By Kathryn Lennon-Johnson
When I interviewed Ray Brilus, Director of Tiger Global, the Far East sourcing specialists, I knew he wouldn’t pull any punches about the reality for businesses in today’s economy.
“Having run a successful low cost sourcing business for the last 10 years, China has been our main focal point for sourcing a vast range of products for our clients around the world. We have a registered business in Shanghai and the UK, and service a global market. However, as a sourcing specialist, I now have to ask the question, how long has China got left before "low cost" is a term from their past,” Ray tells me.
Without a doubt, China’s position in terms of the global economy is one of a power house. Low cost manufacturing has been the mainstay of this revolution that has seen them grow to become the third largest economy in the world (and will no doubt reach number one). But times are changing. If you are looking to source product from China or setup a manufacturing supply chain there, you need to ask yourself a few fundamental questions.
I ask Ray to tell me a bit more about these questions.
“Before I investigate this issue, let me quickly explain my background in business and the changes I have seen in that time. It will give you a bit of an insight to the country.
“I stated a business back in 2002 called Just Flags Ltd, sourcing low cost flag merchandise from China. At the time, I thought there was only one choice to get good manufactured at low cost, and so it proved to be true. There was a reason why every product had “Made in China” stamped on the product. As the business grew, we rebranded to Tiger Global Ltd and specialised in sourcing a vast range of product from China. We started getting involved in outsourced manufacturing, promotional merchandise and new product development, all of which went extremely well (the latter being the most exciting).
“We built a team of sourcing professionals in Shanghai that covered all the key areas you require when sourcing from China including, factory selection and auditing, engineering, CSR, supply chain management, quality control and logistics. We had all the bases covered so that we could service almost any sourcing enquiry from our clients,” he explains.
So what’s changed, I ask.
“Having just returned from China two weeks ago, there is an air of trepidation. Inflation is running at unprecedented levels. I have seen this first hand with my own staff wage demands.
“Employment is also a key area of concern. Almost without exception, factories have employment signs on their gates looking for new staff. There has been a quantum shift in power in the last few years. Talking to factory owners, they now live in fear of criticising their own staff, as they will walk out in the knowledge they can get a new job in a matter of days. Imagine the implications this has for quality control when a manager or factory boss cannot be critical of their own staff. Chinese New Year seems to be a critical time for staff retention. An inordinate amount of staff are now just not returning after their national holidays to their original employer,” Ray tells me.
“Then there is the local currency, the Chinese Yuan Renminbi or RMB for short. For those that have not traded with China before, here is a quick lesson on how it works. The RMB is effectively a closed currency, so you can’t walk into bureaux de change and change your local currency into RMB. The Chinese trade, in the main, in US Dollars. This means, unless your local currency is the US Dollar, you have three currency exchange rates to worry about. Your local one, the US Dollar and the RMB. This makes trading with China a bit of a moving target in terms of your cost base,” he continues.
And that presents a significant consideration for companies looking to source from the Far East now.
“Our UK sourcing business has been trading with China for ten year. To explain why we have all been feeling the pinch in terms of costs from China, when I started back in 2002, the RMB was trading at over 15 RMB to one British pound. At the time of writing, one British pound can only buy me 10 RMB. That is a staggering 33%. This is before we take inflation into consideration. No wonder governments around the world are talking about imported inflation. When goods go up in China, we all pay more for our imports,” says Ray.
So what next for China?
“Many experts are saying that China is moving in to the hi-tech arena. General low cost manufacturing will slowly be phased out in favour of hi-tech industries like industrial goods, cars, pharmaceuticals etc. This will by no means be a quick or painless transition. Already, some global blue chip companies have left in favour of the new emerging low cost countries like Vietnam and Indonesia. The Chinese government is trying to shift production inland where land and labour costs are cheaper to try and mitigate the inflationary pressures.
“So as a sourcing business owner, I am keeping a very close eye on China. In terms of scale, there is very few who can compete. If I need a million widgets made in 45 days, there are very few countries I can turn to for the production (at the moment). Inflationary prices will continue to be a problem, but it is a level playing field for all companies like mine when it comes down to price competitiveness. As the business owner, we now take factory inspection and auditing to another level and look at the relationship the owners have with their staff and how well they are paid and looked after. I don’t want a factory staff member making one of our client’s products doing a shoddy job just because they can get a job elsewhere in days,” Ray warns.
Any last words for those considering from the Far East, I ask.
“Sourcing from China just got a whole lot more complex, but with good systems and procedures in place, some of these can be mitigated. I’m sticking with China for now, but give it another five years and I think I will be writing a whole new chapter on low cost sourcing.”
Kathryn Lennon-Johnson is the Managing Director of Tangerine Trees holistic marketing agency and author of Selling for Entrepreneurs.
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