Sourcing from China has become a lot more expensive, and seems to have caught some U.S. importers off guard. For some U.S. companies, the changes are squeezing margins, forcing price hikes, and leading many to scramble to find new ways to cut costs or locate new sourcing regions.
"Companies say that, all of a sudden it's not as competitive to make their product in China," and are looking at other locations, Patricia Mears, director of international commercial affairs for the National Association of Manufacturers, told the Minneapolis Star Tribune.
The higher costs are largely due to rising wages across China, as well as increased enforcement of existing labor laws within China. Some economists estimate that Chinese wages are rising about 15 percent per year.
Rising energy and raw material costs (e.g., steel, petroleum-based products) are impacting all sourcing regions. But rising oil prices have clearly hiked transportation costs for those shipping out of China. Also, U.S. companies have been hurt by a move by China to reduce exporter tax breaks, as well as the jump in the value of the yuan by 16 percent in 18 months.
Rampant inflation in China is also not helping. China's consumer price index jumped 8.7 percent year-on-year in February, rising at the highest pace since May 1996.
"Clearly, inflation has accelerated," said Manufacturers Alliance economist Cliff Waldman. "Much of the problem is food. Food price inflation in China is running about 18 percent year-over-year."
That's partly because of a massive diet shift toward grain-fed livestock and recent swine disease that have driven up grain and meat prices in China.
Chris McNally, China specialist for the East/West Center in Honolulu, said a few U.S. manufacturers such as Intel have moved factories into inner China to take advantage of cheaper land and local laborers who don't have to be fed and housed in corporate dormitories.
In some sectors, wages for high-skill professionals are doubling.
"I know companies that are paying $200,000 or more a year for a comptroller to oversee their business in China," Phil Mason, president of Asia Pacific and Latin American operations for Ecolab, a maker of cleaning products, told the Star Tribune. "The market has become extremely competitive...There is not a lot of difference today for us to be hiring somebody in China vs. putting in someone from the United States. That's for a high-level, skilled, experienced person going into a leadership position."
"For most of the businesses that we have been in touch with, wages are the big deal," Mr. Mason said.
Discussion Question: Are we witnessing the end of China as the world's dominant manufacturer? How should suppliers (as well as retailers pursuing private label programs) address the rising costs coming out from China? What's the optimal sourcing strategy for today's economic environment?