China's Changing Currency Policy: Something to Fear?

Sourcing professionals looking to China can no longer take low costs for granted


 

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The Challenges in China

Of course, currency appreciation is not the only thorn in sourcing executives' sides. There is a black cloud on the wage horizon in China, too. In the past few months — in response to worker unrest and a spate of suicides — Chinese companies have been doubling, even tripling, their employees' salaries.

The impact has been significant for American importers, who must choose between two unpalatable options: stomach shrinking profits or pass their rising costs on to consumers.

A stronger yuan will exacerbate the pain, but truthfully the bigger threat is that heated discourse over currency policies could spark an ugly trade war between the US and China. That would cause major headaches for everyone — supplier, sourcing executive and consumer — as new duties are imposed, cost structures change and pricing becomes unpredictable.

What Can You Do?

There's no question that sourcing in China is getting a whole lot more complicated. American sourcing executives have been riding high on the low-cost China wave for a while now, many putting all their eggs in one basket. But monogamy, in this case, may be a risky choice. The rules of the game have changed dramatically, and it's time to start playing in new sandboxes.

Here are two essential strategies for prospering in a manufacturing world that is in flux:

Short-term strategy: communication.

As in any relationship, communication is critical, but it just became the Holy Grail in the symbiotic sourcing-executive/supplier relationship. No longer able to take predictably low costs for granted, sourcing professionals must speak openly to their suppliers to understand what new cost burdens, challenges and vulnerabilities they face given China's wage increases and impending currency fluctuations.

Find out how your suppliers' cost structures are changing, and model how these changes are likely to impact your own cost structure. Then, assuming costs are going up, address how you can manage those increases. Who will absorb the hit — you, your supplier, or both of you? Frank discussions like these will help you — and your suppliers — better cope with the impact on your respective bottom lines.

Long-term strategy: diversification.

If you've limited your sourcing to China, sprout wings and explore other geographies. But be sure to do your homework before rushing into new regions — and once there, don't stop researching. Countries' policies and economies are in constant flux, so thorough and ongoing regional analysis will save you major grief as you diversify.

When analyzing, ask yourself these key questions:

  • What are the country's manufacturing capabilities? Does its labor force have experience producing my desired product?
  • If you're cost sensitive — What will my costs look like when manufacturing in this country? What are wage levels, productivity levels, transportations costs and duties?
  • If you're risk sensitive — What are the risks surrounding this country's wage rates, exchange rates and trade policies? Am I willing to take those risks?

 

And, of course, as you scout new geographies, make sure you have the information you need to evaluate suppliers using the "Four Cs" criteria: capabilities, customers, certifications and credit.

The China ride was euphoric while it lasted, spoiling us with a seemingly inexhaustible supply of cheap labor and rock-bottom costs. But with so much at stake now, it's important to think outside the China box.

About the Author:
Josh Green is CEO of Panjiva, an intelligence service for sourcing executives. More information at www.panjiva.com.

 

 

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