China û factory of the world

Why ChinaÆs importance to global retailers will continue to grow in the foreseeable future.
China has become the worldÆs second largest economy in terms of purchasing power parity. Its rise to economic superpower status is being recognised by the West, with some predicting that it will overtake the United States and Germany within five years to become the worldÆs biggest exporter. China already accounts for 6% of world exports and, as stated by a recent report from the Organisation for Economic Co-operation and Development (OECD), ChinaÆs share is on track to increase to 10% by 2010.

China has registered a phenomenal 9% annual growth rate in gross domestic product over the past two decades, and this is not expected to slow in the near future. Economists believe the country could overtake the US as the worldÆs biggest economy within the middle of the 21st century.

ChinaÆs foreign trade in 2005 continued to perform strongly, growing by over 20% to $1,432bn, helping the country to retain its status as the third largest trader in the world. As confirmed by ChinaÆs General Administration of Customs statistics, the countryÆs exports for 2005 grew by 28.4% to $772bn, while imports grew by 17.6% to $660bn.

The European Union continues to be ChinaÆs largest trading partner with bilateral trade of $217 billion in 2005, while the US came in a close second at $211 billion followed by Japan at $184 billion.

How did China achieve this phenomenal rate of growth over a relatively short time? ChinaÆs approach to development has been systematic and thoughtful. The government embarked on a strategy based on manufacturing, using new technology and supporting infrastructure. It followed a strategy of balanced vertical integration, beginning with assembly plants being set up to take advantage of the countryÆs low labour costs. The next step was to focus on building the expertise and infrastructure to manufacture and consolidate low-end imported components. The success of the strategy is shown in manufacturing sector growth rates exceeding 10% over the last two decades.

One of the key reasons for China becoming the workshop of the world is significant government spending on infrastructure. Having the best manufacturing facilities in the world is fine, but if you cannot get your goods to the global market in time, your competitive edge is lost. The government has spent billions of dollars on superhighways, high-speed rail networks and some of the best port and loading facilities in the world.

This continues to be the case, as China recognises the need to build even more power stations to meet the extraordinary demand for electricity to support the expansion of manufacturing centres. Traditionally, the growth of manufacturing has taken place in the large cities in the Pearl River delta and the eastern coast of China, but increased labour and property costs in these areas has resulted in a development push away from the coastlines of China into the provinces, which have a comparatively cheaper workforce and property market.

It is also interesting to note the change in intra-Asia trade flows over the last decade or so, with many of the smaller Asian countries, which had previously exported directly, now exporting ôraw componentsö to China, the added-value products being either consumed domestically or re-exported to OECD countries.

As China evolved into the worldÆs manufacturing centre, it was also becoming a large importer of finished products including ôhigh-endö consumer items, much of this flowing from workers taking advantage of their increased spending power and access to credit cards.

China Manufacturing
In the early 1990s, China was simply a sourcing base for low-cost, low-value products, with much of their goods having a reputation for relatively poor quality. Today, as ChinaÆs manufacturing capabilities become more high-tech and quality control becomes business as usual, the ôMade in Chinaö tag is starting to signify goods of a much higher quality. China, the ôfactory to the worldö, is leaping even further ahead of other emerging manufacturing superpowers such as India and Mexico.

China is the worldÆs largest exporter of clothes and textiles, with the sector encompassing all aspects of the supply chain from production of raw materials through to fabrics and the final products. China is now the worldÆs largest producer of cotton, silk and man-made fibre û it is at least four times larger than its nearest competitor in the textile export sector. Its factories, using the worldÆs leading computer-aided manufacturing capabilities, are enormous and able to achieve huge economies of scale.

ChinaÆs large spending on computer-aided machinery has delivered one of their biggest competitive advantages, as the rapidly changing fashion industry requires short lead times for set up and delivery of new items. This goes a long way to offsetting the competitive edge of India, which argues that as it is closer to European markets it has shorter delivery times. China argues that it can rapidly retool its facilities to meet large orders, and its efficient domestic infrastructure lessens the distance-to-market advantage claimed by Indian competitors.

Among distinct advantages for the textile industry are:
ò The breadth and variety of its clothes production is unmatched in the world.
ò It is nearly self-sufficient in raw materials, including the worldÆs largest production capacity for cotton, silk and man-made fibre.
ò Access to high-quality imported fabrics from South Korea, Taiwan and Japan (more than half of ChinaÆs clothes exports are made from these imported fabrics).
ò Significant Chinese government support for the industry.
ò A skilled labour force, particularly when coupled with low labour costs.
ò China has a fixed exchange rate, which provides stability for future pricing.

The textiles industry is not the only sector feeling the impact of ChinaÆs manufacturing capabilities.

In recent years China has increased its global share of hi-tech manufacturing. China now produces 55% of the worldÆs laptop computers; 60% of air conditioners and 70% of DVD players. It also produces 30% of all flat-screen televisions and 20% of microprocessors;

More than USD1 trillion worth of manufacturing output has moved from Japan to China, with large Japanese consumer electronic companies shifting the bulk of its manufacturing to mainland China.

In addition, 60% of all IT and electronic goods exported from Taiwan are made in China. In the homeware sector China manufactures more than half the worldÆs outdoor furniture, including patio and garden chairs and tables, lounge and beach chairs, park benches, swing chairs and garden umbrellas. Bathroom and kitchen faucet exports from China are growing at 20% a year and China is the worldÆs largest producer of luggage, accounting for 75% of global supply.

