Procurement Intelligence Unit

Depends on the industry sector, low cost labour intensive industries already have began to move out to countries with lower wage costs. And if you do want a peek at the future of China as a importer state have a look at Brazil where unchecked currency appreciation and inflation has already started to impact growth and in certain sectors and the government has moved to increasing protection through tarrifs. 

they have seen this coming and are trying to move away from a cheap sourcing economy to a higher skilled one. The biggest problem they have had, until now at least, is that they do not produce anything alone, all of the technology and machine tools are imported from the highly skilled german/japanese companies that specialise in high spec engineering. There has been an explosion in the number of universities that have opened in recent years. I would imagine that their next target will be the financial markets, which they control to some extent already, as they are propping up a large number of government bonds around the globe. it will stay the cheap sourcing option for a fw years yet, mainly due to other alternatives being too unstable. Would you want to build a factory in Africa? other countries like indonesia and the phillipines, Vietnam are catching up fast though.
Another problem they have is that the rest of the world is getting fed up with them ignoring IPR and patents set up elsewhere, so some trade wars are likely in the future, probably when the US gets a stronger government.

China is maturing to a better sourcing spot. Sourcing for low costs is being adjusted from east coastal region into inland and further west provinces and sourcing for other benefits such as high tech and market penetration just started. Plus, import and export are twin sisters of any large economic entity of the world, won't stop but only grow day by day. How to interpret the trend and manage the activities is at discretion of each company and every practitioner.

In a short answer not in our life times. I have had dealings with China over 20 years now. 10 years ago, there were still strong concerns regarding the quality of what was being sourced, metal alloys in particular were a real no-go area. Since then a good number of Chinese manufacturers have, in partnerships with large multinationals, seriously got their acts together, producing high quality competitive goods, at excellent prices. The main difficulty currently is to separate the good, the bad and the ugly when searching for products in China. It is key to have good local knowledge, people on the ground, who can help you through this, otherwise you may be in for a nasty surprise. All trade at the end of the day is about a balanced relationship. Some of these distortions, when trading with China, are being adjusted, it will take years and years to get these sorted out, but you can´t neglect the fact, that a country that produces 50% of most household appliances used in the world, is going to be around for a long time as a tremendously important player. Trading between different cultures has aways been a challenge, and that´s why companies need great procurement teams to help them, and as it won´t be going away, enjoy the ride...

Not sure about the imbalance between Chinese exports v imports (billions of pairs of shoes out versus the odd Bentley in) or the Chinese success in keeping their artificificially-devalued currency, the Renumbi, low, or for that matter the need to keep export levels high so as to keep manufacturing exploding so as to cater for the millions of farm workers flocking to the cities, so as not to cause civil unrest in a communist country, so the Party doesn't hit problems.Figures for Chinese manufacturing are due out next few days, and appear to be showing a "signifcant" slow down.Property prices in the major (coastal) cities are ballooning akin to Japan in the early '90s, inflation is running at c.7%, but that's all OK as KFC expect to open another c 1k outlets in the next couple of years.At least we in the West have had the success, by exporting massive amounts of manufacturing to China and the Far East, in reducing our pollution levels !!! 

Not sure about the imbalance between Chinese exports v imports (billions of pairs of shoes out versus the odd Bentley in) or the Chinese success in keeping their artificificially-devalued currency, the Renumbi, low, or for that matter the need to keep export levels high so as to keep manufacturing exploding so as to cater for the millions of farm workers flocking to the cities, so as not to cause civil unrest in a communist country, so the Party doesn't hit problems.Figures for Chinese manufacturing are due out next few days, and appear to be showing a "signifcant" slow down.Property prices in the major (coastal) cities are ballooning akin to Japan in the early '90s, inflation is running at c.7%, but that's all OK as KFC expect to open another c 1k outlets in the next couple of years.At least we in the West have had the success, by exporting massive amounts of manufacturing to China and the Far East, in reducing our pollution levels !!! 

agree good question. The next low wage labour markets will be India and then Africa, which really is the last unexplored continent. In south east China are wages increasing with 15-20% a year and PRC already today see this area coming under pressure from other low wage areas. But as mentioned above there is a large and growing domestic demand in PRC and this growth will continue for quite many years and with protective legislation this demand will be covered by domestic production primarily. Even though both issues points towards a shift from net export to importer i doubt PRC will be net importer within the next decade. 

