.
At ET2C we are always looking to understand our clients and deliver flexible solutions to address their needs across Asia. For more information, please contact us at contact@et2cint.com.
Does the name Abebe Bikila mean anything to you? Unless you’re a running fanatic or Olympics expert, probably not. Abebe was the first African to win the Olympic marathon, which he completed in Rome in 1960. That’s pretty impressive, especially considering that the US and Russia were vigorously training their athletes as a propaganda move, but it gets better. Not only did Abebe win the marathon by running at a 5:10 minute per mile pace (roughly 18.4kph), but he also did it barefoot.
Abebe Bikila Winning the 1960 Olympic Marathon displays the Ethiopian spirit to quickly adapt and overcome.
It’s no surprise that his home country of Ethiopia is the oldest independent state in Africa while also boasting the title of the second fastest growing economy in Africa and the world. This fast growth and political stability have flagged the developing nation as a potential site for international businesses to cultivate their business in this possibly-bountiful economic environment.
The global outsource manufacturing sector is increasingly fluid, particularly with soft goods (the lowest value add manufacturing process) and businesses are always keen to identify the latest low cost manufacturing base. Asia’s demographic, even with India included, is aging.
Labor is still an important component of manufacturing even in an era of automation and technological advances. The only other continent that can compete with Asia on labor is Africa.
One of the countries being looked into includes Ethiopia. While all sub-Saharan nations in Africa seem to be experiencing economic growth at an average rate of 3.2%, with its 10% growth as of 2018, Ethiopia stands out as one of the fastest. Can this fast growth be sustained, however? Or is Ethiopia just booming before its bust? A look into the profile of this ancient and resilient nation displays hope for prospective businesses but is not without its red flags.
Ethiopia
One of the characteristics that has caused the most publicity for Ethiopia is the country’s economy. Ethiopia’s exports have all the characteristics of an emerging economy, complete with a dominant agriculture sector with a rapidly growing manufacturing sector. At the time this article was written, Ethiopia exports a total of 3.13 Billion US dollars of products every year, with its main exports being vegetable products like coffee, which constitutes 24% of the total $1.81 billion made from vegetable exports. Manufactured products are still small in comparison, with only 232 million US dollars being coming from this emerging industry. The economy over the past decade has grown at 10% a year making it one of the fastest growing economies in Africa.
Although Ethiopia still ranks as one of the continents poorest countries, it has resource and labor to make it an attractive destination of export manufacturing. With a population of some 100 million people, 70% of whom are under 30, it has a demographic that props up the manufacturing sector, particularly given the unemployment rate is around the 17% mark.
Ethiopia, while developing its manufacturing industries, still relies primarily on agriculture as its main source of exports.
In addition, it has a developing infrastructure, in part thanks to Chinese FDI. Some of the successes in this space include the development of Ethiopia Airlines, upgrading its network of trunk roads, and expanding access to water and sanitation services, all signaling progress for a more connected Ethiopia – the Addis Ababa-Djibouti rail line cut the journey time for taking goods from land locked Ethiopia to the sea from days along roads to 12 hours. However, one of Ethiopia’s largest problems lays in its power access, where, according to a World Bank journal article, a further 8,700 megawatts of power are needed in the next decade, which requires the doubling of the current power capacity (Morella & Foster, 2011).
Nonetheless, Ethiopia is also improving the conditions and sprawl of its road networks, with a US $43m road designing and construction agreement dedicated to infrastructure. Yet, this large investment along with the need to upgrade its power capacity combined with the large trade deficit could see large amounts of debt in Ethiopia’s near future.
Industrial Parks
Similar to the special economic zones that transformed Shenzhen into a manufacturing powerhouse decades ago, Ethiopia now has close to 30 industrial parks demarcated as ‘Special Economic Zones’. There are also incentives for foreign companies to open up manufacturing plants within these zones such as duty free exports, 10 year company tax breaks and no tax for foreign workers and duty free exports.
