China: Have the Tea Leaves Floated to the Bottom Yet?

When you're served tea in China for the first time, it's a complete surprise to find dozens of leaves floating in your glass. But then you quickly realize that the practice in China -- which knows its tea better than any other country, perhaps India aside, I might add -- is not to filter tannic stuff either by using a tea pot and strainer or a bag. For Westerners -- especially the English -- this might seem like a ghastly uncivilized way to serve such a cherished drink. But you quickly adapt to the process. Within five to ten minutes, the leaves eventually float to the bottom of the glass, and you can avoid a tea mustache, sipping the still warm drink.

When I talk to Spend Management professionals doing business in China these days, the majority believe that the region is still on the up, and that we've just begun to scratch the surface of what will be possible. They argue China has an insatiable thirst to learn and listen -- which I would agree without question -- and that the region's vast labor resources will continue to afford low-cost production for decades to come. For these types, the tea leaves have just begun to steep in the glass. This sentiment is reflected in a recent McKinsey Quarterly article that argues that "US companies have captured only a fraction of China's potential as a source of low-cost products and plan to strengthen their purchasing activities in the country, despite high employee turnover and other difficulties. In a survey of 39 US companies with sourcing offices in China, the respondents estimated that these companies buy only 30 percent of the goods they ultimately could buy there, though that figure will rise to 50 percent three years from now." The article goes onto to discuss how organizations how organizations have only captured about 25% of "the potential savings from purchasing in China ... [but that this] is expected to hit 40 percent in three years ... Notwithstanding all the press about Chinese exports to the West, only a fraction of the full potential has been captured so far."

But not everyone shares this optimism. Others, including my wife, who has traded finished products and sourced globally for over fifteen years, is one of those that believes the tea leaves in China have already floated to the bottom, and that we're on the tail end of the boom -- at least the current boom. Those who take this argument believe that Chinese wage inflation combined with a coming, insatiable domestic demand for products (because of the rise of the Chinese middle class) as well currency and IP issues will make the region less attractive for new sourcing investments than such places as Bangladesh and India (the latter especially for more sophisticated products). To back up this point, I know of a handful of companies that are either moving away from new global sourcing efforts from China because of the above issues (and inconsistent quality as well, especially in the metals areas), or switching out current spend to other regions. And even more are beginning to investigate new global options to hedge their bets on existing China spend.

Personally, the most wonderful thing I learned in China about a good local tea is that you can refill the glass numerous times while still maintaining at least some part of the flavor and essence of the leaf. Like an elegant tea, I believe that there are many cups yet to wring from the tea tips when it comes to China sourcing. But the question remains what will be left, and what leaves we'll be drinking from. Whether China quietly keeps the best stash for themselves -- as Chinese party members have done since the rise of Communism -- certainly remains a question for debate.

Jason Busch

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