China is maturing like any other country would over time and increasing prosperity from alow cost production base to a more mature and higher cost country. The challenges with that is to ensure quality and effcicency increases at the same rate to balance the increase in labor cost . In addition there still is ahuge potential in thisbig country tom ove more inland away from the costal regions to the more remote provinces and extract the lower labor cost benefits. Ultimately esp foreign firme need to make a call why they go or invest to China, is it the low cost production base which allows them to export cheaper or do they wish to participate in a large and still grwoing domestic market as a primary focus ? For many foreign companies this requires amind change. 

China is getting more and more expensive. Some manufactures already started looking for other destinations.

Companies looking for the lowest cost goods and services have started and will continue to increasingly from outside China. I think that Chinese companies have the opportunity to reduce the impact of the change. Firstly, Chinese companies have the opportunity to change their position in the market because they have greater capacity, many have advanced technology and have already started engaging on meeting foreign production standards. Secondly, Chinese companies will also move to 2nd and 3rd tier cities to reduce labour costs.

One of the key unknowns is the impact of ecological limits on Chinese aspirations, their economy needs more water and energy as well as raw materials to grow. Security of supply for all these elements is not clear and in some cases the trend is negative especially ground water resources. We may see China as our source of low cost sourcing but whether China can actually maintain its momentum and export led boom is dependent on a large number of natural capital inputs, which have limits. There is much China is doing and aspires to do to become more resource efficient, but we should be mindful of its desire also to be a lead player in global politics too. This means facing China's climate change responsibilities too, as the new world leader, so the race to the bottom on input costs cannot continue with cleaner energy and sustainable raw material sourcing globally required. With the growth of its internal markets China may need more of its goods to keep the emergent millions economically contented. So what does that leave us with? Might therefore be worth having a Plan B in the filing cabinet.

One of the key unknowns is the impact of ecological limits on Chinese aspirations, their economy needs more water and energy as well as raw materials to grow. Security of supply for all these elements is not clear and in some cases the trend is negative especially ground water resources. We may see China as our source of low cost sourcing but whether China can actually maintain its momentum and export led boom is dependent on a large number of natural capital inputs, which have limits. There is much China is doing and aspires to do to become more resource efficient, but we should be mindful of its desire also to be a lead player in global politics too. This means facing China's climate change responsibilities too, as the new world leader, so the race to the bottom on input costs cannot continue with cleaner energy and sustainable raw material sourcing globally required. With the growth of its internal markets China may need more of its goods to keep the emergent millions economically contented. So what does that leave us with? Might therefore be worth having a Plan B in the filing cabinet.

I believe it has already started. Many of my known contacts are moving to other countries such as India, Vietnam, etc. The higher wage issue will be a hard obstacle to tackle and survive.

To some extent, the answer to your conundrum depends on whether you're looking at sourcing manufacturted goods or services. In manufactured goods China's competitive advantages of lower labour and infrastructure costs are diminishing, and emerging markets such as Vietnam are nibbling at China's market share. This is a temporary phenomenon, however, as over the next 5 years China is relocating much of its manufacturung industry into the centre and west of the country. As it does so, it is replacing its plant with modern. hi-tech, low-carbon infrastructure, that will drive higher productivity and also benefit from the lower labour costs of those locations. So China will recover its competitive position in low cost, high volume manufacturing. 
Manufacturing aling the southern and eastern seaboards is already transitioning in favour of high-tech manufacturing, new-age materials, telecommunications, electronics and pharmaceuticals. These are far less cost-sensitive, more value-creating manufacturing approaches.

