Lower labor costs make other countries alluring, but China’s transport infrastructure and container services make it hard to beat.
Tariffs imposed by the U.S. on imports from China have given companies another reason to consider relocating production to other countries.
But China’s excellent logistics infrastructure and container shipping services are important reasons companies may keep their factories there.
An article published by Boston Consulting Group in December said, “China’s factories now generate more real manufacturing value added — $3.7 trillion in 2017 — than the U.S., Germany, South Korea and the U.K. combined” and added that “it is reasonable to assume that China will remain manufacturing’s center of gravity for the foreseeable future.”
Still, rising wages and regulatory costs in China are among the reasons some companies have been moving production to other locations.
“I’ve been in Shanghai the last 13 years, the last 30 years in Asia and Latin America,” said Daniel Krassenstein, global supply chain director for Procon Pacific, a manufacturer of industrial sacks. “So I’ve seen supply chain shift happen over and over again.
“This has been happening prior to the Trump administration. A lot of the supply chain shift predates the tariff war or the trade disputes between the U.S. and China,” he said. “A lot of this has to do with labor costs and compliance costs.”
Krassenstein was one of several speakers who spoke about the shift of manufacturing in Asia last week at the Journal of Commerce’s TPM19 conference, which focused on the transpacific container trade.
He cited statistics from China’s Ministry of Human Resources and Social Services that show average annual wages in China have risen from 29,229 Chinese yuan renminbi in 2008 to 74,318 yuan in 2017. That’s an increase in U.S. dollars from about $4,357 to $11,078 at current exchange rates.
Compliance costs are also rising. He said China’s national environmental regulators are doing a better job of enforcing regulations. In the past, some regional agencies had not been as strict.
Social welfare costs such as labor taxes for unemployment and subsidized housing are rising as well.
Procon Pacific makes polypropylene bags or “super sacks” that are used to store and transport agriculture products, minerals and chemicals. Forty-four of the large bags can be loaded into a 40-foot, high-cube container.
While it has joint ventures in China, where it makes those bags in three factories in Jiangsu, Shandong and Chongqing, Procon Pacific has shifted 30 percent of its production to India and 10 percent to Vietnam.
Krassenstein said his company paid laborers in China about $800 per month, while it paid $475 in Vietnam and $200 in India, and since the company is subject to “social taxes,” the cost is even higher in China.
In manufacturing a bulk bag, he said about half the cost comes from the raw material and half is from converting it into a final product, much of which is labor.
“So if labor cost keeps increasing, it becomes cost prohibitive to make our lower-end bags in China,” he explained.
Even though Chinese workers are much more productive than those in Vietnam or India, he said for a labor-intensive product, it is cheaper to make it in India.
Another advantage that India has, he said, is that raw material costs are lower.
“The Indian government is subsidizing the costs of raw materials,” he said. “It’s a double whammy against China.”
However, Jane Singer, managing director at the magazine and website Inside Fashion and an analyst of the apparel industry, said, “China is still the hub for raw materials. Most of the other Asian nations don’t have enough domestically produced raw materials.”
Krassenstein said there is explosive growth in new construction in India to support manufacturing expansion.
“It’s like that baseball movie, ‘Field of Dreams,’ if you build it, they will come. There is more construction going on — new greenfields and factory expansions — than I’ve ever seen. I was living in China in the early ’90s and seeing the growth then. It’s exponentially more in India right now.”
However, he said a major advantage that China has over India is the quality of its logistics infrastructure and the frequency of container service.
“Out of Shanghai you get at least three services a week pulling into Los Angeles or Long Beach, Tacoma, Vancouver or Prince Rupert. … When you’re looking at a Mundra or a Mumbai, you’re looking at pretty much once a week. When you’re looking at Kolkata or Chennai, not only is it once a week but you have that transshipment to deal with.”
For some products, however, Krassenstein said India’s ability to add large amounts of labor can be an advantage. “A typical turnaround time after a purchase order is made on a bulk bag from China is six to eight weeks. Out of India I’m doing it in three weeks.”
He explained, “India has the capability to quickly add 200 workers into a facility. China presently has a serious labor shortage and labor displacement issue. You cannot quickly add 50 to 100 laborers into a facility.
“On agility, I certainly agree China has the ability to, on a dime, ship a quick 500-unit order and produce it to spec with higher quality than India can. But on a single specification of a lower-level commodity, nobody can compete with India’s capability to do a very fast turnaround. That helps to equalize the door-to-door transit time,” Krassenstein said.
Singer said in Bangladesh, garment manufacturers make up for the lack of speedy container service by depending more heavily on air transport.
