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  • The Changing Winds of Outsourcing Manufacturing in China

    While searching China’s Xinhua News Agency site to secure references to my previous posting related to the after effects of the tainted milk scandal, I came across a rather interesting article that provides some indication of the changing winds of outsourcing manufacturing within China.

    The article, Toy exports slump with higher costs in Southern China, notes that China’s major toy manufacturing province, Guangdong, is experiencing a slump in toy exports to Europe and the U.S. amid rising costs. 

    The cost of manufacturing toys in southern China has increased an average of 25 percent, while overall export demand has remained slack due to the effects of the world economy and keen competition. Both the EU and the U.S. have adopted more stringent standards on imported toys, and that has required Chinese producers to spend 15 percent more on higher quality raw materials as well as much more time on product inspection and quality needs. Labor and transportation costs within China have also risen.

    In the first ten months of 2009, exports to Europe, Hong Kong and the U.S. have dropped 10.9 percent, 12 percent, and 15.2 percent respectively, which indicates that the bulk of toy purchases have already been consummated to stock for the upcoming holiday buying season and declining export volume for 2009 is a certainty.

     Toy manufacturing represents the most margin sensitive aspect of manufacturing sourcing and in fact it was the toy industry that led the first wave of production outsourcing within China’s Guangdong province.  Since that time, the obvious need for higher quality and safety standards are driving these same brand owners to source their production in more interior regions of China, or within other evolving low-cost manufacturing regions. In essence, the trends noted should not be a total surprise.

    This trending in the toy industry is however another indicator of the changing winds for global outsourcing or near shoring.  The singular notion of savings in direct labor costs can no longer justify an outsourcing decision. The added factors of market acceptance of quality, more stringent regulatory compliance, transportation and landed cost factors now play a more significant aspect to the overall sourcing decision.

    The latest and most timely reminder of for increased quality and safety concerns stems from this weeks highly publicized product recall of infant cribs, the largest in U.S. history,.  Over 2.1 million drop-side infant cribs, manufactured from January 1993 to October 2009 are being recalled because of potential hardware breakage leading to infant safety concerns or potential death from suffocation.  The affected cribs were noted as being manufactured in Canada, China, and Indonesia.

    The takeaway is that sourcing decisions are no longer static, and sourcing professionals need many more strategic skills and information sources to make the most intelligent and timely sourcing decisions.

     Bob Ferrari

    1 Comment

    1. I will comment on intellectual rights and trust issue:

      Under “agreement” in China many Chinese will understand as verbal agreement. One must remember that you are dealing with western mind set where fear of ‘loosing face’ is well imbedded in the thinking of the self respecting business man.
      So if you are dealing in the first place with known and respected company / people then you can have a security of the NDA as well general business trust build without any paperwork. Not to mention that foren company have lite chance enforcing complex agreements in the local court that rule if favor of locals.
      So, travel China, meet people, spend time with them, build relationship, judge character and you will be OK.
      My 2 cents worth of experience.
      Peter from http://www.pa-international.com.au


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