China is (Not) the Most Cost-Effective Country in the Region

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The profit squeeze being faced by manufacturing companies in China, was noted in an earlier post (“Profits Squeeze May Hit Growth“), and the issue is starting to have an impact. The latest news (from the FT) is that the savvy Hong Kong conglomerate, Li & Fung, is to increase operations outside China. The paper notes:

    “Inflationary pressures in China have forced Li & Fung, one of the world’s largest trade sourcing companies, to increase operations in more competitive regions, led by south Asia…. Li & Fung, which has sourcing operations for raw materials in more than 40 countries, advertises itself as a reliable barometer of global trade trends.”

William Fung, the MD, does not mince his words, and is quoted as saying something that may surprise many on the China trade bandwagon:

    “China’s costs are all going up…It is no longer the most cost-effective country in the region…Anything [sourced] from China has a higher inflation component than from other places around the world.”

The FT lists some key areas of concern for the company’s bean counters in China. These include:

    • “Double-digit” increases in labour costs
    • Revaluation of the RMB
    • Rising oil and energy costs

The report adds that the company had already moved some operations to cheaper inland areas, due to rising costs in the more developed coastal areas. They have also been at the forefront of another, much-covered trend, and have been moving up the value chain, away from textiles, and “towards higher margin ‘hard goods’ such as toys and footwear”.

Of course, Li & Fung is a very experienced and successful trading company, and needs to maintain its margins (which recently rose from 9.6 percent to 10.7 percent). This is not to say that products cannot be made cheaply and efficiently in China – they most certainly can. However, the “China price” may now be a bit higher than it was, and strategic thinkers are already diversifying their sources, and seeking to maintain a lead – as received wisdom starts to be questioned by some of the wisest people in the business.

See news sources:

    Li & Fung to expand operations into south Asia
    FT (subscription)
    …president of Li & Fung’s trading arm.Within China, the company…rising labour and other costs…such as toys and footwear.According…categories from China have been increasing…for machinery and electrical products, on which Li & Fung does not focus…

    China’s competitiveness hit by energy and labour costs
    FT (subscription)
    …deflation”.William Fung, Li & Fung managing director…the once unbeatable China price its US and European clients were…furnishings to sporting and travel goods. Li & Fung, which used to buy…non-apparel products from China, has seen 25 per cent…

2 Responses to “China is (Not) the Most Cost-Effective Country in the Region”

  1. Archive » Less Competitive. More Expensive.| China Business Blog Says:

    […] nt agendas), at different times. However, a report in the FT (following up earlier news on Li and Fung’s move away from China sourcing) does indicate that in the manufacturing sector, p […]

  2. Archive » Christmas Comes Early for China Sourcing| China Business Blog Says:

    […] the massive scale of these deals, efficiencies are not hard to achieve. But for others the profits squeeze continues to have an impact. Nevertheless, there are still good savings – and l […]

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