Has china lost its low cost edge?

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For years, labor rates have been the primary advantage Chinese manufacturers have benefited from, however, wage rates in China are growing at an accelerated rate, with some reports indicating they …

For years, labor rates have been the primary advantage Chinese manufacturers have benefited from, however, wage rates in China are growing at an accelerated rate, with some reports indicating they will surpass rates in Mexico and other developing countries very soon.

What does this mean for your supply chain? Should you be concerned?

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  • 1. Has China Lost ItsLow-Cost Edge?Laura HodgesDirector, Pricing and Purchasing ServiceSeptember 27, 2012
  • 2. Why the Concern about China?• Recent studies have suggested that China has or will lose its low-cost status over the next 3 years• Buyers report that Chinese quality has just reached their comfort level• Should you be concerned? • Labor costs are exploding but remain low and productivity is high • The renminbi will continue to appreciate over the long-term • No cost advantage for most material prices • Shipping costs are at extremely low levels• How should this impact your sourcing decisions?• Are there other countries that you should consider? Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 3. China’s Rising Profile in US TradeShare of U.S. Nominal Merchandise Imports, By Country, %201816141210 8 6 4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 China Canada Mexico JapanSource: IMF Direction of Trade Statistics. Copyright © 2012 IHS Inc. All Rights Reserved. 3 www.ihs.com/PricingPurchasing
  • 4. China Also Plays A Larger Role In Supply Chains China as a Percentage of Global Production 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Base Metals* Steel Cement *consumption Copyright © 2012 IHS Inc. All Rights Reserved. 4 www.ihs.com/PricingPurchasing
  • 5. The Chinese Economy Takes Over the Top Spot Share of world GDP, measured in nominal US dollars 2010 2020 Other Asia, Other Asia, Mideast, Pacific Mideast, Africa Pacific Africa 20.5% 33.8% 6.1% 5.8% Japan 8.7% North Emerging North America Europe America 20.1% Japan 6.4% 27.1% 5.7% Other Western Other Emerging Americas Western 7.1% Europe Americas Europe Europe 25.2% 6.3% 7.5% 19.6% US 22.9% US 16.9% China 9.4% China 19.6% India 2.7% India 5.5% Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 6. Yet, Overall Labor Costs Are Still Very Low• The average Chinese manufacturing worker earns approximately $2.50 per hour • This reflects a more than 12.5% annual growth over the past decade• Strong upward pressures on wages • Minimum wages are rising by more than 20% annually in some provinces • Inflation rising with higher food and energy costs • Productivity gains pushed 10% higher annually• However wide disparity exists across the country and occupation• Over the next decade, wages are expected to double and will grow another 10-15% in the next 3-5 years Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 7. No Chinese Advantage on Material CostsGlobal Cold-Rolled Sheet Prices Global Copper Prices(USD per metric ton) (US$ per metric ton) 1,400 12,000 1,200 10,000 1,000 8,000 800 6,000 600 400 4,000 200 2,000 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 US Europe China US Europe ChinaGlobal Ethylene Prices Global Polypropylene Prices(US$ per metric ton) (US$ per metric ton) 2,000 2,800 2,600 1,800 2,400 1,600 2,200 1,400 2,000 1,800 1,200 1,600 1,000 1,400 1,200 800 1,000 600 800 400 600 400 200 200 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Copyright © 2012 IHS Inc. All Rights Reserved. US Europe Southeast Asia US Europe Northeast Asia www.ihs.com/PricingPurchasing
  • 8. Continued RMB Appreciation Canadian Dollar Euro (Canadian dollars per US dollar, quarterly averages) (Euro per US dollar, quarterly averages) Japanese Yen Chinese Renminbi (Yen per US dollar, quarterly averages) (Yuan per US dollar, quarterly averages)Copyright © 2012 IHS Inc. All Rights Reserved. 8 www.ihs.com/PricingPurchasing