The majority of these companies are Chinese built and managed but are in the main focused on utilizing the local labor pool contrary to many reports of widespread Chinese labor being imported. Their scale is significant; the Huajin International Light Industrial City is a 1.5 million square-meter park that will eventually have a capacity of 100,000 workers and provide the amenities (such as housing, healthcare etc) – a larger population than the average UK town.
It is not only the Chinese that are investing in ‘Made in Ethiopia’. In Hawassa, some 270km south of Addis Ababa, built at a cost of $250 million by the Chinese Civil Engineering Construction Corporation, there are 140 hectares (part of the first phase) with 52 factory sites which house 20 different apparel firms from 11 different countries. Notably, American clothing giant PVH, whose brands include the likes of Tommy Hilfiger and Calvin Klein, and H&M take up some of the available space.
A Marathon, not a Sprint
That’s not to say that there are not challenges that Ethiopia needs to address. It will take time and it will not happen overnight. Unlike 90% of International Labor Organization member states, Ethiopia has no minimum wage. Even though $57 per month is the international poverty line, there are workers being paid less than $50 per month even with overtime. This is something that needs to be addressed and foreign firms will be giving particular focus to this as part of their ethical code of conducts, and there has also been a ground swell of discontent among workers on pay with an increasing number of strikes being held.
The productivity is currently estimated to be a third of that in China. This will develop over time and is a sign of the immature nature of the manufacturing sector (whereas China has to continue squeezing out any productivity gains to remain competitive) and the development and continued investment that will be required going forward.
Summary
There is a vast demographic dividend on the African continent, and with the Asian average age increasing, the labor pool of the East is beginning to diminish. That is even including countries like India, Bangladesh and Indonesia. Low value add manufacturing is already present within Ethiopian industrial parks, namely footwear and apparel/textiles, and with continued development and investment ‘Made in Ethiopia’ is likely a label that will become increasingly common in Western retail stores. There are challenges, but these are not dissimilar from the Asian manufacturing base some 20 years ago and arguably Western retailers/brands are now better equipped to deal with the management and implementation of ethical standards at overseas manufacturing plants with the visibility now required across their supply chains. It will take time, but Ethiopia is well positioned to be crowned the ‘Winner’ when it comes to mass manufacturing compared with its African neighbors.
Internally, at ET2C, we are making it our business to understand how the Ethiopian manufacturing sector is developing and its current relevance to our clients. We are constantly looking for new opportunities across Asia and beyond to help our clients source from the most suitable suppliers.
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We are pleased to announce that ET2C International Inc’s Industrial Division will be exhibiting at Southern Manufacturing & Electronics in Farnborough, 5-7th Feb 2019. We will be showcasing world class, high quality products and assemblies, manufactured in low cost geographies: China, India and Vietnam. Pop by and see us on stand N125!
About Us
ET2C International is a comprehensive global sourcing company that is committed to providing businesses with access to low cost country manufacturing territories (China, India and Vietnam).
We are leading experts in offshore manufacturing within the industrial sector and are well placed to mitigate the risks of producing your products overseas.
For the past 18 years we have been manufacturing and supplying world class components: Castings, Forgings, Plastic Injection Mouldings and Sub-Assemblies, to clients across the globe.
We bring to our clients a wealth of knowledge about both manufacturing and operating in Asia. This includes both strategic and operational advice and tangible solutions to maximise value direct through to the client’s bottom line, whilst mitigating the inherent risk of outsource manufacturing.
Are you looking to benefit from the Asian manufacturing? Do you want to know more about how ET2C can support and add value to your business?
Come and visit us on stand N125 or drop us a line.
We look forward to speak with you!
