Global Sourcing in China: Li & Fung Looks Beyond the Great Wall as the Low Cost Era Ends

The Great Wall of China was originally built to contain an empire and keep barbarians out. Ironically, many centuries after its construction, China may be welcoming a new invasion from its inner regions, opening the wall as it attempts to transport goods from the inside, out. I recently came across this article which gives credence to the accelerating pace of companies looking to source from inland China. According to the piece, Li & Fung, plans to "switch to sourcing from China's cheaper interior as infrastructure" due in part to improving infrastructure and "high-speed railways linking remote areas and major Chinese cities." At the same time, the firm believes that the low-cost era in China is over -- an observation that we should all internalize on a number of levels as we think about our own China and global sourcing strategies.

Accordingly, "The last 20 years had been a deflationary environment for costs of goods and was unique because China added so much production very quickly to the world." Fast-forward to 2010 and one expert quoted in the article suggests that, "the party is over ... Basically China has a lot of the same issues that all developing countries have when they become developed." As a result, we are "moving into ... an era [of] higher prices" thanks in part to the "Foxconn" effect and an upward pressure on both "commodities" and "labor."

Of course none of this should be news to those following the evolution of China sourcing on a professional basis. But it will ultimately surprise many consumers as we see inflationary pressure on finished goods (e.g., sneakers, certain electronics, etc.) where global supply chains have moved entirely offshore. For those companies with global or local supply options available outside of China, however, Li & Fung's observation provides yet further proof that it may be time to explore other options. Yet I'd argue that the apparel industry will have a near impossible time taking off its tight fitting, cheap China sweater. It fits like a glove, albeit a cheaply manufactured one that will only get more expensive.

Jason Busch

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