Top Global Business School Collaborates with One of the Leading Boutique Purchasing and Supply Chain Consultants in Asia to Uncover the Future of Sourcing in China and Other Emerging Markets.
September 24th, 2013 Shanghai – Today, the results of a new research study was released, which show increasing importance of emerging and frontier markets over the next five-year period (until 2018), on the expense of more mature markets. The reasons are obvious; even five years after the Lehman Brothers collapse, global growth has far from recovered, interest rates remain rock-bottom, and unemployment appears permanently sky-high in many countries. Hence, where economic growth is anemic, companies have to revert to cost-cutting as a means to increase profit and ultimately generate shareholder value. And even though emerging markets are getting more expensive, the consumer demand growth in these countries adds as an extra incentive to stay in order to minimize total cost.
In terms of sourcing regions at global level, we see that regions like South Asia and South-East Asia are expected to grow most in importance over the next five-year period. Even though these regions do not have the same manufacturing capabilities like China, they are often very attractive for IT Services (e.g. India) and call center operations (e.g. Philippines). Furthermore, they have also suffered from a capital outflow recently, making their currencies weaker and hence domestic products more affordable. In contrast, the Chinese Yuan is still partially pegged to a currency basket, making it less volatile but also more expensive.
What’s really interesting is the fact that Africa, although scoring low in absolute importance, for the fist time tallied the biggest relative increase of 31% in importance score (from 1.66 to 2.18). The most plausible reason is the fact that it has for long been a forgotten continent ever since the colonial era of Western powers, today being ”rediscovered” by Chinese firms, hence putting pressure on Western firms to follow suit. Despite the continents’ diversity, political instability, risks are being perceived as reasonable with respect to potential returns.
Despite the increasing importance of Africa, China as the Middle Kingdom is still inarguably the center of gravity for global sourcing, for the reasons mentioned above. For the consolidated top-three rating of sourcing countries, China is perceived as almost three times more important as the runner-up for direct supplies, and almost 50 percent more important as the runner-up for indirect supplies. Interestingly, it also appears as if China is virtually the only emerging markets-alternative as nearshore locations like Germany and USA are still going strong despite stiff competition. Having said that, the long-term notion of companies in low-cost countries stealing Western jobs to a large degree seems to be a misconception.
When looking at China specifically, it is clear that the Shanghai-Yangzi Delta region is still the most attractive region, although it is predicted to drop slightly in importance by 2018. The only region that can compete in absolute terms against Shanghai and surrounding provinces is Guangdong. When looking at the predicted relative change in importance by 2018 though, the inland cities of Chengdu and Chongqing together with the more remote Hohhot-Inner Mongolia regions are the top picks. Although not the ideal locations as a source for land-based transports, they have vast local consumer markets and provide access to qualified and affordable workers.
Another key takeaway from the study is also the fact that companies are forced to constantly streamline and strive to generate growth. Therefore, was not surprising that cost reduction is the number one reason behind global sourcing, and that price hikes are the top risk associated with global sourcing. Interestingly, areas such as CSR and sustainability can here be of great help, as these are ultimately about producing more with less resources and meet new customer demand. Apart from that, many of the biggest worries concern risks related to suppliers themselves, such as lack of performance and lack of knowledge. Risks that are hard to influence or mitigate such as political risks are to a great extent simply accepted.
In terms of suitability of supplies being sourced, the pattern hasn’t changed much over time: the higher labor contents, the bigger pressure to localize to more pronounced low-cost regions. In areas where labor costs are rising fast, companies have to follow suit and ”upgrade” the level of value-added of supplies. In many cases companies tend to get blindsided by purchase price increases, while labor productivity and total cost are what matters at the end of the day (i.e. including transportation, warehousing, cost of compliance, and so forth). Moreover, another factor to consider is productivity increases – as long as these keep up the pace with cost increases, there is little reason to worry.
The study also reveals what factors that distinguish high-performers from average-performers. First, at a strategic level, high-performers align their strategic China goals to corporate goals, they involve senior management, align operations to strategy, and articulate a mission statement for sourcing activities more extensively than average performers. They also go to greater lengths concerning evaluating the external environment for opportunities and threats, conducting formal supplier performance assessments, and make organizational changes to support their China operations. Finally, the purchasing department of high performers more strongly collaborates with quality assurance, production and warehousing/distribution than average performers.
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Asia Perspective is an independent management consultancy with global presence and local knowledge. We assist our clients with business advisory regarding analysis, strategy and implementation. Our mission is to turn our clients’ Asia business vision into reality and add significant value to their business.
About China Europe International Business School
China Europe International Business School was founded in 1994 as a joint venture between the European Community and the P.R. China. Its objective is to further strengthen China’s integration into the world economy by providing high-level management training and facilitating the transfer of international management expertise to managers in China. Its MBA Program has been ranked #1 in Asia since 2004, #7 worldwide in 2009, and its Executive MBA Program ranked within the top 25 worldwide since 2005 by the Financial Times in its global MBA and EMBA rankings respectively.
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