Asia, led by China over the past two decades, has long been one of the greatest centers for trade. From the ancient days of the Silk Road to the modern mega-cities of Guangdong, Shanghai , Delhi, Ho Chi Minh City, Bangalore, Hong Kong, Dhaka to name a few throughout many points in its history, stood out as a home of commerce. However, this does not mean that one should just wade into Asia’s manufacturing sector. The region covers two thirds of the world’s population mixed together with a variety of cultures, languages and political mindsets. The region is a dynamic hub but there is complexity at every turn and understanding what these are at a granular level and how they may impact your supply chain is key to unlocking the vast opportunity that this part of the world presents.
Fortunately, many of these issues can be addressed with some local experience on the ground. The internet revolution has added an enormous upside to how business can be conducted and reduced global expanses to the press of a button at a computer in someone’s home. But with that, people and businesses have assumed that just as it is easy to find a supplier, it is easy to manage the supplier remotely. As a starting point, it is worthwhile to first dispel some of the myths that exist on doing business in this part of the world.
Myth 1: I Can Manage Everything from Overseas
If you were buying from a manufacturer down the road from your home, and were committing considerable working capital in purchasing products or investing in tooling, there is little doubt that you would make sure you had visibility of what was going on at the plant, likely frequenting the site at numerous points during the production. The same should be the case with Asian manufacturers, but too often we see companies managing at arm’s length; different time zones, different language, different culture – what could possibly go wrong?
There is little doubt that any dollar committed to the purchase of the manufacture of products should be carefully managed and looked after. Having some kind of local oversight is vital to making this happen. It allows issues to be identified and addressed when they should be. All because the internet suggests that the factory is a good one, does not mean that your production will necessarily be what you need it to be.
Myth 2: Suppliers are Easy to Find
There is no doubt that sites like Alibaba make connecting with suppliers easier (and that is a good thing!). But that does not mean that these factories are necessarily the best suited to manufacture your products, such as manufacturing capability, market experience, access to certain raw materials, ability to export, size of the business, financial health, location, IP to name just a few.
The key point is developing a sustainable partnership in the truest sense of the word. Selecting the right supplier means, particularly in Asia, having face to face meetings, seeing the site and understand why this company and location is best suited to your needs. We would suggest that going one step further as part of the due diligence process and taking an ‘under-the-hood’ approach can identify any potential issues beyond simply the manufacturing aspect.
Myth 3: Quality and Consistency Will Remain Constant
Engaging with a supplier is the most effective way of handling any quality issues.
Never underestimate the importance of quality assurance and control as an integral part of a production process. Identifying the risks of a production within a critical path should be discussed internally and with the factory from a product perspective and then a quality program implemented to address any of these.
We find that engaging in this arena with the supplier (again at a local level) is the most productive way of managing quality. It should be a continuous improvement process and to the extent that the quality piece is adopted by the factory and all the staff, you essentially have multiple QC inspectors throughout the complete manufacturing process. Again, it should be a partnership.
Myth 4: I can Always Count on My Goods to arrive in a Timely Manner
Addressing errors in an early stage can help creating timely deliveries.
Any production will always have issues and being able to address these in a timely manner is what is key to hitting delivery deadlines. A key component of this comes down to the supplier relationship – albeit the different Asian cultures will also present unique challenges – and the communication channels. We always say a problem is not a problem if it is identified early and can be addressed even if it is the acknowledgement that there is a likely delay to a production because of something unforeseen at least knowing 4 weeks in advance, it is possible to look for solutions on the freight forwarding side or perhaps even update clients, who may be able to look at different delivery windows, just as an example.
It should be recognized though that Asia, and China in particular, have become very good at delivering against the impossible where required. That said, if you do get a cascade of ‘’Mei WenTi”s in response to a complex product matter or a particularly tight deadline, we would urge you to dig a little deeper!
China is leading the world on trade, but its macro-environment is extremely complex which makes it difficult to navigate alone.
Myth 5: I Can Set Up an Asian Office
A local presence is certainly a step in the right direction where there is scale and an internal capability at company level to manage this. There are a variety of locations around Asia that are well suited depending on your supplier hubs and specific regions that both suit your local market and your product manufacture.
