Global Buyers Driven to Source From Low-Cost Countries

Prices of products sourced from China are likely to rise at least 10 per cent in the first half of 2011, believes Bruce Rockowitz, president of global consumer goods exporter Li & Fung Ltd. Western countries already struggling with rising commodity prices will feel even more pressure as China passes on its rising costs in labor and other manufacturing inputs. Already importers around the world are looking for cheaper alternatives. One article in Time Magazine calls this the ‘China Effect’. This effect refers to the fact that wages in China are on the rise as a result of China evolving from an export-dependent, low-cost manufacturing country to a demand-driven, service-oriented country. The rise in Chinese wages are in turn causing low-tech factory work to migrate across China’s borders to neighboring countries such as Malaysia and Thailand to Vietnam and Bangladesh. These countries have a competitive advantage over China because they have a relatively large supply of cheaper labor as well as other manufacturing costs.

Currently, the global trend is for international buyers and importers to manufacture and source products from low-cost countries. This trend is expected to strengthen over the next ten years – particularly in skill-intensive industries as these are more impacted by rising labor costs. Labor-intensive industries (toys, apparel and footwear) and certain skill-intensive industries, such as consumer electronics and computer hardware will be particularly affected. According to Citigroup, manufacturing wages in China was the seventh least expensive and Malaysia the eighth in 2010 after a comparison of 12 Asian countries. Despite the fact that many importers and manufacturers have a history of sourcing or manufacturing in China, the trend of rising costs in China is a considerable deterrent for only having a presence in China in the future. In fact, if the current wage trends holds in China, many businesses expect future wage increases in China to significantly outpace those in Southeast Asia.

According to a Mckinsey report, from as early as 2002, low-cost country exports were already growing twice as fast (around 13 per cent) as global trade (around 6 percent). Global trade in the apparel alone could grow from US$200 billion in 2002 to over US$300 billion by 2015. The world trade of the electrical and electronics industry already exceeds US$1 trillion and is also expected to grow. Currently, countries such as Malaysia and Thailand all have a significant lead in these industries. Malaysia boasts one of south-east Asia’s most promising economies due to decades of industrial growth and political stability. Another reason Malaysia is a good candidate for a China-alternative is that the language is less of a barrier because English pervasively spoken throughout Malaysia and most Malaysian suppliers can readily communicate with potential buyers in English.