Then there is China's drive into services outsourcing - which is not a short term strategy, nor is it driven, as we are in the west, by organic market forces. China spent the years 2000 to 2005 learning how to do outsourced services - often by attracting applications as offshore services from the USA, UK, Europe and Australia. From 2005 to 2010 it has focused on building capability - a small degree of scaling up, but a strong focus on process improvement, ISO accreditation, CMMI compliance, regulatory change for IP protection and data protection. It has built 1,609 hi-tech and economic development zones, appointed 21 centrally-funded "Model Cities" and its top 131 companies have establised 708 branches across 94 cities within China. It is now poised for exponential growth. 
That growth will not be market-driven, offshore services growth. It will be simply mandated by the Chinese state, which is the whole or majority owner of all the country's strategic assts. China's top 47 banks have already started outsourcing their processes into China's domestic onshore outsourced services sector. China will create a domestic market for growth that is stronger and faster than anything we have witnessed before. As a case in point, one of my clients has just won a contract for a single process from one bank. That contract will require them to triple the size of their workforce over the next two years, adding several thousand employees. There will be many, many such contracts over the next 5 years for Chinese service providers. 
By 2015, China's capability in ITO, BPO and KPO will outstrip India - simply because the Chinese government will make it happen. They have allowed for an unprecedented 3% drop in GDP to accommodate this strategy. This the period of China's economic mobilisation, where, instead of just 30% of their population driving their economy, they will engage 70% of their population. Sharing the wealth, sharing the opportunity - but importantly - building massive scale and capability. 
In the period 2015 to 2020, as they race towards full WTO membership, China will offer that scale in services to the world, at service levels, productivity levels and costs that the rest of the world will find compellingly attractive. So you tell me ... do you think China will stop being a sourcing destination?

 If factories at central and west China are automated, why go there to build factories? Labor cost is no longer the main issue, right? Why not manufacture in sourcers' home country? Isn't it easier to control quality, delivery, etc...? One company, Foxconn has gone on to build automated plants in central and west China. Does it make sense to break a central factory in Shenzen into 5 smaller ones? Just some thought and information from other sources... Yes, high tech manufactures will be attraced to stay in China, but shoe factories, other labor intensive ones will move out. Some have already gone, I was told... China is becoming a consuming power house in the near future. It will be a formidable economy soon.....

 I think China will remain as the sourcing destination. There are some temporary issues due to labor cost increase, etc. But new approaches or ways of business will be developed to cope with that.

China is losing its competitive edge on labour intensive products/commodities, such as: textile, shoes, etc to surrounding low cost countries. However, we saw a growing trend of more technology/high skill oriented products, such as: auto parts, bio supplies, energy efficient/renewable energy related products, etc being sourced from China, as supply markets for them are maturing. 
Wouldn't expect any service/manufacturing oriented countries stop being a sourcing destination, you will always find a unique value proposition from them at each stage of their development.

People start to source the product from Inland for the lower labor cost, but they should also put the efficiency and importation cost into their consideration

 Labor shortage is also showing up at coastal regions. For a population over 13 billion, who could have image this? Just another issue to tackle. Hope this will resolve also...

Here is the problem. With the money China takes in from its manufacturing sector, a large portion is reinvested in the US economy. Over the last decade China has dramatically increased its amount in obtaining US treasury holdings. In fact, China owns approximately 25% or about $1 trillion of US debt held by foreigners (foreigners hold about $4 trillion of the $14 trillion US public debt). With this amount of "ownership" of the Dollar, China can manipulate their own currency to stay low in value (Renminbi-Yuan) while keeping the Dollar high. That being said, the US and other trade deficit nations will continue to use cheap labor in China versus manufacturing domestically. 
I strongly believe China will indeed at some point have a "self sustaining economy" in which they will rely less on macro comparative advantage principles. In other words, they will be able to sell to themselves instead of relying on foreigner consumers. Note that China has about 1.5 billion people with a GDP growth rate of about 11%. On the other hand, the US only has a population of 300 million with a GDP growth rate of about 2.5%. China has a $200 billion trade surplus, while the US has a $500 billion trade deficit. You do the math. Its not surprising companies such as Walmart and McDonalds have been putting most of their investment into China. If I ran a business I probably would do the same.

