Thumbnail: 

With increasing labour costs, rising inflation and a strengthening currency, 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 recent KPMG report of MNCs in the region.

A number of countries 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 ASPAC. Clusters of specialized production are emerging, such as footwear in Indonesia and Vietnam and hand stitched fabrics and metalware in India.

According to KPMG estimates, over the past year, Indonesia and Bangladesh have been the biggest winners for footwear and textile exports respectively. Indonesia recorded 42 percent growth in main footwear exports to USD 2.1bn for 2010, while Bangladesh saw textiles exports grow by 43 percent to over USD 18 billion in the fiscal year to July 2011.

"Sourcing goods in China purely because of ultra-low costs is a thing of the past," says 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."

China's scale and high levels of investment in fixed assets, infrastructure and skills continue to give it an advantage in the production of certain goods. In many product categories, higher productivity offsets higher labour costs. However, demand for closer-to-home production, small minimum order quantities and protectionist measures in some end markets could present some further challenges for sourcing businesses that are rely heavily on China.

While no single country can match the scale of China, countries such as Bangladesh have large low-wage workforces that are starting to be employed, while Southeast Asian countries are making moves to remove tariffs and customs restrictions.

Preferential trade terms meanwhile 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 labour shortages in some regions in China are important factors for securing other sourcing destinations.

"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 adds.

"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 labour-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."

MORE ARTICLES ON MANUFACTURING
 

Quote Image: