Asia Sourcing: Future Trends & Models

This month I had the honor of being a panelist at the French Chamber of Commerce’s forum on “Sourcing in Asia: The major sourcing companies get together to discuss the future trends & models.”

I was a bit hesitant to accept the invitation to join the panel under the title of “sourcing expert” because I knew the French Chamber had some very large and China-savvy members like Tesco, Marks & Spencer, Carrefour, Fiducia, HSBC, BNP Paribas and KPMG to name a few. For example, Chamber member Bombardier has assets of almost 24 Billion (yep, BILLION!) as of 2011.


I own factories in China with 200 employees- I feel like such a small fry and my China expertise revolves around helping mid-sized buyers who purchase 100K to 20million USD in China, so naturally I was a bit hesitant to call myself an expert in front of billion dollar players. But the Chamber assured me that there would be members of all sizes and I should relax. As it turns out, they were right. Buyers large and small are facing the same challenges in China. So I am very glad I accepted the offer to join this interactive panel and hope I was able to share some ideas with the audience.


In this article, I would like to share with you some of the trends that were discussed by this group during the 2 day forum in Hong Kong hosted by the French Chamber of Commerce where the main discussion revolved around “where is the next China?”


I was happy to join this discussion as the issue is also a hot topic on my blog. For example, I have written the following pieces in the last year or so:


Reports of China’s death as a sourcing destination are highly exaggerated.

Heavy hitters weigh in on future of China Sourcing

What lawn mowing methods tell us about the costs of labor in China

Labor Shortage in China



For the most part, panelists and audience members agree, China will remain the premier sourcing destination for the majority of products for at least the next decade. But there are some key exceptions and some clarification to that general statement.



1. While China as a nation will remain the main sourcing destination, it is important to note that the coastal areas are getting more and more expensive and production is gradually moving inland as opposed to leaving China. So you could say that the “next China” is China’s interior. Visit here for a well-researched white paper on the subject.


Coastal Labor rates and rents are on the rise, while government incentives in places like Shenzhen and Shanghai are being pulled as part of an effort to encourage growth in the western regions of China. This is a smart move as if China turned into a nation of haves and have-nots it would lead to instability on a massive scale.


2. Note I underlined “gradually” above. Clearly costs on the coast are on the rise, but why isn’t there an exodus of manufacturing leaving the China, let alone the expensive coast?


The manufacturers present at the panel sited the following three major points to explain this anomaly.


a) Labor rates may be lower in the interior, but costs of raw materials are the same at a national level. As China has moved up the value chain in past year, the production is less and less labor dependent. Think iPads vs. t-shirts.


b) “Guanxi” (relationships) don’t transfer. Established businesses on the coast have build stable relationships with the port authorities, labor bureaus, tax man, government inspectors and so on. Moving to a new location means starting from scratch. And if even one of these critical relationships is not handled well at the new location, it could spell disaster for the business. So factories move only as a last resort.


c) Logistics is a major issue. Most factories in China’s current production hot spots of the Pearl River Delta and Yangtze River Delta are a few hours from the port, but keep in mind that the costs to move product around domestically in China are expensive compared to moving freight internationally by sea. The representative from Damco (part of the Maersk logistics family) shared a very descriptive ratio. To put things in perspective, he explained:


The cost to move a container by truck from Guangzhou to the sea port of Shenzhen is twice as much as the cost to move that container from Shenzhen to Los Angeles. And the cost to move a container from inland China (Chongqing for example) to Shenzhen if 4X the cost of going Guangzhou to Shenzhen.


So it is very clear that the costs of logistics are critical factor in the descison to move inland or not.


3. While there is no mass exodus, some industries are leaving China. Which industries are leaving China and why?


The short answer was “large volume, high labor, low tech” products are the first to move out of China. Think shoes and socks ordered by the container load. But if your bill of material (BOM) is complex, take a vacuum cleaner for example- metal parts, an engine, plastic parts, printing, stickers, hardware, switching and so on- most likely the vast majority of the BOM is made in China and comes from various different suppliers across China. Coordinating this supply chain for delivery to Cambodia for final assembly would be a nightmare. However, if you are making shoes out of Brazilian leather, then shipping your BOM to Asia for final assembly, then it does make sense to manufacturer in Vietnam or Indonesia which have slightly lower labor rates than PRC.


