The end of the China Effect?

May 21st, 2007 at 02:58am Sean Delaney - Iasta UK

I know this has been written about before but we cannot under estimate China’s effect on world economic growth over the last 15 years. The low wage Chinese economy has been a major influence on prices and in some instances deflation in most developed countries.

However, is the party all going to come to an end? More crucially what impact will this have on our low cost country sourcing strategies?

Let me elaborate…..in a recent article it stated there were some concerns about the state of the Chinese economy but there is a danger that these concerns could be “prone to being overdone”.

Taking this article on its own then I would agree with this summary but when you take this in the context with other factors I think the issue is a lot bigger.

Firstly, this year China has tentatively raised interest rates in an effort to slow growth. However, this intervention has had little effect with GDP increasing from 10% in Qtr4 of 2006 to approximately 11% in the first quarter of 2007…and that’s the official line real GDP and inflation could be a whole lot higher.

Secondly, the central bank allowed some limited realignment of the exchange rates (it is still estimated that the currency is some 15 – 20% undervalued). Since interest rate rises have had little effect it seems obvious that the Government will have to intervene in exchange rates to stem demand for exports.

Thirdly, in an effort to standardise the corporation tax system the Chinese Government are planning to increase the corporation tax for foreign companies from 15% to 25%.

Fourthly, if that wasn’t enough there are signs of wage inflation within the economy both in white colour and blue colour workers.

Finally, due to the developing worlds’ insatiable demand for commodities, prices are at an all time high. Since these are generally input costs it seems inevitable that output prices would need to rise to compensate.

I could be accused of overdoing the issue here but it seems to me that the price pressures are real. Somebody said once that if it looks like a duck and quacks then maybe it is a duck!

In much the same way during the 70’s the dependence of the industrialized world on OPEC oil was exposed when prices were increased dramatically. The question is, could rising price of Chinese exports have the same effect?

In my opinion, the Sourcing community is certainly going to have some challenging times ahead. For example, at which point do you change your policy on Low Cost Country Sourcing, what are the triggers and when are they likely to arise?

In many instances, this decision is already finely balanced, for example, the long lead times are not exactly suited to say the retail industry.

Take Arcadia (£1.8bn turnover) clothing retailer in the UK made the strategic move to shift production from the Far East to countries like Turkey. Highly Fashionable products can be on the shelf 3 weeks quicker than sourcing from the Far East.

eSourcing has to play its part but the question is how. Here are some thoughts:

• Increase the visibility of your spend. If you are not doing so then start using spend analysis software. This will help to understand areas of spend that have been untouched.
• In conjunction with SA, projects will have to be run on a much more frequent basis. Look at smaller values and train administration staff to host projects.
• Cost avoidance projects are as important. Do not take incumbent supplier price increases on the chin. Spend time analysing the pricing matrices and possibly share the benefits of projects.
• Cost saving and sharing with third parties. Look at the opportunities and be realistic about the time scale v’s the benefit. If the analysis says it will work – make it and dedicate resources to it. The next collaboration project will be easier than the last.
• Dedicate more time to nurturing the product develop process. Influence spend decisions earlier. (Far Easier to accomplish if staff and processes are aligned with the organisations eSourcing goals).

It is difficult gauge the exact timing and the exact impact. However, what I do know is that each country will feel the impact differently and those without a flexible exchange rate could be more at risk. Of course, I could be “overdoing” the risk?

Entry Filed under: General, Global Supply Issues/Risk, Spend Analysis, Suppliers, Supply Management Best Practices, e-Sourcing Marketplace

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