Andreas Kruger, head of ocean freight in the Americas for DHL Global Forwarding, said clothing manufacturing, particularly of low-end garments, is expected to shift from China to Bangladesh and India as well as Vietnam, which is currently the world’s third-largest exporter of ready-made apparel and benefits from strong trade ties with the United States.
DHL produces a quarterly “Global Trade Barometer,” an index that ranks seven countries and provides what it says is an “early indicator for the current state and future development of global trade. It is based on large amounts of logistics data that are evaluated with the help of artificial intelligence.” It says a score of more than 50 shows expansion is expected in the next three months in trade development.
That was the case for each of the seven countries it measured in November, with India showing the strongest score, 75. The other six countries had the following scores: South Korea, 64; U.S., 61; China and Japan, 58; Germany, 56; and U.K., 53. A new edition of the study is expected to be released this month.
Singer of Inside Fashion said that some of the trends affecting the apparel industry “will sooner or later — and probably sooner — impact many other consumer-related categories.”
Apparel has gone from a business with four seasons to one in which “many brands are doing 12 a year — 12 seasons and 12 collections. What that meant is the supply chain has to be very, very fast. There’s just no turnaround time. That has impacted everything all the way up the supply chain from logistics through to materials,” Singer said.
“I think some of this is going to impact other areas of consumer goods, particularly as brands try to keep coming up with fresh merchandise and they want to keep things new and they don’t want to hold inventory,” she said.
Singer thinks China wants wages to go up so that it is less dependent on exports and has a stronger consumer economy, while taking care “not to totally trash the manufacturing side.”
While China may not have the lowest wages, and the cost of complying with environmental laws is increasing, she said that “when you weigh in factors like efficiency of the supply chain, it becomes a very different equation. … There’s a reason why a lot of people are in China.
“Because people are doing much smaller orders now and they’re needing to have faster turnaround,” she said, “China is very hard to leave .”
She said moving a supply chain to another country “is a humongous job.”
“You wouldn’t really do it in a situation like these tariffs because you’d say to yourself, ‘By the time I get to a new place, everything could change. We could even have a new administration.’”
However, she said buyers are moving with their Chinese manufacturers that have factories in other countries throughout Asia. “We’re also seeing factories in China working with their buyers on price.
“We are seeing people shifting sources, but we’re seeing it more of a hedge. … It’s not just China. It’s every country, everywhere. If you look around the globe, you never know what is going to blow up next.”
For example, Singer said that Pakistan for a time was “sort of a no-fly zone because they have a lot of political risk,” but is now attracting interest from importers, while “China has become dicey because of the trade war. Vietnam has been a real hot place for a lot of people in the apparel industry. Now there’s concern it’s going to be hit just like China with wage increases because of the amount of not only garment businesses but electronics and everybody else who are really descending on Vietnam, which just has so much labor.”
Singer said the top criteria for evaluating where a company wants to source garments includes the cost of domestic raw materials, worker productivity and infrastructure, including access to ports, and port efficiency.
Increasingly companies are concerned about digitization — “talked about a lot, not easy to do” — and transparency, she said.
Companies also want to be able to track goods from “factory through to the selling floor.”
“The ultimate goal is zero inventory. Nobody is going to be able to have zero inventory, but the target is to get that inventory down because inventory is cost, carrying cost, tied up funds and it is risk — risky in apparel because it is seasonal, it’s fashion. You make something and it is sitting there and by the time it gets there, the season has changed.”
She also talked about the “e-commerce effect,” saying while only about 10 to 20 percent of sales of all products are sold online, “apparel has become obsessed with e-commerce. People can’t stop talking about the ‘Amazon effect’ and so on.” Even though companies are selling more online, they are losing money on sales, she said, because of the cost of shipping and restocking.
Companies are trying to figure out how to deal with demands by shippers for free shipping and how to deal with returns.
“Better logistics and greater transparency can help with that,” she said.
DHL’s Kruger said e-commerce in China continues to grow even as the Chinese economy slows down and that India’s e-commerce turnover, currently as big as that of South Korea and Australia, is projected to grow more than fivefold by 2020.
Singer said the apparel industry is more open to using 3PLs than in the past, realizing that if industry does not work together and have some shared resources it is going to be very tough because “nobody can afford to build within their own house the level of sophistication in logistics that they need to cope.”
The industry also is embracing digitization, though she said one problem with implementing such systems is that there is “no down time” to bring on new systems and train employees on new systems, especially in an industry in which there is a lot of staff turnover.
“Anyone with a system that is more plug and play or brought on in increments is gaining traction,” she said.