Dear All, 
Interesting topic! and one that I have spoken at a few conferences this year! 
China will not stop being a sourcing country anytime soon! 
The amount of investment that has poored during the last 15-20 years will be almost impossible to replicate in any other country in our lifetime! 
When you walk into a company like BYD and see some 800 Injection Plastic Moulding Machines working and producing stuff you will understand what I am talking about! and that is just one company. 
I agree with earlier comments that is maturing and becoming a more sophisticated and therefore more expensive but it has also become more reliable and better at making Quality products. (Otherwise people like Mercedes, Apple, Bowers & Wilikns, BMW just to name a few, wouldn't be producing their products here!) 
The move to the West is a Practical, Economical, Enviromental and Politically correct one too! It will add cost but heck not that much more, in real terms! JB

The slow down of the interest can generate 2 new ways of developing oiur sourcing activities:1- look for other destinations (Rusia, Brazil...)2- think about a no so mondial market and build solid and profitable local business relationship. Not so modern but so present in our industries !

China is invented early 70's and not yet reached its peak - it is going on by adjusting, aligning and approaching good ground. May be the slow growth of NA/Europe could make them to re-align themselves and be the supplier for globe... there are lot of good guys making sincere efforts to move...

I read an article this week by BGC in which they forecast that by approx 2014/5 labour rates in some un-unionised Southern states could equal those in China, as the Chinese rates increase. This could make those states attractive for siting manufacturing. Interesting to see how this develops. Eastern Europe, Africa, the lower GDP Asean countries and South America are also all potential low cost labour countries. What seems interesting is that China has been quietly building investments in the US, UK, Africa etc. So the supply chain might be different, the source of origin may be Central or Western China: or Laos,Ukraine or Peru, but the business could be Chinese owned! I'm sure China will manage the internal issues of changing population wealth and expectations better than most of its rivals. Like Howard, I don't expect to see China decline in my lifetime, but do expect to see more growth and also for China to play a more prominent part in world affairs.

Right Now china is always looked for availing cheap products. Therefore they are looked for Sourcing certain material by certain companies. I will not say china as a Sourcing "destination" as I agree with few points of all the above comments. 
First, I agree with Susanne, the wages of people in China is increasing year by year & BCG point of appreciation of Yuan; Secondly I agree with the point of Dileep that china has the advantage of high capacity & third with Ryan point that china's large Geographical advtg & large Population along with a point - "Just don't look to source mass market socks or underwear from these areas - you will most likely get killed." 
Lastly the point of Qin that we can't predict future of china in the sourcing aspect based on the above points. It is true that sourcing is being done based on the advantages that we get from sourcing certain material from certain country. But it is for sure that China will not remain as sourcing powerhouse for too long because as the economy increases, inflation increases, wages increases & price of the commodity increases. china can't rely on its lower currency value for long, due to the increasing international pressure.