  • 9. Shipping Rates Are Not A Concern (Baltic Dry Index, 1985=1000) 12,000 Abundant supply should keep rates low for at least 10,000 the next three years 8,000 6,000 4,000 2,000 0 2003M1 2005M1 2007M1 2009M1 2011M1Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 10. Productivity Gains Have Been Strong (Chinese output per employee, USD) 50,000 40,000 30,000 20,000 10,000 2005 2006 2007 2008 2009 2010 2011 Productivity has almost doubled since 2005, reducing the true impact of higher wagesCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 11. How Does this Impact China’s Cost Advantage?US Production Costs for Steel Castings Chinese Production Costs for Steel Castings(Source: 2010 Annual Survey of Manufacturers) (Source: 2010 Annual Survey of Manufacturers) Cost (000s) Share Cost (000s) SharePayroll 5,412,793 30.42% Payroll 1,353,198 9.85% Production 3,880,981 21.81% Production 970,245 7.06% Management 1,531,812 8.61% Management 382,953 2.79%Energy 1,499,672 8.43% Energy 1,499,672 10.92%Material 10,881,765 61.15% Material 10,881,765 79.23% Scrap 5,651,202 31.76% Scrap 5,651,202 41.15% Ferrous shapes & forms 2,560,415 14.39% Ferrous shapes & forms 2,560,415 18.64% Sand 512,083 2.88% Sand 512,083 3.73% Industrial equipment 292,619 1.64% Industrial equipment 292,619 2.13% Nonmetallic products 292,619 1.64% Nonmetallic products 292,619 2.13% Nonferrous shapes & forms 329,196 1.85% Nonferrous shapes & forms 329,196 2.40% Other 1,261,919 7.09% Other 1,261,919 9.19%Production Costs 17,794,230 100.00% Production Costs 13,734,635 100.00%Value of Shipments 27,100,175 65.66% Assume material costs are roughly equal The average Chinese manufacturing worker is only 40% as productive as the same US worker The average Chinese manufacturing wage is only 10% of the US wage Copyright © 2012 IHS Inc. All Rights Reserved. The Chinese cost advantage is 23% in 2010 www.ihs.com/PricingPurchasing
  • 12. Cost Erosion Continues In the Next Decade Existing 23% Cost(Cost Index, Steel Castings, 2010Q1=100) Advantage170.0 Eliminated by End of Decade160.0150.0140.0130.0120.0110.0100.0 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 2020Q1 2022Q1 US ChinaCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 13. Cost Saving Still Exists But For How Long? • Using this example, casting production costs in China are approximately 23% lower than those in the US • Shipping costs, exchange rate appreciation, and supply chain risks do cut into these savings • While it may still make sense to source from China, the margins are narrowing • Over the next decade, Chinese wages are expected to move from 10% of US wages to 25% • This is enough to make China uncompetitive for your basic manufactured goodsCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 14. Lower-Cost Countries Are Also AvailableGlobal Manufacturing Wages (USD per hour, 2012) Pakistan Vietnam Indonesia Philippines Thailand Depending upon your India location, Indonesia, and Peru China Mexico may be good Turkey alternative sourcing options Venezuela Romania Mexico Malaysia Hungary Brazil South Africa Taiw an Czech Portugal Argentina Korea, South United United States Japan Canada Germany Australia Sw itzerland Norw ayCopyright © 2012 IHS Inc. All Rights Reserved. 0.00 10.00 20.00 30.00 40.00 50.00 www.ihs.com/PricingPurchasing
  • 15. Indonesia Offers an Attractive Option (Manufacturing wage, USD per hour) 8.00 6.00 4.00 2.00 0.00 2000 2005 2010 2015 2020 Mexico China IndonesiaCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 16. No Country is Without RisksMexico - Exporter Risk Rating - 10 (1-Year) / 23 (5-Year) - A cumbersome bureaucracy and endemic corruption persists - Increased violence from drug gangs and a clampdown on organised crime - A labour surplus exists but shortage of technically skilled workers is a problem - Renewed efforts to make labour laws more flexible but political resistance is strongIndonesia - Exporter Risk Rating - 11 (1-Year) / 34 (5-Year) - Endemic corruption, inefficient bureaucracy, and red tape are a challenge - Reform on business regulations has slowed markedly over the last few years - A 40-hour limit on the working week is comparative disadvantage - Indonesias labour force is under-educated The Risk Scores represent a subjective probability of a range of business risks in a given country, and the numbers range from 0 to 100, with lower numbers representing lower risk The China risk score is currently 14 (1-Year) and 33 (5-Year)Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 17. Implications for Buyers• China will retain its low-cost status over the next five years … • … depending upon the labor intensity of the manufacturing process• Labor was the primary advantage in China • And those costs are rising along with the exchange rate • Expect a pause this year for exchange rates but wages will grow near 10%• But China is approaching the end of its low-cost status• For high-labor, low-margin goods, start looking for alternative low- cost countries (Indonesia) or ones closer to home (Mexico)• Be aware of the unique risks in each country Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 18. Thank you! Contact IHS today to learn more… Americas Marc Venditti +1 781 301-9325 Asia/Pacific Christopher Munch-Fals +65 6576 5354 Europe, Middle East & Africa Natalie Rowlands +44 203 159 3260Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing