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With China No Longer Cheap, Wages in Low-Cost Sourcing Locales on the Rise Too

Considering that trade relations remain up in the air and retailers can’t get from under the spreading bankruptcy plague, global sourcing still managed to make strides in the second quarter.

As CBX Software noted in its Retail Sourcing Report for Q2, manufacturing conditions improved in most low-cost sourcing countries, and strong consumer demand and economic optimism prevailed in the face of rising input costs and price pressures.

“As we enter Q2 2017, global demand for goods produced in low cost sourcing destinations looked positive, with growing exporters such as Bangladesh, Vietnam, India and Indonesia all seeing yoy [year over year] growth in exports and foreign investment,” CBX noted in its report. “Some shifting of exports and trade allegiance was evident due to U.S./Trump policy.”

Highlighting some key economic indicators, CBX said this fiscal year, Bangladesh’s economy is set to grow by 6.9%. In Vietnam, exports grew by more than 15% in the first quarter, to reach $27 billion. India brought in $35.8 billion in foreign investment, a 21.7% jump on what it attracted last year. On the less favorable side, relations between Cambodia and the U.S. have grown strained as Cambodia has asked the U.S. to forgive roughly $500 million in debt, and Pakistan’s exports (textiles included) shrank 8.3% to $1.64 billion.

In looking at the World Economic Forum’s Global Competitive Index, India improved the most by far—the country, which is predicted to catch China when it comes to sourcing in the not too far future, climbed 41 spots to rank 39 out of 148 countries. China’s position, on the other hand, remained unchanged at 28 in terms of competitiveness.

What’s happening with China wages?

China’s average monthly minimum wage increased 6.6% to 3,275 yuan ($475.81) last year, compared to 7.2% growth in 2015.

As CBX explained, citing China National Bureau of Statistics (NBS) data, “The supply of these workers is slowing and their age in increasing from 35.5 in 2010 to 38.6 in 2015. Rising costs of workers in China will continue to put pressure on manufacturers through 2017.”

Several Chinese provinces announced minimum wage increases in the first quarter of this year, and more hikes are expected in the coming months.

What about global minimum wages?

“With greater visibility into social conditions in low cost countries, currency fluctuations, increasing unrest and union pressure, wages in traditional low cost sourcing countries are on the rise,” CBX said.

Wages went up in Cambodia, Indonesia, Thailand and Vietnam in the first quarter.

“As many no longer consider China low cost, wages in other lower cost sourcing destinations will continue to increase somewhat in line with growth in GDP and inflation,” the report noted. (See snapshot of current wages in chart below).

Currency’s current effects on sourcing

Currency is always a consideration for costing, so fluctuations always have to be factored into sourcing.

The U.S. dollar reached a 14-year high in January, though some of those gains have since been lost.

“The U.S. dollar is expected to continue gaining strength through the coming quarter, based on stronger economic forecasts despite some uncertainty at the start of the year,” according to CBX. “While the euro gained somewhat on strong Eurozone data, the currency faces ongoing uncertainty due to the Brexit, elections in the Netherlands, France and Germany and shifting U.S. economic policy. The Chinese yuan, which underwent some depreciation in Q1, is expected to continue to fluctuate.”

The state of commodity prices

There was little in the way of good news for sourcing when it came to commodity prices in the quarter.

“After a five-year period of mediocre performance, analysts predict that commodity prices have finally bottomed out, an impact felt in stronger prices amongst most commodities,” the report noted. “China is also affecting commodity prices with lower demand and growth in domestic commodity production.”

Oil prices may increase as much as 20 percent by the end of the year, thanks to ongoing conflicts with the Middle East, and stronger consumer demand will likely push prices for natural fibers like cotton and wool up too.

“Cotton prices were strong through Q1 and into Q2, a trend which some analysts do not expect to continue through 2017,” according to CBX. “Fine wool prices followed a similar trend to cotton, breaking a 29-year high in March, based on demand for better quality wool from Chinese mills. Unlike cotton or synthetic fibers, wool only comprises 1.5% of global fiber consumption and as a premium product, the price is really an indicator of consumer demand.”

The latest on the East Africa opportunity

Companies have been paying closer attention to sourcing in East Africa in recent years as costs in China continue to rise, especially considering its strong domestic cotton supply, large pool of available labor, low wages and proximity to European markets.

Despite interest increasing since PVH and H&M started sourcing there in recent years and the renewal of the African Growth and Opportunity Act (AGOA) in 2015, the current value of Africa’s garment exports is still small.

Citing World Trade Organization data, CBX said in 2015, China exported $175 billion in garments, Bangladesh $26 billion, and Africa’s garment exports were roughly $10 billion. Also, much of those exports came from longstanding manufacturing countries like Morocco, South Africa and Mauritius, not so much East Africa.

What’s more, according to CBX, challenges like lack of technology and qualified managers, political uncertainty and corruption, lack of an upstream supply chain and social compliance concerns have prevented any substantial growth for East Africa. Some companies are certainly starting to include the region as a small part of their sourcing matrix and others are looking at it as an option for raw material sourcing.

“For finished garments though, at this point it seems unlikely that without strong government and private sector investment in East Africa as a region or in individual countries such as Ethiopia and Kenya, this part of the world is unlikely to be the next Bangladesh or Myanmar anytime soon,” CBX said.

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