Sourcing is cyclical and follows the geography with the most advantageous overall opportunity for improvement. Labour cost is a function of that opportunity. 
China still maintains some very real advantages including a large geography and a population that has not yet enjoyed the booms of the industrial zones and established centres. As it develops, these other regional centres will open up to development as access improves (roads, telecommunications, and other infrastructure). 
Existing Chinese manufacturing centres will no doubt compete with other geographies such as Africa, Southeast Asia, Eastern Europe, the US, and internally. Factors that will impact what areas become the competition soonest include language and cultural concerns, time zones, shipping costs, education, eco-political stability, and a host of other factors that might also involve government support / subsidies and so on. 
China will always be a sourcing destination. But like every other country and economy, the question becomes: a sourcing destination for what. As costs increase, textile manufacturing will shift, sourcing of services will increase, higher value manufacturing will increase, and Chinese and international firms will establish specialized areas of expertise. The US is still a manufacturing destination. The UK is still a manufacturing destination. Just don't look to source mass market socks or underwear from these areas - you will most likely get killed. 
The only thing that is in question is how quickly this change will happen. If we use Asia as an example, Japan led, Korea, Taiwan and Hong Kong followed. Each country developed more quickly that Japan as they had an existing template to follow and modify. Other countries have the Chinese example. Will Vietnam be next, Indonesia, Africa? Maybe its still China as internal regions equalize. 
The timing depends on a lot of things. Can other regions stabilize? Will governments seek to end wars, social inequality, poverty and focus on development? If you end wars, eliminate the bias towards class and women and focus on education, training, small venture finance - you have a chance. I am sure that labour costs are pretty low in war torn countries. But who wants to source out of them?

Ryan, your analysis is spot on. Global sourcing professional should always look into this dynamic picture and have a strategic view. Be proactive, not reactive.

Right Now china is always looked for availing cheap products. Therefore they are looked for Sourcing certain material by certain companies. I will not say china as a Sourcing "destination" as I agree with few points of all the above comments. 
First, I agree with Susanne, the wages of people in China is increasing year by year & BCG point of appreciation of Yuan; Secondly I agree with the point of Dileep that china has the advantage of high capacity & third with Ryan point that china's large Geographical advtg & large Population along with a point - "Just don't look to source mass market socks or underwear from these areas - you will most likely get killed." 
Lastly the point of Qin that we can't predict future of china in the sourcing aspect based on the above points. It is true that sourcing is being done based on the advantages that we get from sourcing certain material from certain country. But it is for sure that China will not remain as sourcing powerhouse for too long because as the economy increases, inflation increases, wages increases & price of the commodity increases. china can't rely on its lower currency value for long, due to the increasing international pressure.

 I am surprised that the only quality discussed in this chain is price. Sourcing is not solely driven by unit cost, what about quality, the supplier ethics, environmental policies. Whilst CHina can produce some products at lower unit cost for the moment, the total cost, complicated logistics and extra lengthy lead-time, has often caused me to pay unit cost but less total cost for a more locally sourced item. 
I area times are hard, but whilst buyers insist on buying at cheapest unit cost.for the points mentioned above, it's my belief that China will revert to 2/3 tier producers, will move to smaller less developed areas, reduce their costs again, and off we go again. 
However, nothing is forever.

@ Karen, 
Quality is a function of expertise. But make no mistake, China can produce quality. It depends what you as a buyer are willing to pay for. If you supply a target cost, your supplier will fit that particular target. But if you are only willing to pay for tin and expect gold - it is not going to happen. 
Supplier ethics? Works both ways. If you expect something at a ridiculously low price - something's going to give. Pay more get more - whether it be quality, ethics, environmental compliance - and specify exactly what you are looking for. 
As far as local procurement is concerned - time, logistics, face-to-face contact and a host of other factors should be considered. If you can make a case for local procurement for competitive advantage, then stay local. But you should keep your options open. If for some reason, your reasons for local procurement disappear and you have not made other contingencies, you may find yourself scrambling and paying much more for lack of options. At least know who you might want to deal with overseas.

It will be interesting to see China split-up after a developed and emerging market slowdown, pending banking crisis and a revolt from the middle class over the poor environmental record in the country. It's easy to forecast a break-up into a number of small nations - Tibet, Xianjiang, Greater Korea, a Coastal Zone, Southern Mongolia, and an independent Hong Kong again..........