4. If the interior of China is gradually becoming the “new China”, what types of companies/products are most suited for production in the interior at present?


As a China based manufacturer and service provider, this was the most interesting question discussed at the conference. The agreed answer to this question was “high tech, high value, light weight product.”


Here is why.


In point 2C above I explain the tyranny of distance when sourcing inland. But China is attempting to overcome this problem with massive investments in infrastructure in the interior. Everybody knows that in theory water freight is the most efficient way to move product and the 3 gorges dam project is opening up a waterway all the way to Chongqing. But in practice, it is improvements in Air and Rail that get manufacturers excited. Get out a map and look up places like ChongQing, Chengdu and Xian. It is fair to say they are in the middle of nowhere. But, China now has direct flights from these areas to Europe. They have even built a railway all the way from Chongqing to Germany! Keep in mind that China covers a huge piece of Asia. Xinjiang in the west of China is 1/2 way to Jerusalem. So the solution to open up the western region to business is not to ship goods to China’s coast, but send them direct to Europe from western China.


Let’s talk about this China-Germany railway. It is taking about 13 days to move product by rail along this route. That is great when you realize that it takes 30 plus days to move by river or truck to China’s coast and around the world by ship. So why haven’t you heard about this magic railway yet?


1. Security. Do you really want a container load of high value product moving thru Kazakhstan? (No offense Borat)

2. Lots of borders and customs clearance hurdles to jump though.

3. I heard that many of the countries along the way use different gauge rail tracks and this slows down movement.

4. Politics.


So at the moment, only a handful of companies are moving freight via this new orient express. HP is one such company. News first came out in 2009 with titles like HP, Foxconn to build laptop manufacturing hub in Chongqing:

Leading computer maker Hewlett-Packard (HP) and major electronics maker Foxconn Technology Group have agreed to jointly invest $3 billion.

The manufacturing hub will consist of two main facilities, which together can produce 20 million laptops for exports each year.

HP and Foxconn chose Chongqing because of its low labor, land and logistical costs, as well as the city’s attractive free trade zone, Huang Qifan, the city’s vice mayor, said. In addition, the city also granted HP and Foxconn a discounted corporate income tax rate of just 15 percent, he said. The usual rate is 25 percent.


Basically, to sweeten the deal for HP and Foxconn to invest in western China, the government granted them exclusive access to the China-Europe train route for a period of time. Joe Public exporters like me, and like you, can’t get product shipped via the train even if we wanted to. Believe me, I tried.


But that will change over time. More air routes will open from China’s west and the waterway from Chongqing to the coast will make improvements. Assuming costs on the coast continue to rise at the current pace of 10 to 15% each year, then west China’s infrastructure will determine the tipping point where product moves west in mass along the lines of how production moved from Japan to Korea to Taiwan to China’s coast. This is not crystal ball gestimations. It will happen. Just a matter of time.


On a side note, my co-worker at PassageMaker Sourcing Solutions, Mr. KC,  is the team leader for our projects in the HP supply chains. As such, he was invited by VIP’s of HP to join a tour of their operations in west China last year. Here are some interesting observations he shared with me when he got back from the trip.


1. Since the railway to Europe is not open to the public at this time, in the drive to entice businesses to set up in the west, cities like Chengdu and Chongqing are subsidizing the costs of logistics. Basically, if you ship a 40 foot container to the USA, you pay the fist 3000 RMB (485 USD) and they pick up the tab for the rest! Now that’s an economic stimulus package if there ever was one.

2. Chongqing wanted HP and Foxconn so bad that not only did they give a massive tax break, but they built a highway from the HP factory direct to the airport and named it the HP Highway. Maybe if I move my small shop if could get a side street named after me!



If production is moving, it is moving inward from the China coast, not outward to S.E. Asia any time soon for most product categories. The HP and Foxconn operation is on a massive scale, but it does provide proof of concept that western China can indeed be an attractive place to business.




About the Author

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center ( He is also the author of, “The Essential Reference Guide to China Sourcing” ( and founder of PassageMaker Sourcing Solutions (


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