Spend Matters: Live From China (Third Dispatch)

The Two "Cs" -- Currency and Capacity

With the exception of US/China trade and economic policy, the two most important hot button issues I discovered so far in China on this trip have been currency and capacity. These two items are often the determining strategy in whether China is a good fit in today’s global sourcing environment.

From a currency perspective, the talk on everyone's mind is about the weakness of the dollar and the strength of the euro. Last time I was here, the dollar was roughly 10% stronger relative to the RMB than where it is today. And many are predicting the dollar will still fall further against the semi-floating Chinese currency. For many folks I've spoken with, the questionable strength of the dollar is making many single digit and low double digit China savings opportunities less attractive given the risks involved.

However, the strength of the euro is leading to a very different scenario on the continent, where China sourcing opportunities can now offer between 10-25% additional savings compared with Eastern Europe in many categories. For me this is quite an interesting development because when I was getting started in global sourcing analysis in the late nineties, China held little interest as a global sourcing destination for Europeans, other than for those also interested in selling into the region. My, how a few years can make a difference!

From a capacity perspective, the name of the game is available capacity in local markets. For markets where capacity is constrained locally in the US and Europe, China is proving an attractive option not just to achieve savings in a range of categories, but to help companies meet market demand. This is especially true in Europe at the moment, where it can be extremely challenging to find supplier capacity in certain metals markets either in Western Europe (e.g., Germany, France) or Central and Eastern Europe.

So when the dust settles on China sourcing trends for 2007 and 2008, in addition to all the noise around VAT rebate changes and supplier quality and performance management, I'll also remember how critical currency and capacity were to companies in determining and executing the right China sourcing strategies.

This post is part of the Spend Matters / MFG.com China Sourcing series.

Jason Busch

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