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Sourcing Summit “Alternatives to China” Panel Highlights

The concluding panel at the Sourcing Journal’s inaugural event, “Sourcing Summit: Projections and Reflections 2013,” was entitled “Alternatives to China.” The often contentious issue of the future of sourcing to China loomed large over the entire conference and so this panel was eagerly anticipated by many, both as an opportunity to crystallize some sense of the changing contours of Chinese manufacturing and also to plumb industry experts for actionable solutions.

The panel was populated with an impressive assemblage of industry insiders equipped with a deep experience with the Chinese economy: Rick Helfenbein, President of Luen Thai USA; Sylvia Reyes, Apparel and Textile Director, Proexport Colombia; and Louise Bohmann, Senior Associate, Customs and International Trade, PricewaterhouseCoopers. Ivan Kenneally, Editor in Chief of the Sourcing Journal, moderated the discussion.

Kenneally began by noting that almost every panel discussion was compelled to confront the specter of China’s transformation from a provider of heavily discounted labor to an expensive and sophisticated manufacturing titan. Now, the entire sourcing community has to adjust its strategies to accommodate the fact that China is no longer a bargain. Kenneally’s query, both about China’s evolution but also about the future of sourcing itself, kicked off what rolled into a very lively discussion.

Helfenbein was the first panelist to weigh in. While he acknowledged that China was too integral to sourcing to be simply replaced, he emphasized that every sourcing agent moving forward would have to have a “China plus 3 or 4” strategy, studiously open to viable alternatives appropriate for different products and circumstances. While many express skepticism that other emerging markets have the infrastructural maturity to draw business away from China, Helfenbein strongly disagreed, arguing that it is already that case that other, powerfully attractive options have surfaced. “The top 5 countries (China, Vietnam, Indonesia, Bangladesh, and Mexico) comprise 64% of all apparel imports to the USA. The top ten countries comprise 80%. If you can’t find what you need in these ten countries, then something is wrong,” he said.

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Reyes made an impassioned case for considering Colombia a legitimate alternative to China. She argued that its geographic proximity alone, and speed to market as a consequence, make it a worthy choice. Also, Reyes noted that its increasingly sophisticated infrastructure, considerable gains in productivity and recent political stability are also some of the key virtues of Colombian commerce.

But most of all, Reyes seemed to contend that a grand opening of the markets, both between Colombia and the US and the EU, would mitigate the fact that it’s obviously more expensive than China. While China has largely avoided large scale free trade agreements that would eliminate tariffs and duties that cut into margins, Colombia has aggressively pursued them.

Reyes also expounded upon the apparently significant gains Colombia is making in streamlining its manufacturing processes, consistently increasing the overall efficiency of its quarter of the supply chain. While  she conceded it’s unlikely Colombia is soon to be a much cheaper alternative, she did suggest that these gains could offset some of the price disadvantages.

Reyes remarks were not limited to Colombia but extended to the whole of the Western Hemishere, which, she argued, is a competitive destination for sourcing for US firms because a combination of geographic proximity and efficient process make for unusually quick turnaround.

Bohmann added her technical acumen to the discussion. Kenneally observed that China is traditionally understood as almost two separate entities economically, the coastal cities where most of the factories are historically clustered and the inland cities which provide cheap labor. However, if the robust push on the part of the Chinese government towards urbanization continues, it seems possible that the distinction between these two geographic sectors could begin to blur and potentially even vanish.

Bohmann suggested that this distinction still holds and is likely to in the proximate future. While the topography of Chinese economics is surely undergoing a sea change, these tectonic shifts are not happening overnight. Depending on the product, these traditional classifications still wield practical significance.

Bohmann also discussed the possibility that a “first sales” strategy could help minimize costs for those firms that continue to do business in China. With traditional valuations, the basis for determining a good’s dutiable value is the price the importer of that good pays an intermediary. The trick of first sale is to pin the dutiable value on the price in the transaction between the manufacturer and the intermediary. This takes the intermediary’s gross margin out of the equation, lowering the dutiable value of the good. Bohmann admitted that this strategy wasn’t always applicable, but in some circumstances it could significantly increase margins.

In terms of alternatives, Rick expressed some optimism regarding the rise of Vietnam and Cambodia, the two nations he said are “seeing the most growth right now, and will become increasingly important over the next 5 years.” And while Helfenbein conceded that price was a principal driver for sourcing decisions,  he cautioned that “key sourcing decisions should be based on many factors, but worker productivity and speed to market are the core essential elements.” He also counseled that geography is essential. “Never stray too far from your source of raw material. The supply chain will continue to tighten up and distance matters.”

At this juncture in the discussion, Robert Sinclair, COO of Li & Fung, expressed his skepticism from the audience regarding these candidates to replace China, mostly on the grounds that their collective capacity was simply inadequate to meet global demand. In Sinclair’s view, business to China will continue to increase although its character and conditions will have to evolve. He was particularly down on the possibility that Myanmar would soon emerge as a manufacturing contender, noting that it still languished in a state of economic “immaturity,” lacking the necessary infrastructure to draw much foreign investment.

Some observers from the audience asked the panelists specifically about technical fabrics and embellished fashion garments, questions that highlighted the permanent importance of China for global manufacturing since all the panelists agreed China reigned supreme in these categories. In fact, even if those materials could be shipped from other country, only China has the technical labor sophisticated enough to produce those garments in a way satisfactory to Western standards.

All the panelists concurred that the long term prospects for the China were subject to seismic revision, driven by macroeconomic factors that could not simply be halted by bureaucratic tinkering. The emergence of a middle class armed with disposable income, urbanization and wage increases will have wide reaching reverberations. In its economic infancy, China lent, saved and exported while the US borrowed, consumed and imported. As it progressively mimics the American model, and crosses the threshold into economic maturity, the sourcing community will have no choice but to make sometimes painful adjustments.