Despite the disadvantages, which include
- limited ability to respond to demand changes,
- high logistics costs in boom economies, and
- the potential for large currency-exchange losses
it looks like economics are going to push many multi-nationals back to China.
Consider the following advantages that the global recession has created, as pointed out in a recent article on Sourcing Successfully in the New China by Accenture’s Jonathan Wright:
- Dips in the global economy have left China with lots of excess manufacturing capacity, which exceeds 50% in some industries.
- Dramatic overcapacity exists in ocean freight, with hundreds of vessels floating fallow in Hong Kong’s harbours.
- China’s domestic growth is as promising as any economy in the world.
- Labor rates are still significantly lower than Western countries.
- Most suppliers have dramatically improved their product/service quality by implementing control mechanisms and systems, renewing manufacturing lines, and increasing their available talent pool. They are also much more open to continuous improvement methodologies.
When you put all this together, those companies with good demand planning systems and dual sourcing strategies (to allow for unexpected demand increases to be handled near-shore) could lock in great deals now on both production and transportation and have a significant advantage during the forthcoming recovery while being in a great position to serve the emerging domestic market in China. While I normally don’t push the outsourcing bandwagon, it looks like those companies that climb aboard early could benefit greatly while those companies who wait until it becomes the “in-thing” will have totally missed the boat (as prices will rise as capacity diminishes).