Posted by PTL Group
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on Friday, 19 October 2018
in Business in China

The Shifting Supply Chain in Asia——By Daniel Krassenstein

During this year’s Autumn Partners Event, Daniel Krassenstein gave a fascinating presentation on “The impact of the Trade War on the supply chain between USA and China”

Daniel is the Director of Asia Operations for Procon Pacific, a global packaging solutions company, and has over 30 years’ experience across the world in international supply chain management. Being been based in Shanghai for the past 13 years, he is an expert in the Chinese supply chain process.

While most are concerned with the current ‘Trade War’ between China and the USA, what Daniel interestingly noted is that China and USA are both on divergent paths. In fact, the trends in Global supply chain show that a natural shift is taking place, with manufacturing moving to South and South East Asia, particularly India and Vietnam, as opposed to a shift influenced by trade sanctions.

Daniel gave 5 reasons for the shift in manufacturing from China to Vietnam and India.

1. Labour Cost Incr

2. Labour Displacement in Coastal Provinces

3. RMB Appreciation (at least until most recently)

4. Cost of Compliance with environmental regulations

5. Raw Material Costs

It should be noted that none of these reasons are influenced by the current ‘Trade War’. The reason with the most significant impact, particularly on companies like Procon Pacific where labour amounts to 40% of the cost of the product, is that in China, the average wages have increased year on year. A worker in a factory in 2008 was paid on average 1,500 RMB per month, now the average is around 6,000-7,000 RMB per month. This rise in labour cost, has an influence on where companies look for their manufacturing and while studies have shown that with higher wages comes greater productivity, companies cannot sustain such increases as it overall has such a dramatic impact on their expenses. Thus, the supply chain is being stretched in such a way that a move away from China due to labor costs is inevitable.

This is not to say that there are no advantages to China, indeed with the matureness of the market, high-productivity, and sophisticated infrastructure, for certain higher-end products – especially if at least partially targeted at the China market, then China manufacturing is still more favorable. While there might be lower labor cost in India and Vietnam, the infrastructure is poor, making transit times significantly longer, so compromises still need to be made. It will be interesting to see, once infrastructure improves together with an increase in the quality of life (and cost of manufacturing) in South and South East Asia, where the supply chain will shift to next.

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