People's Republic of China's annual average GDP growth for last decade (i.e. 2001 to 2010) was 10.5%, which was equivalent to the combined growth rate of all the G7 countries. The result of this express growth was that by the end of 2010, China's GDP was USD 6 trillion (next only to USA) and one fourth of this was accounted only by exports. China's exports value (as shown in the table) for 2010 reads USD 1.58 trillion, just about India's total GDP. From Apparels to toys, from electronics goods to furniture, you just name it... China produced almost everything at very competitive prices and Global retailers treated China as their one stop shop - the world's factory.
Everything was going well until recently when Chinese manufacturers started feeling the heat of inflation and rising fuel prices. The three main reasons why the world's factory was going all guns were - cheap manpower, low energy cost and low transportation costs. So this low cost production phenomenon was a majorly dependent on the low crude oil prices. But, the crude oil price has gone almost double of what it used to be 10 years back and so do the energy and transportation costs. Also because of soaring inflation, the costs of raw material are going up day by day. Additionally, inflation has also increased the cost of living in China, hence the workers demand more wages and gone are the days of getting cheap manpower. Basically, it will not be wrong to say here that the edge which Chinese manufacturers had over the other manufacturers is getting blunt sooner than later.
The wounds are getting visible now. Few days back Asda, the British arm of Wal-Mart, announced that it is buying some of its fabric from the UK this year. And this is not the only case, many other retailers have been heard moving from costal parts of China to the inland cities where wages are less (though they still have to bear the higher transportation costs) and others have announced to move out of China all together, to the lower cost locations such as Bangladesh, Pakistan, Indonesia, Philippines, Thailand, Vietnam etc. To encounter the high logistics and supply chain costs, the US retailers are also trying to move to the concept of 'Near-Source' Manufacturing. This trend is going to be beneficial for the locations like Brazil, Mexico, Argentina, Central America and Caribbean. Talking about the European retailers, they have one more reason to move to the 'Near-Source' Manufacturing and that is the current financial crisis in Europe. Many European countries are putting extra efforts to strengthen their Manufacturing units to generate revenues and counter the crisis. This means cheaper Denim from Turkey, Ceramics from Italy, Toys from Germany and plastic items from Hungary to name a few.
Though there can be some skepticism in sourcing products (and eventually relying) on already crisis hit Eurozone. Also a worrying fact may be that the European retailers who are paying the Chinese suppliers in US Dollars currently will have to shell out GBPs and EURs which are soaring closer to 1.5 USD and 1.3 USD respectively. But if we see the big picture - overall the Global prospects of this new 'Near-Source' Manufacturing model look good and it seems to be a concept that will prosper in coming future. This will not only diversify the retailers' Supply Chains by decentralizing the production but also will lessen the over dependency upon China. Plus, this surely will encounter the current problems of rising fuel rates and higher wages.
May be this far too early to demean and write off China's manufacturing prowess... May be China will not tank overnight. Yes, this process may take some time but its occurrence is inevitable. Soon we will start experiencing the decline in Chinese exports and over a period of time the 'World's Factory' will be shut down. Eventually the Dragon will fall and others will rise...
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