The Changing Face of Sourcing in China

Posted by Reading Time: 4 minutes

July 18 – The made in China label that can be found anywhere from clothing and kitchenware to electronics and medicine, has taken a beating recently, and while product safety remains a concern, China has remained the world’s factory, mainly because there is simply no one else who can do it. Vietnam is simply too small, and India just doesn’t have the infrastructure.

However, as the cost of oil and labor rises, many purchasing managers and exporters are wondering whether China is still an outsourcing opportunity. After all, why travel half-way around the world when a maquiladora in Ciudad Juárez can build the same appliance.

Michael Borchert, chief China representative for the U.S.-based sourcing and sales firm Precision Components, believes that while the face of sourcing is changing in China, a lot of old truths still remain. Below, he explains what has changed, and what has stayed the same in the China sourcing game.

Sourcing and pricing are still very different concepts
Many companies have come to think that sending out quotations on product is the way to measure new opportunities. In China, the price received on a quotation is not the true cost of an opportunity. Logistics, lead times, material prices, exchange rates, quality considerations are just some of the factors that measure into cost. Now, more than ever, understanding the factors that affect cost is important in developing a good sourcing strategy.

Immensity is now diversity in the China production market
China has thousands of factories. Years of development have seen the growth of industries and investment in technology. This has lead to diversity. Factories producing the same product are now very different from one another. They can range in size from five employees to thousands of workers. Equipment used for production ranges from antiquated to world class. Facilities range from open air sheds to temperature controlled buildings. This diversity shows in pricing, whether cheap or expensive, but it also shows in other areas; such as consistency and quality. Understanding all elements of diversity and their effect on production are increasingly important in sourcing.

Labor versus material
Cost is an equation of the amount of labor and material in a product. Recent shifts in material markets are driving prices up in all markets. China’s historical strength has been labor, and in changing markets it will continue to be so. Labor reform is changing this advantage, but compared to material it is still the main factor for savings. Balancing labor versus material in a product will be crucial for continued sourcing success.

RMB appreciation
The RMB’s continued rise against the dollar is causing many local suppliers to change their approach to settling contracts on product. Keeping a close watch on the changes in value are important and being clear on exchange rates for contracts helps to negate these effects. Long term planning will be needed to keep sourcing strategies successful.

Value added tax is a main concern of purchasing from China. Up until a couple of years ago, most suppliers that exported products were given an average VAT refund of 17 percent. This encouraged exports and was an important factor in the lower cost of goods. Since the VAT refunds have gone away or been significantly reduced, local suppliers now have to pay higher taxes, even when exporting, meaning increased prices. Knowing where products fall in the VAT refund percentages and how much this will affect costs savings is important for new sourcing strategy.

Growth is fast, change is slow
While growth in China is still at break neck speed, the actual changes seen at a single factory location may or may not be keeping pace with changing sourcing strategies. Implementation of new quality procedures, use of new machines for increased precision and less material waste, or any number of new requirements must be followed closely to see that they are integrating well. Fast change is still a new concept in China, so the ability to measure this versus expected return is crucial.

Know your suppliers
No matter where you source from visiting a facility is still a crucial key in sourcing success. Now, more than ever, it is important to visit that supplier on a continual basis. Face time is becoming the equivalent of face itself. Credibility increases, processes are continually reviewed, and with increasing costs suppliers will less likely to make mistakes or get away with them if purchasers are there adding control to the money that is spent.

Quality and system are still dual concepts
Depending on product choice there are many requirements for quality. China has made a concerted effort to bring their factories in to world wide systems of quality. This being said, quality and system are still dual concepts in China. Quality is a mentality; system is a way by which it is achieved. As more suppliers move toward quality systems it is still important to remember to balance purchasing requirements with continued oversight on quality control.

Service is an increasing function of your relationship
Contracts have always been seen as the start of negotiations in China. This is still true. Getting contracts fulfilled on time, assistance with quality issues, engineering, and technical support are all a function of how good the relationship between the supplier and purchaser is. With ever changing factors in China, the strength of your guanxi will be an ever increasing determinate of success.

It’s not a question of if, it’s a question of when
Expectations have always been one of the challenges of sourcing in China. In approaching sourcing on the mainland, it’s best to remember that it’s not a question of if, it’s a question of when. Set this as the first expectation for all purchasers and clients and all the frustrations, misunderstandings, renegotiations, quality problems, bad material, missed deadlines, payment issues, midnight panic calls, product swapping, my cousin’s new factory made it instead of me, and Maotai lunches will have been planned for.

The advantages of China sourcing are still here, adjusting to the new challenges will determine how much one can profit from them.