China may still be the world’s largest supplier by a large margin, but as the powerhouse nation’s share slowly spreads out to other low-cost countries, many manufacturers are left looking for the upfront funds necessary for starting operations elsewhere.
Brands and retailers are moving to countries like Bangladesh, Pakistan and Vietnam as alternatives to sourcing in China and finding themselves in need of the financing to do it.
“When there’s an emerging market where the supply of labor is cheaper than the demanding market, then there’s a trading opportunity,” said Chris Chang, managing director of DS-Concept Factoring USA and China, a trade finance provider for the world’s small and mid-market. “But that brings a challenge for the financing part.”
Factoring—a financial transaction where the brand or retailer sells its accounts receivable (like invoices) to a third party (the factor, like DS-Concept) to meet its immediate cash needs—has become a localized product over time, which has made for a lack of available services for SMEs to obtain trade financing.
“International trade finance is really a labor intensive trade service that has to be provided,” Chang said. “SMEs are the backbone of every economy, so the government needs to finance these businesses, but nobody wants to finance a small business.”
DS-Concept does, however.
Demand for factoring has risen to high levels in Bangladesh and Pakistan as each grows its manufacturing base and more buyers want in on the labor cost savings.
Here’s how it works at DS-Concept.
As a factor, the company provides liquidity to interested manufacturers or vendors and then does the collection on behalf of the U.S. or European buyer.
Of course, the buyer has to be credit worthy and must live in a country where the factor is comfortable with the legal system should any recourse be necessary.
Think of the company as a sort of Shark Tank. Brands and retailers that show growth potential can benefit from DS-Concept as a venture capitalist of sorts, as it funds the company’s transactions but leaves running the business to them.
Companies that are moving across borders in search of alternatives to China are entering a new jurisdiction where the local banks don’t know about their credit or how much money they have. Without information like that, and without likely three years’ worth of financials and some assets to show for themselves, a foreign bank in a new sourcing market will hardly be dishing up dough freely.
“We don’t think like a bank, it’s really a marriage between trade and finance,” Chang said. “We can finance a company who may have been in China 12 months ago and now they are selling in Vietnam to the same buyer, and they can show their track record. This may be a new kid on the block in Vietnam, but in China he is established and we will finance that transaction.”
The reality of factoring may become more prevalent for more brands as the slow (though small) fade out from China won’t be letting up any time soon.
“The Chinese have mastered the supply game so that they are the most competitive supplier in the world, but if you say you need the cheapest product in the world, the labor cost and inflation in China will not make it competitive,” Chang explained, adding that the move to low-cost countries is product-dependent; high-tech goods will still be made in countries with high-tech capabilities, like China. “IPhone is still made in China and I don’t anticipate it being made in Africa or Bangladesh anytime soon.”
Textile manufacturing has, over time, shifted from Japan, Korea and Taiwan, then on to China when China got cheaper, then out from China when China got pricey. Brands and retailers are destined for places where they can find a competitive advantage.
Some factories in China are shuttering as companies move elsewhere, but the more established, industry leaders are, for the most part, secure and staying put, and these are some of DS-Concept’s clients.
“They may come to us to set up a subsidiary and try to do vertical business and supply directly to the buyer. They would still require our financing because banks don’t always have offices on both ends to collect the money,” Chang said. “In order for them to compete on a global scale, they need flexible funding solutions and it’s tailor made case by case. Our people are diversified in culture and business background, so they can speak the language of clients.”
The factories in China that are hurting have started to evolve, become B2C or offer value-added services.
“You either upgrade and provide a better product where you can ask for a better price,” Chang said. “Because if you’re merely competing on price, then you are going to lose.”