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State of Trade Report: Costs, Port Problems and China Top of Mind for Sourcing Stakeholders

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Global trade and sourcing is constantly in flux, and each year brings both familiar challenges and new angles to analyze for sustaining a successful business.

Sourcing Journal partnered with Panjiva, a leading intelligence platform for global trade professionals, to conduct a survey on the state of trade and uncover where the economy is heading in 2015.

This year, it seems buyers, suppliers and members of the global trade community are less optimistic about the state of the sector, more concerned about costs, and increasingly feeling trapped into sourcing in China.

According to the survey’s findings, when asked about the economic outlook for global trade heading into 2015, respondents were 9 percent less optimistic about conditions than last year’s survey revealed.

“Frankly, the lower level of optimism surprised me. 2014 was a very strong year for global trade,” Josh Green, Panjiva CEO said. “And, as 2014 drew to a close, most macroeconomic indicators were pointing in a positive direction. However, for a lot of traditional retailers, the holiday season was a bit soft, and I suspect this dampened the global trade community’s optimism heading into 2015.”

Concern about costs could also be playing into the lowered optimism. For the second consecutive year, rising wages in key manufacturing countries was the biggest concern among the global trade community, followed by volatility in commodity prices. In 2014, apparel sector wages increased in Cambodia, Vietnam, China and Haiti, and cotton prices hit five-year lows.

More than 80 percent of respondents said they expect manufacturing costs to increase further over the next five years. This suggests improving manufacturing efficiency will continue to be key to reshaping sourcing and staying competitive in the face of constantly rising costs.

“A few years ago, I asked a sourcing executive how he planned to address the threat of rising manufacturing costs. He said that he would be sending engineers to his factories, so that they could find ways to improve efficiency and improve yields. At the time, this was a unique perspective — most other executives I talked to were on the hunt for new, low-cost sourcing destinations,” Green said. “Now, however, our survey suggests that the sourcing community is turning from geography-hopping to process-improvement as the preferred approach to keeping a lid on costs. As a result, in 2015 I expect a lot of sourcing organizations will be trying to figure out where they can find a good engineer or two.”

China remains the go-to sourcing locale, with 81 percent of buyers sourcing there, followed by 54 percent sourcing in India.

And contrary to popular chatter about sourcing moving out of China and into other low-cost countries as wages and costs there increase, an overwhelming 96 percent of buyers surveyed believe that sourcing in China is of greater or equal importance than it was one year ago, suggesting that production will still be centered there — despite the fact that 61 percent said sourcing in China is more costly than last year and 52 percent expect prices to continue climbing.

“For years, manufacturing costs in China have been rising. And, for years, the sourcing community has believed — or perhaps hoped — that a low-cost alternative would emerge. Now, I think it’s finally sinking in that there is no ‘next China.’ Yes, there are other places to manufacture, but costs aren’t remaining low for very long in these new sourcing destinations. And sourcing teams are struggling to find the capacity and capabilities that are comparable to what’s available in China.” Green said. “Based on what we heard in our survey, this state of affairs has a lot of sourcing executives feeling trapped in China.”

While there’s been talk about Myanmar as the next sourcing hotspot, only seven of the 350 respondents identified it as the next place to make product. Seventeen percent said they plan to source there in 2015 and 59 percent said it was “too soon to tell.”

Africa has also been a buzz destination and 24 percent of respondents have so far sourced from the region — primarily South Africa — and 33 percent indicated intent to source on the continent this year.

The West Coast port problem, which was only recently resolved as a labor contract was agreed upon by dockworkers and their employers, delayed and disrupted shipments and caused companies to find alternative routes for product. According to the survey, 60 percent of respondents expect the port delays to impact how they ship goods in 2015.

Los Angeles and Long Beach, two of the main ports affected since the labor contract expired last July, saw a slowed growth rate of just 2 percent in the second half of 2014, compared to 5.4% in the first half of the year. Other U.S. ports sustained a 5 percent growth rate throughout 2014.

Despite the rising costs and shipping setbacks, buyers are reporting plans for bigger budgets this year — 43 percent said they’d be spending more money. And many pointed to technology as the recipient of that cash. Technology to help increase transparency, increase speed to market and reduce costs, will be most sought as 57 percent cited plans to implement transparency aids, 31 percent said they would buy into enterprise resource planning (ERP) platforms, and 23 percent said they would begin using product life cycle management (PLM) programs.

To uncover the complete outlook for 2015, download the full State of Trade report here.

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