Just be aware that this does come at a considerable cost and there will be an investment required that may be difficult to actually recover. Often professional services firms will give a simple overview of the ease of establishing an entity in Asia (we have seen this many times) but the reality is markedly different. We know this because we operate across multiple Asian markets.
There is a complexity every which way you turn from simple points around different language to the legal status of legal representatives (personally) through to transfer pricing and the management of Fapiaos (Chinese invoices). The point is that from a Sourcing perspective, should a company be investing capital in setting up an entity based on scale and also the current fluidity present in the Asian manufacturing base. There are lots of other options that may be more cost effective and reduce the level of risk that a company takes on. Do not get distracted from the main event; the management of your Supply Chain.
Is setting up a buying office the most effective tool for you?
Myth 6: I can Buy from Asia at Arm’s Length
There has never been a time where partnership has been more important. It truly is the single most important aspect of sourcing from Asia, in our opinion, in this current climate. The ability to have a company that truly partners and buys in to your plans, understands your needs and actually invests in their own facility to be able to deliver is essential.
As partners, the factories or suppliers need to be treated fairly. There is simply no point in continually knocking down prices year on year, as we have seen and experienced before. That’s not to say that one should not be commercial, but it is around paying them fairly, committing over a period of time and giving visibility of what they should expect. In this relationship, the supplier will have clear sight of what they need to do, perhaps what capability they need to develop and have the funds to do so. Where a supplier is struggling to make ends meet, then this will increase the risk of quality issues arising through sub-contracting or cheaper raw materials, or a lack of interest in dealing with the orders or not following through on the Sustainability Code of Conduct that you agreed and implemented earlier in the year.
Ultimately, paying a little bit more now, will go a long way over the medium term.
Summary
There is nothing complex about any of the above points. It is just necessary to take a view about how best to manage at a local level your suppliers. There are a range of options available and picking the right one will be the difference between a good year or a bad one. There is always going to be risk when you are purchasing from foreign suppliers. Think about how best to manage this.
Purchasing from foreign suppliers can be complicated. To get the most out of the Asian manufacturing base, ask us for any procurement or sourcing insights.
The key points are visibility of production and developing those partnerships either directly or via third party service providers.
We, at ET2C, are well placed to have discussions with you about your current supply chain across Asia (offices in China, Vietnam, Hong Kong and India currently) and whether we are best suited to help you. Give us a call or drop us an email.
As the bell rings to mark the end of the 2nd round of the bout between the United States and China, there are still no real insights into the fighters’ respective strategies nor which is going to be able to outmaneuver the other. The crowd is understandably nervous about the reverberations of both the fight and the outcome and its impact upon them.Talks concerning the trade pact ended in 2015, but according to Vietnam’s Minister of Industry Tran Tuan Anh, it took longer than normal to finalize the specifics of the deal because the European Court of Justice wanted to ensure investment protection by enacting a separate Investment Protection Agreement (IPA).
Statistics
China, with its 1.34 billion people versus the United States’ meager 311 million people, remains the underdog because of the relative size of economies and trade deficit. In 2017, the GDP of the USA was $19.4 trillion versus China’s GDP of $12.2 trillion. In terms of trade, the USA has imported $529 billion on a rolling 12-month basis and China, in stark contrast, has imported $135 billion over the same period. Therefore, there is no doubt that the USA can certainly punch harder because of the levers that it can pull. Trump is relying upon this clout and it is playing out in the latest round of tariffs. On 17th September, Trump announced tariffs on 10% on over $200 billion of products that the USA imports, which come into effect on 24th September and will increase to 25% at a later date. In response, China has said that they are going to impose a tariff on $60 billion dollars of 5% or 10% depending upon the category.