Price and Quality
Growing competition in the 1990s forced OECD retailers to look beyond their local markets, especially in the area of low-end goods such as clothing, toys and other fast-moving consumer goods. This trend was considerably buoyed by the success of high-volume, value-based retailers. This in turn blurred traditional views of price and quality û the perception that high-quality product came at a high price was no longer the case with consumers searching for lowest price products while not willing to compromise on quality. Domestic competition, changing ideas of value and the globalisation of trade compelled retailers to develop networks of domestic and foreign suppliers.

With the development of speciality retail formats and private label programmes, sourcing from lowcost countries became an essential element in the supply chain. Retailers engaged in a constant process of improving quality while driving down prices and shortening delivery times. Consequently, opportunities offered by sourcing from low-cost economies have grown strongly in recent years.

Many retailers originally used sourcing agents in Asia to come to grips with the myriad regulations in place in the 1980s and Æ90s. Another ôimpedimentö was the Multi-Fibre Agreement (MFA), which imposed quotas on sourcing a broad range of clothing goods from emerging markets such as Bangladesh, Sri Lanka and Nepal. The MFA expired in January 2005, but some quotas still exist. These agents were experts in bringing together the various parties, and the initial savings and efficiencies gained were significant.

Many retailers, having learned much about their supply markets, switched to direct sourcing to improve margins and derive greater economies of scale. This was helped further as the Chinese government eased regulations covering foreign companies.

As the scale of sourcing from China increased, most retailers set up a sourcing or procurement office in Hong Kong or went directly into China. In 2005, there were well over 200 multinational sourcing entities in Shanghai alone, and figures provided by the Chinese government estimate that these entities bought over USD50bn worth of commodities in 2005.

In 2002, the US retailer Wal-Mart shifted its overseas procurement centre from Hong Kong to Shenzhen to get closer to the market. Today, more than 3,000 people are employed in the global sourcing centre in Shenzhen. Carrefour, Gus, Home Depot, Kingfisher, Metro, Woolworth, Tesco, Target, Gap and Ikea are just a few of the other global retailers who have opened sourcing offices in China or Hong Kong, all to get closer to the ôfactory of the worldö.

Figures continue to support the push for even greater presence of multinationals setting up in China.

In 2004, Wal-Mart sourced over $18bn worth of products from China, and indications are that their sourcing there is increasing at an annual rate of 20%. Some estimates are that over 60% of the goods sold in Wal-Mart stores bear the Made in China label. And Wal-Mart was not the first retailer to source globally, with competitors such as Sears, Kmart, JC Penney being among the first US retailers that came to Asia in the 1970s. Although they only started sourcing in Asia in the late 1980s, Wal-Mart in 1995 became the leading US retailer sourcing globally, especially from China.

The real beneficiary of this change has been the consumer, who is now able to access high-quality goods at incredibly competitive prices.

Impact on Supply Chain Strategies
Overseas sourcing is not without its complications. How do you ensure that the goods you order are going to be available without maintaining huge inventory levels in your local markets? What about obsolescence? Will your margins be further reduced through having to give discounts because of the time it takes to get to market?

With the increasing level of complexity of cross-border supply chains, the need for automated solutions for inventory and receivables management has become even more critical. Shorter lead times are putting pressure on the suppliers not only to deliver more quickly, but also to streamline the flow of documents and information to alleviate blockages and demurrage costs from goods sitting on the wharf.

Integrated electronic supply chain platforms are playing a key role in linking the parties involved in cross-border trade. Through a common platform, trading partners are able to share data, documents and information to perform a variety of functions and deliver significant management information to assist in locating inefficiencies.

A lack of trust between the buyers and the suppliers is becoming a thing of the past, with retailers now viewing suppliers as strategic partners. The buyers have recognised that they have a vested interest in the ongoing viability of their key suppliers. This need lies in the ongoing reliability of the supplier to meet tight deadlines, product quality and the need for the supplier to continue to focus on ways to reduce the overall costs to produce and ship goods. Buyers are seeking more transparency into the costs of goods and there is increasing collaboration between suppliers and buyers to reduce these costs to their mutual benefit. In fact, many trading partners are using technology solutions to exchange data, with some even integrating these systems into their own enterprise resource planning systems.

Moreover, with retailers facing balance sheet pressures, the market is slowly seeing a shift in sourcing from the traditional trading instruments such as letters of credit to open accounts, coupled with an extension in payment periods. Additionally, vendor-managed inventory (VMI) and just-in-time distribution are becoming more common in the retail world. This has resulted in the suppliersÆ finances becoming increasingly stretched, with pressure increasing on their working capital. However, as the retailerÆs ability to grow is directly linked with the ability of the supplier to keep pace with demands, retailers are seeing the benefit in forming partnerships with international banks to provide alternate financing solutions.

Retailers have become accustomed to sourcing products in China on a large scale, and cost is not the only factor on which sourcing decisions are being based. Just a few of the other factors include production quality, reliability and ability to meet time commitments, transport infrastructure, labour quality, environmental and social responsibility, and political stability. China scores well on all these factors. Thus, its importance to retailers will continue to grow in the foreseeable future.
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