As China progresses from a low-cost manufacturer dependent on exports to a service-oriented economy driven more by domestic demand, wages there are rising. With increasing labor costs and an ageing workforce, 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 new report from KPMG International. Southeast Asian sourcing locations like Bangladesh, India, Indonesia and Vietnam maturing as regional integration and preferential trade terms take hold. A number of countries in South and Southeast Asia are set to benefit from this recent shift. 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 the Asia Pacific region (ASPAC). Clusters of specialized production are emerging, such as footwear in Indonesia and Vietnam and hand stitched fabrics and metalware in India. 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. While no single country can match the scale of China, countries such as Bangladesh have large low-wage workforces that are now starting to be employed, while Southeast Asian countries are making moves to remove tariffs and customs restrictions. Preferential trade terms 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 ageing population and labor shortages in some regions in China are important factors for securing other sourcing destinations. Consumer companies sourcing there, however, may need to consider new supply models or destinations in order to sustain productivity gains as costs such as labor continue to increase. The age and quality of a country's workforce is important to understand its future potential. Hence there will still be good reason to invest more in younger and cheaper countries such as Bangladesh , Vietnam , Cambodia and Pakistan . �Food and drink, consumer goods, sourcing companies and retailers continue to reassess the role that Asian countries are playing in their supply chains,� according to Willy Kruh, global chair of KPMG's Consumer Markets practice and a partner in the Canadian firm. �Closer attention to efficiencies in production and the supply chain, in addition to optimizing costs, may dictate that production be scattered across a number of countries. As a result, there will be implications for business structuring, working capital management, risk mitigation, tax and business process engineering.� China 's infrastructure, the completeness of its supply chain, its speed to market and a growing presence in global shipping all mean that China will continue to be a preferred hub for sourcing. But Southeast Asian countries will increasingly present even more attractive sourcing opportunities as new preferential trade agreements continue to be negotiated. China has indicated its shift towards infrastructure and higher technology industries; in sectors such as textiles and apparel, there is a clear opportunity for Southeast Asian producers who can benefit from more maturity in supporting services such as sampling, sourcing of inputs and logistics.
Currently China accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close as per economist.com, mainly due to increasing land prices, environmental and safety regulations and taxes and labour. On an average, labour costs have surged by 15-25% pa for the past four years. China 's coastal provinces are losing their power to attract workers from the hinterland. This is apparent in diminishing figures of the migrant workers returning after they visit home during the Chinese New Year break.
AlixPartners, a consultancy, offers this intriguing extrapolation: if China 's currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there. In reality, the convergence will probably be slower. But the trend is clear. Many manufacturers are looking to relocate out of China to low cost destinations in the region. However, lack of reliable suppliers of specialized services is slowing down the shift. Instead, manufacturing houses are looking to automate more processes in a bid to replace some (but not all) workers. Advantage offered by low labor cost destinations are typically more than offset by other problems, especially the lack of a reliable supply chain. Many high end manufacturers opine that except in commodity businesses, �competence will always trump cost.� The other disadvantage in these low cost destinations is lack of competence, efficiency and a dearth of skilled labour. Also, another large benefit that coastal China offers is its proximity the booming Chinese domestic market coupled with increase in labour productivity complemented by the fact that China 's huge labour pool is large and flexible enough to accommodate seasonal industries. Also, China 's supply chain is sophisticated and supple. Even if labour costs are less than half of those in China to make a given product, the unreliability or unavailability of many components may make it uneconomic to make things elsewhere. As per Time.com, not all of the companies relocating to low labour cost regions are Western multinationals; in fact, many are Chinese firms. As salaries and spending power in China rise, the Chinese are importing more goods from the rest of Asia . At the same time, those rising salaries are forcing China to outsource more of its low-end manufacturing. The shift is also governed by predictability of future costs. According to HSBC, intra-Asian trade is forecast to grow at an average annual pace of 12.2% until 2020, 40% higher than the rate by which Asia's trade with the U.S. is expected to grow in the same period. Nearly 50% of Asian exports (excluding Japan ) now go to other Asian countries, according to Credit Suisse. That is more than the current demand for Asian exports in the U.S. , the E.U. and Japan combined. Consultancy firm Boston Consulting Group reported that many American companies might shift manufacturing back to the US. The consultancy says that the manufacturing in sectors like appliances and electrical equipment, furniture, plastic and rubber products and fabricated metal products, could shift back to the US before the end of the decade, adding US$20-55 bln in output annually to the US economy.