After this round, Trump still has another $267 billion dollars of imported products upon which tariffs can be applied. China has no additional products and can only increase the rates on existing products should it feel the need. Does this mean that America is about to land the knockout punch? Is there any leverage that the Chinese have? From reading the majority of the opinions and newspapers, there is certainly a growing consensus that believes China is backed into the corner.
Float like a butterfly
However, this underestimates China’s ability to box clever and effectively. Ms. Lovely, a professor of economics and trade with China, makes a compelling case that maybe, just maybe, China can outmaneuver Trumps aggression and strength should this fight continue for many more rounds. Her argument centers on the fact that:
a. many factories in China are foreign-owned;
b. China only adds a % of value to the supply chain;
c. China is, critically, thinking strategically.
For a start, she points out that 60% of China’s exports to the United States are incredibly produced by foreign-owned factories in China. As a result, there is no short-term solution to the tariffs because it takes many years to close and move factories based upon the structural shift required and the capital expenditure that has already been exhausted to establish the facility in the first place.
While consumer electronic products were generally removed from the list, network and router items will be covered by the tariffs. But for Beijing, Trump administration’s actions are a threat not only in purely trade terms: one of its main target is the “Made in China 2025” initiative – China’s plan to achieve global dominance in key technologies.
Ms. Lovely highlights that in the largest export sector, computers and electronics, China only adds an average of 50% of the value, thereby reducing the nominal impact of the tariffs on China. Different sectors vary in terms of the added value but the argument is sound across many sectors and softens the blow to China (though it raises additional concerns for the global economy because of its interconnected nature).
Finally, China is clearly thinking strategically and is conscious of the context in which this fight is set. China has doubled down on its commitment to its supply chains to the rest of the world and is only putting tariffs in place in response to the United States that are designed to avoid impacting the foreign-owned factories and companies.
In contrast, Trump is isolating the United States and is, based upon the above, impacting U.S. companies with facilities in China and those purchasing from China. Add to that, his rural loyalists are suffering due to the impact in the competitiveness of their exports to China and consumers are already being hit with price increases across the board (e.g. Ms Lovely, points out the 16.7% increase upon washing machines relating to the 20% hike in tariffs that Trump originally imposed).
We would add to the above that should there be a reduction in products imported from China and a material impact upon the Chinese economy, which is a real threat to China because it relies upon the capital inflows, then the RMB is likely to devalue and counter, to some extent, the increase in tariffs to the USA. That said, we do not see the Chinese Government actively devaluing their currency significantly because that would exacerbate outflows of capital and might result in a series of devaluation of currencies by other countries. Li Keqiang confirmed in a speech to the World Economic Forum in Tianjin that, “a one-way depreciation will do more harm than good for China.”
“Market sentiment improved after Premier Li Keqiang pledged on Tuesday that China will not engage in competitive currency devaluation, a day after Beijing and Washington plunged deeper into a trade war with more tit-for-tat tariffs.” (Reuters)
And the Winner is…
We all know that tariffs economically make no sense; they operate as a drag on GDP, are essentially a tax on the consumer and are counter to any free market analysis and, ironically in this case, the republican ideology. Whilst it is accepted not to be a major economic cause by most economists, the Smoot-Hawley legislation enacted by Congress in 1930 was certainly a contributing factor to the Great Depression. As a result of the above, the growing groundswell of lobbyists in Washington DC will continue to increase the pressure upon the administration. With the midterm elections in November, this is an administration that is going to be much more sensitive to these voices than the Chinese Communist Party in its own country.
The problem for all parties with supply chains from or through China is that we have no credible insight into the United States’ strategy. We have an unpredictable fighter in Donald Trump from whom we cannot make real assessment other than running through the various hypotheticals. We really do not know if this is an attempt to push China to address some of the clear violations of its intellectual property practices in the short term or an attempt to reduce the interdependence of the Chinese and American economies over the longer term.
At least over the next couple of years, this lack of certainty will undermine any true structural shift in supply chains from China until people are able to make a better assessment of the underlying strategy and long-term goals.
