With increasing labor costs and an aging workforce, China is losing its foothold as the world’s lowest cost manufacturer of consumer goods. Rising costs are forcing companies to take a closer look at new sourcing locations across Asia, according to a new report from KPMG International.
A number of countries in South and Southeast Asia are set to benefit from this recent shift, the report notes. While hard goods ranging from consumer electronics to furniture are still being sourced from China, apparel and footwear production is widely dispersed and more mobile across the Asia Pacific region (ASPAC). Clusters of specialized production are emerging, such as footwear in Indonesia and Vietnam and hand stitched fabrics and metalware in India.
“Sourcing goods in China purely because of ultra-low costs is a thing of the past,” said Nick Debnam, KPMG’s Asia Pacific chair, Consumer Markets and a partner in the China firm. “With demand still soft in many Western consumer markets, it is also proving difficult for companies to pass on higher costs to consumers. This changing environment is forcing companies to reassess sourcing strategies.”
While no single country can match the scale of China, countries such as Bangladesh have large low-wage workforces that are now starting to be employed, while Southeast Asian countries are making moves to remove tariffs and customs restrictions.
Preferential trade terms have also boosted exports from Cambodia and Bangladesh to the European Union (and also to China due to recent agreements between Bangladesh and China), while Indonesia has tended to be a more popular sourcing destination for Japanese and North American buyers.
Cost alone is not the only factor driving some companies to source elsewhere. An aging population and labor shortages in some regions in China are important factors for securing other sourcing destinations. Consumer companies sourcing there, however, may need to consider new supply models or destinations in order to sustain productivity gains as costs such as labor continue to increase.
“While wage levels are an easy point of comparison when assessing different sourcing locations, the age and quality of a country’s workforce is important to understanding its future potential,” Debnam added. “It’s going to be impossible to avoid the challenge of rising wages entirely wherever you are in the region. It is relative increases that matter when measuring a country’s competitiveness in labor-intensive sectors. That being the case, there will still be good reason to invest more in younger and cheaper countries such as Bangladesh, Vietnam, Cambodia and Pakistan.“
“Food and drink, consumer goods, sourcing companies and retailers continue to reassess the role that Asian countries are playing in their supply chains,” according to Willy Kruh, global chair of KPMG’s Consumer Markets practice and a partner in the Canadian firm. “Closer attention to efficiencies in production and the supply chain, in addition to optimizing costs, may dictate that production be scattered across a number of countries. As a result, there will be implications for business structuring, working capital management, risk mitigation, tax and business process engineering.”
China Keeps an Edge but Southeast Asia to Advance
China’s infrastructure, the completeness of its supply chain, its speed to market and a growing presence in global shipping all mean that China will continue to be a preferred source for sourcing. But Southeast Asian countries will increasingly present even more attractive sourcing opportunities as new preferential trade agreements continue to be negotiated.
“It’s clear that new trade terms will enable Southeast Asian countries be as competitive as possible as companies explore new regions for sourcing,” said Mr. Kruh. “China has indicated its shift towards infrastructure and higher technology industries; in sectors such as textiles and apparel, there is a clear opportunity for Southeast Asian producers who can benefit from more maturity in supporting services such as sampling, sourcing of inputs and logistics.”
The KPMG International report, Product Sourcing in Asia Pacific, gathers the insights from over a dozen sourcing, retail and food and drink companies, and KPMG partners on the emerging trends of product sourcing in the Asia Pacific region. Report data is based on desk research from a variety of sources including the UN Comtrade and the US Dept. of Commerce, Office of Textiles and Apparel.
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