China will maintain it's position as a soucing destination, till similar alternatives are visible within the nearby Asian countries that may take a few decades.

China will maintain it's position as a soucing destination, till similar alternatives are visible within the nearby Asian countries that may take a few decades.

China will continue on the sourcing destination path for US imports until Logistics costs are absolutely unbearable and Total cost of ownership is Within 3% of US pricing. Some products are already at this point but there are many companies failing to recognize the true cost of capital and flexibility of products where benifits far outweigh this 3%. On the other hand there are still China imports that are 10-20% cheaper than Regional US Manufacturers; it is cost prohibitive to regionalize these types of businesses and all major US Corporations are focusing on valuation/ shareholder value which is where the company must focus. China and other low cost mfg regions will cease to be the sourcing destination when the US Govt starts taxing imports to "level the field". This will one of the major shifts, however, nobody should hold their breath for this. Vietnam and many other areas are still largely unexplored and have already begun major transformations in education, capabilities and export expertise that trumps China. Long winded, but the answer isn't clear to anyonenright now due to the political issues that override Logic.

Dear Jason, 
Interesting thinking!! Just for your information: 
According to latest information received yesterday, the Logistics costs (Shipment Costs from HK to LA) have dropped to the lowest point in 21 months. Welcome to the Globalization of our Planet / World! 
If the USA and other countries start to buy more Oil, then the price goes up! If the demand goes down, the price follows! Likewise, if the demand for freight goes up, prices follow! If demand goes down then see above! 
As you said, “Until Logistics costs are absolutely unbearable”! I cannot see this happening in the immediate future, how prices will become “unbearable” with “Anemic Demand” from USA and Europe! 2+2=4 
Then you go on, stating that “China will only stop being the sourcing destination when the US Govt. starts taxing imports to level the field". 
Most of the current successful USA companies TODAY are so, because of their involvement in one way or another with China. There is no better example to illustrate this point that GM! The company had to be rescued by the USA Government, their accomplishment of repaying the debt to the USA government in record time and with a good profit to the USA Government, was largely due to their Extraordinary” performance in the Chinese Market where they are the No. 2 Car making operation, in a country with the largest sales of cars in the world! 
If all of the sudden, the USA Government increase duties on Chinese Imports, then the Chinese will crucified the USA by a) downloading some trillions of USA Bonds that is holding! b) Charge companies like GM a “Super” tax on profits made in China and transferred to the USA. FIX!! 
Protectionism did not help the USA in the 1927 Recession; if you read any book on the subject this is plain and clear for all of us to see, if you want to repeat your mistake, I guess I can only conclude that you are a BAD STUDENT. 
The basic problem in my opinion is exactly as you mentioned “All major US Corporations are focusing on valuation / shareholder value, which is where the company must focus” 
As long as USA companies continue to do this and their “Top Managers” continue to obtain “Gigantic” Packages / Bonuses for achieving these goals, without any consideration for the well being of their employees, cities and country, you guys have a problem. 
If the Unions continue to push for higher remunerations and benefits for their members, whilst their leaders get paid Megabucks, you guys have a problem. 
The Country government doesn’t invest in Infrastructure (Bridges are known to have fallen over!) and couldn’t care less about the world environment, but is fully committed to be the “Sheriff” of the world, organizing and planning wars abroad so that the military machinery can spend trillions of their defense Budgets, (for which the Generals are getting paid Handsomely). You Guys have a problem. 
As long as the government is run by “Interest Parties” (Donations are most Welcome by all parties!) and “Lobbyist Groups” interested only on working for companies that Paid them millions, then your education system will reach new LOWS!, Medical expenses will reach new HIGHS and all of you will have a problem! 
Please try to fix these internal USA problems before you try to export them overseas! In the meantime the Chinese, Thais, Vietnamese will continue to provide you guys with Cheap imports into the USA and Europe!!! JB