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Sourcing Experts Say Production Shifts in China Never Materialized as Expected

There has been an industry trope for years that sourcing in China is shifting to new regions, however industry experts say that, while there have been some shifts, they did not match the levels of predictions.

Despite the talk of high wages and labor shortages driving companies to inland, rural regions in China, infrastructure challenges and other concerns mean that the status quo in China has not changed significantly.

All the things people in the industry say about China are true, said Rick Helfenbein, president of Luen Thai USA. Wage rates are rising, the cost of materials is going up, and there is a real labor shortage, driven in part by the unintended consequences of the one-child rule in China. But, he pointed out, China is still far and away the largest single source of apparel and textiles that enter the United States and the production trends have not changed significantly over the years.

“I love when China experts get up in front of an audience and say clichéd statements: the next China is China; the future of China is to move to the west; the future of China is to move to the north,” Helfenbein said.

All in all, he said, China is doing okay despite rising costs. The Chinese government would like to move from low skilled, low wage industries up the manufacturing ladder, and some production has shifted to the center and northern region of the country, but the infrastructure challenges and operating hurdles in the inland regions are still significant, Helfenbein said.

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Helfenbein said he has not seen a seismic shift in sourcing in China. The end result is likely to be that most production will stay where it currently is, with the better factories continuing to get better and the bad factories going out of business. Some companies may migrate out of China into nearby countries where they already have some production or are comfortable operating, such as Vietnam or Cambodia, he said.

The only thing that is certain: no one will have a China only strategy…. Most companies are looking at a China plus two or three, probably China plus three. You can’t be all over the board, you only have so many people and resources,” Helfenbein said.

Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel, said most companies are not talking about new cities in China where they are moving production.

“Mainly I hear that they are pleased with what they have in China,” Hughes said. For several years people have been talking about efforts to move production away from the edges and further inland, Hughes noted, but to the extent that is going to happen it already has. Shanghai and Ningbo are two cities where logistics executives say they’re happiest to operate because the supply chain is the fastest, best and most efficient.

The logistics in China are already perfect in many ways, Hughes noted. Newer production centers, such as those in southeast Asia, face challenges such as lack of infrastructure or problems with the depth and size of their ports.

“You don’t hear people talking about changes in China anymore… I’m not sure if that means it’s done, or it’s just not news,” Hughes said.

Josh Green, chief executive officer of Panjiva, said there are three major trends that can be put in the same “more talk than action” bucket. The three trends are that manufacturing is moving to the United States, that sourcing is moving beyond China and that production is moving to new regions in China.

“There’s a common thread to this story: that is that it’s just harder to shift your supply base than all this talk would suggest. The talk would suggest that if the prices are going up in China, go somewhere else, whether that’s another country, somewhere else in China or here in the U.S.,” Green said, but that is obviously more difficult than the discussions indicated. “If we took all the talk at face value, what you’d expect to see since wages started to go up would be no more manufacturing in China. And in fact we all see that’s not the case. China is still the dominant supplier…the powerhouse will continue to be the powerhouse.”

Green said Panjiva was recently reminded just how popular China is as a sourcing destination when it launched a new product, offering clients Chinese trade data. The appetite in the sourcing community for the newly available data was surprising, Green noted.

“It speaks to the reality that China continues to be the key market when companies are thinking about their supply chain,” he said.