The Road from China

China is a critical trading partner for Australia particularly with regard to our mineral exports and the range of imports from food staples, through electronics, household goods, to automotive parts to complex heavy engineering items. 

There is however a growing set of sourcing alternatives to China which can provide competition against rising Chinese prices and the comfort of a second set of suppliers.

Within the normal constraints of overseas sourcing, Chinese imports provide a source of low cost goods delivered on time to a specified level of quality.  For Australian merchants used to trading with local and overseas niche suppliers, prices and trading terms, Chinese capabilities seem almost limitless. From basic offerings to high tolerance make-to-plan items, the Chinese cost advantage based on low labour and material costs blew away the competition.

Times change and so do market dynamics. China is now experiencing a rapid rise in costs, and other Asian and Pacific countries are modelling their industries on its success.  China’s new competitors are also leveraging cost differential as their advantage over Australian manufacturers, and many are becoming increasingly competitive against the Chinese market.  Development of manufacturing capability capable of meeting Australian market needs in some of these countries has brought to light some other competitive advantages which now have to be weighed against the ‘export infrastructure’ which has matured in China.

Because of issues around the repeatable quality of imported goods, competitors to China have taken time to develop but are now becoming increasing competitive in terms of cost, repeatable quality and supply dependability.  As that hurdle has been overcome, other factors such as time zones, languages and ability to consolidate shipments etc are coming into consideration.  China may become less attractive because of lessening cost differential but, equally likely, other countries will become more attractive if their export infrastructure can be developed to provide a ‘complete’ cost-competitive alternate source of goods and thus some competitive tension and ‘hedges’. 

One of the maxims of good sourcing has always been to have ‘not too many and not too few’ suppliers. The rise of China as the ‘world factory’ has resulted in a lot of Australian companies placing all their eggs in one basket and buying solely from the least expensive reliable source, China.  While supply is sustained that approach is, of course, fine but as soon as supply disruptions or rapid price hikes occur, a second supplier has clear value.  Generally, we recommend diversification to Australian and other global customers to reduce supply side risk.  Traditionally, that policy has been relatively easy to implement but, in recent years, China has stood out as the ‘sole affordable source’ and the two-supplier policy has been traded off in favour of cost considerations.

The rise of other viable sources brings that policy back into play but raises issues of increased freight costs from multiple sources – again cost / performance trade-offs which have to be treated case by case and which are influenced heavily by the risks which Australian companies are willing to bear in supply disruption.

Categories are country specific and currently most sources bring their own set of advantages and risks.  At the very real risk of generalisation, Vietnam offers low cost labour as a plus, however currency volatility is a key risk. Categories being sourced are textiles and auto components. 

In Thailand, labour costs are also low, and there is good availability of agricultural land resources. But political instability is stopping Australian companies creating critical supply chain dependencies into Thailand’s auto components and textiles markets.

India has the largest low cost workforce and a very large pool of engineers so is a natural source of engineered items and equipment.  English is the predominant business language in India and western-style business culture is also strong. 

The time difference to Australia is one reason why Philippines is getting preference but India’s capability to replicate the Chinese export infrastructure; consolidation centres etc might reduce their ‘total cost to serve’ and thus outcompete the smaller Philippines.

Another real source option is the Philippines, which has a significant English speaking workforce and is being preferred to China and India for outsourcing. Political risk is also key issue in the Philippines, however.
And of course we’ve all heard the stories about China buying up assets and infrastructure in Africa, so that’s another place to watch over the longer term.

Given that there is an increasing number of price competitive source countries, buyers’ considerations must also include the advantages of the existing Chinese export infrastructure.  Most Australian importers are becoming more sophisticated in dealing with multiple vendors in China resulting in increasing numbers consolidating shipments in China to optimise shipping costs to Australia.  There is now a question about the practicality of operating consolidation centres regionally, rather than just in China and to thereby include other regional sources within the shipping consolidation umbrella.  Perhaps that will be the role of yet another country. 

This is a complex topic which more companies need to be considering at a strategic level.  Procurement teams are often locked into China-based sources and are watching rises in costs and a reduction in the cost differential between Australian sources and Chinese sources but strategic evaluation of China versus other regional countries is often a challenge at sourcing levels.

Another interesting perspective which we don’t have room to discuss here is that Europe sources its lower-cost goods from different sources all together with their ‘China’ being in eastern Europe, South America, Caribbean and some African countries.

At any rate, there are certainly some big changes in the making in global sourcing, so it’s time to revisit sourcing strategies and have a look around. Don’t get caught playing catch-up.

Carter McNabb is a Partner at GRA, an expert consulting firm specialising in supply chain strategy, planning and execution. e: cmcnabb@gra.net.au w: http://www.gra.net.au/ p: (03) 9421-4611