With an increased understanding of the cost of quality and other production metrics and efficiency, cost is no longer the only metric upon which our clients make strategic sourcing decisions, which is representative of the “Near Far Sourcing” strategy that we see in the market place. We typically do not see clients switch factories without seeing a significant reduction in cost of somewhere between 10% to 15% to outweigh not only production efficiencies, quality but also internal processes and the cost of making changes and developing trust and relationships.
We continue to work with our clients to explore additional opportunities from India, Vietnam and other jurisdictions in which we operate but, we would do the same without the potential of a full-blown trade war playing out because all of our clients are better positioned knowing the sourcing landscape in which they operate. We believe that we need to see more of the fight to determine the outcome and a longer-term strategy for our clients’ supply chain.
Vietnam is one of the World factories that could fit with your needs; you can read more and more on the internet from sources like journalists, bloggers and directly from companies themselves. How is it possible for Vietnam hold that position? ET2C Industry Insight will list down for you 6 reasons to source from Vietnam.
1. Favorable geographical location
Vietnam is one of the top South-Asian countries with almost 3.500 kilometers coastline, this large cover of sea access makes it a great potential for shipping efficiencies and open doors to countries with no access to the sea such as Laos and Cambodia. Vietnam has a total of 114 seaports, 14 of which are relatively large and named as one of the keys to economic development, we can list down the three main commercial ports, Saigon port in the south, Da Nang port in the center and Hai Phong port in the north.
2. A young and skilled workforce in Vietnam
Vietnam can offer to companies that are willing to invest in there skilled workforce a production of higher quality products relative to other low earning countries in the region. Vietnam actually wants to remain competitive, with very low labor rates, while bringing a greater quality for an economic transformation that is why for the instance Vietnamese workers perform better in reading than workers in other low earning countries.
The industries in which the Vietnamese workforce excels in are manufacturing, IT, retail, healthcare, tourism, pharmaceutical, logistics, agriculture and e-commerce compared to our low earning countries.
3. Numerous positive trade agreements
Trade agreement including Vietnam have been impended in large numbers over the last decade. We can of course start with in which Vietnam is a member and has an important seat in the discussions taken. ASEAN is not only political but economic where investments, trades and shipping remain ease. Vietnam is a member of WTO since 2017 which makes trades flow faster and smoother, it is also covered by the regulation organ of WTO for any trade dispute. Finally, it is between both US and EU that Vietnam has created some economic links through the TPP recently by completing all bilateral negotiations, it has not been sanctioned yet with EVFTA, 28 members of the EU can trade freely with the most ambitious developing country, Vietnam.
Founded in 1967, the Association of Southeast Asian Nations is a regional intergovernmental organization comprising ten Southeast Asian countries. In 1995, Vietnam joined ASEAN as the seventh member. Photo credits: Global Panorama
4. The best political stability option of the region
Vietnam is a communist country which has successfully achieved a change on its economic and business environment at the right time in 1986 through the “Doi Moi”, a political and economic innovation campaign. It is indeed possible to create foreign companies, develop them and be sustainable compared to other options in South East Asia where political stability is weaker. Vietnam is now officially one of the fastest growing countries of South East Asia with an economically robust, politically stable and rapidly growing market.
Huế, Vietnam Photo Credits: Dirk Spijkers
5. Great and unique production units
Vietnam is a great choice for companies willing to start sourcing and save money and time.
Small and medium companies are a perfect fit with Vietnam as working with production units from Vietnam will also allow them to purchase in small quantity. This major manufacturing hub in the ASEAN region also provides user-friendly administrative procedures for exports and imports.
6. Great partners for this journey
ET2C International Inc Vietnam branch will be a great match to your inquiries into Vietnam.
With more than 10 years of experience working in Vietnam, we continuously examine all local factories and sort through them to bring you the best quality at the best possible price.
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