It’s easy to see why China has risen to become the global center for manufacturing private-label goods. By taking advantage of China’s historically low wages, large workforce, strong infrastructure, positive currency exchange rates and relatively low taxes, dozens of Western retailers have been able to increase their profits-while maintaining high quality standards-by outsourcing the production of their private-label product lines there.
But today, many of the benefits that lured these retailers to China are turning into liabilities, and China is beginning to lose its appeal as a trading partner. One Global Edge Sourcing Group retail customer describes the current environment in China as a period of “exponential changes” that are completely reshaping the country’s economy and social order.
As the labor pool in China shrinks-both for assembly line workers and skilled technicians-and demand continues to escalate, wages have steadily risen. In late June 2008- in response to double-digit inflation-the Chinese government announced a minimum salary increase of 10 percent in its capital city, Beijing, which will have an immediate impact on the profitability of manufacturing goods there.
In addition, competitive pressures driving shorter lead and response times, coupled with the skyrocketing costs of fuel, are making many retailers question the wisdom of transporting finished goods, especially weighty products, halfway around the world. Increasing fuel costs are dramatically eroding private-label profit margins and forcing retailers to rethink their outsourcing strategies. Shipping prices have increased up to 300 percent since 2000, and are expected to double again, as oil prices settle above $100 per barrel. Changes in currency valuation represent yet another factor affecting the profitability of outsourcing to China. As the dollar weakens and the Yuan strengthens,
Western retailers have seen their profits dip even further. Since 2005, the Yuan has gained 18 percent against the dollar, and this trend is expected to continue. Finally, the relatively low Chinese taxes that foreign owned businesses have enjoyed will be gradually phased out, thanks to China’s new Enterprise Income Tax Law, which was enacted on January 1, 2008.While Western businesses previously were subject to tax rates as low as 14 percent on the facilities they own in China, these rates will gradually increase to a standard 25 percent by 2013.
Given all these changes, Global Edge Sourcing Group estimates that over the last two years Western retailers have been paying 20-30 percent more for products sourced in China, and that these costs will continue to increase year over year in the foreseeable future.