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

The profit squeeze being faced by manufacturing companies in China, was noted in an earlier post (“Profits Squeeze May Hit Growth [1]“), 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:

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

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

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 [2], 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.

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