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Sourcing in China

Insights on China’s

Insights on China’s Economic Situation and its Repercussion on Global Sourcing As the Chinese economy evolves, its economic growth is somewhat stagnating with recent growth rates beneath the past decade. The repercussion of growth decline on labor markets has so far been relatively small due to the changes of economic activity into labor-intensive service sectors; as drivers of economic growth keep shifting from manufacturing to services on the supply side and from investment to consumption on the demand side, and as actions to curb the rapid aggregation of credit were implemented (The World Bank, 2014). China is no longer simply a low cost country but a sourcing region with firstclass infrastructure, a highly skilled workforce and high-end technology in regards to a lot of industry sectors. Wage levels in China have risen increasingly during the past decades as the economy expands and the private sector creates new business and employment opportunities. Figure 3 shows the development of China’s average yearly wages over the past decade. The cost of manufacturing in China is constantly increasing and this is directing companies to search for alternative sources of supply, particularly if they are producing low-priced goods such as garments. Popular destinations for those companies are countries in Southeast Asia; usually specializing in one single product. Globalization has given the opportunity for companies to explore cost arbitrage around the world; the low cost countries phenomenon induces foreign direct investment flows away from developed to developing countries offering more attractive cost advantage. Although average labor cost is surely lower in these low cost countries, it is very important to take into account many other factors when selecting another sourcing destination. UK Singapore Brazil Canada Hong Kong BVI (British Virgin Island) Russia China United States of America 0 20 40 60 80 100 120 140 160 180 2 | Largest Recipients of GLOBAL FDI Inflows in 2013 (Source: Morrison, 2014) 12

Insights on China’s Economic Situation and its Repercussion on Global Sourcing Wage levels in China increased continually over the last two decades as the economy has developed and the private sector has created new employment opportunities. However, disparities among geographic regions, industrial sectors and employment levels have also increased significantly, widening on the one hand the rich-poor gap but also allowing China to still offer rather low cost labor that can compete with other low cost countries. Costs of land in these regions appear to have similar conditions (Cuñat, 2014). Even though China is shifting to become a more expensive sourcing country, it still offers many other advantages other low cost countries do not have. Among these advantages are the vast availability of natural resources, world class infrastructure and supply channels, good quality products, high skilled labor and the ease of doing business. Low cost countries might present some issues such as skilled workforce deficit, lack of infrastructure and geopolitical instability among others (Cuñat, 2014). China might not be convenient for all business opportunities, but it is still playing a major role when formulizing most global supply chain strategies. China’s continuous development has created the adequate competitive conditions to appeal to companies around the world. In order to counter the increasing production costs, Chinese companies are currently focusing on optimizing the value chain to enhance productivity and efficiency and to keep its position as a leading world-class manufacturer (Yue, 2010). 60000 50000 40000 30000 20000 60 50 40 30 20 16024 18364 21001 24932 29229 32736 37147 42452 46769 51474 10000 10 0 0 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 3 | China Average Yearly Wages in RMB (Source: Trading Economics, 2014) 13

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msg ist eine unabhängige, international agierende Unternehmensgruppe mit weltweit mehr als 6.000 Mitarbeitern. Sie bietet ein ganzheitliches Leistungsspektrum aus einfallsreicher strategischer Beratung und intelligenten, nachhaltig wertschöpfenden IT-Lösungen für die Branchen Automotive, Banking, Food, Insurance, Life Science & Healthcare, Public Sector, Telecommunications, Travel & Logistics sowie Utilities und hat in über 35 Jahren einen ausgezeichneten Ruf als Branchenspezialist erworben.

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