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Vietnam & India Sourcing: Advantages and Disadvantages 3/2/2011

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So you are already sourcing from China…have you ever thought of sourcing from India? What about Vietnam? Are buyers trending away from China? What are the advantages and disadvantages of sourcing from other developing countries like these? Let’s explore!

A survey was recently released by Global Sources reporting on how China’s increasing labor costs and the fluctuation of the yuan have impacted buyers’ sourcing strategies overseas.

Over 380 buyers were surveyed and more than 50 percent of respondents said they have seen higher prices as a result of the yuan’s appreciation. But are they changing their strategy? The answer is yes… somewhat.  More than 50 percent of buyers say they are planning to step up their sourcing from India and Vietnam sometime in the future. (It did not indicate whether or not they plan to decrease their China sourcing however.)

The truth is: Vietnam and India are becoming increasingly attractive for foreign enterprises due to their low-cost and abundant labor supply.

What does this mean to American companies?

Places like Vietnam and India could be a viable option for your company if you specialize in low-end products. Industries that are labor intensive can also be successful in these countries due to the large labor pool (bigger than China’s) and the low cost of labor. Industries like textiles (clothes, shoes, sheets etc) have been successful at increasing savings by moving production to countries like India where the workforce is robust and there is a large percentage of English speaking workers (20% higher than China’s workforce). Also, India’s income tax will decrease this year in order to be more competitive with China.

Although the numbers do indicate an uptick in sourcing from these developing countries, do be forewarned: This is not the ideal plan for everybody. India and Vietnam are still in their youth, and fall short in a number of critical manufacturing areas in comparison to the United States and China. The traditional means to becoming a manufacturing powerhouse no longer stand alone. Not only will a country need to be strong in labor, energy and materials, but the country will also need to have a strong-willed work force with innovative thinkers.

Another critical aspect that must be taken into consideration is the different countries’ logistics infrastructure.  The logistics infrastructure in China for example is much more developed and sophisticated than in India or Vietnam.  We typically find that sourcing from China is much more efficient because of the hundreds of billions of dollars invested over the last 20 years in roads, highways, ports and airports.  With that being said, if quick turn-around and reliable, timely shipping and receiving are a must for your business, China might be a better choice.

China India Vietnam
Total Airports 502 352 44
Major Ports 130 12 14
Railways 77,834 km 64,015 km 2,347 km
Roadways 3,583,715 km 3,320,410 km 171,392 km

It is to be noted however, that although India has the third largest road network in the world, about 2.6 million km or almost 75 percent of their roads are considered rural. Travel by roadway in India is also often times considered dangerous; people do not abide by traffic laws, roads are bumpy and uncared for and traffic is intensely crowded. In fact, the National Highway make up only 2% of the nation’s roadway length, but handles about 40 percent of the roadway traffic.

Beyond logistics, the 2nd most common issue when looking beyond China is your raw material supply chain.  As nearly every major industry’s supply chain has shifted to China over the last 20 years, so have the raw materials companies/suppliers.  When evaluating a move away from China, it’s important to understand whether or not your source of raw material is available in your next destination.  If you don’t, you very well may end up finding out that while you are benefiting from cheaper labor elsewhere, you are offsetting those savings by your increased logistics and duties costs as you ship your raw materials in from China.

China also excels at supporting large-scale investment projects – something that Vietnam and India struggle with due to their infancy in the manufacturing arena as well as the large government bureaucracies that you must deal with.  If a company wanted to expand and build a new facility to ramp up production in China, it could take 6 months, whereas in India it could take 2 to 3 years.

In conclusion, China is still the manufacturing powerhouse for most, and will remain so for quite a few years to come.  However, we are likely to see a shift in the type of manufacturing China is involved in. They are now encouraging investments in high tech industries and research and development enterprises. Their goals is to move towards a more sophisticated manufacturing region that can garner higher wages and eventually propel more and more people into the coveted middle and upper classes.

We would love to hear how your company’s overseas buying strategy has changed (or hasn’t changed)!

Sources:

http://www.globalsources.com
http://www.2point6billion.com/news/2011/02/17/china-india-compared-by-al-jazeera-8606.html
https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
http://online.wsj.com/article/SB10001424052748703800204576159410421853214.htmlhttp://www.business-in-asia.com/ports_in_vietnam.html
http://understand-china.com/?manufacturing=logistics-4

http://indiatoday.intoday.in/site/Story/110495/Cover%20Story/wealth-does-not-create-roads-rather,-roads-create-wealth.html

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10 China Facts You May Not Have Known 2/2/2011

China Facts Skyline and Flag
1.       China is the second largest economy in the world.

2.       China is the largest exporter in the world.

3.       China is the second largest importer in the world.

4.       China currently accounts for nearly 10% of world trade.

5.       The United States’ 2010 estimated GDP is $14.7 trillion.

6.       China’s 2010 estimated GDP is $9.8 trillion.

7.       The Chinese government indicated in January that its companies signed contracts worth $45 Billion with American businesses. This increase in United States export business is expected to support an estimated 235,000 U.S. jobs. (The Boeing Airplane order for 200 planes is the largest portion of this deal, valued at $19 Billion.)

8.       Before this year, the last time that an American President hosted China’s president for a dinner was 13 years ago during the Clinton administration.

9.       In 2009, China’s economy was one third the size of the United States’ economy.

10.   China’s population is approximately 4 times the size of America’s population.

*Note: Ok, so number seven is only about America, but I wanted to show the comparison. The facts listed above are to the best of my knowledge the most accurate as of today. There is no guarantee they will stay true in the future.

Sources:
1. http://www.nytimes.com/2010/08/16/business/global/16yuan.html
2. http://www.cbc.ca/world/story/2010/01/10/china-exports.html
3. http://www.chinadaily.com.cn/business/2011-01/29/content_11937210.htm
4. http://www.china.org.cn/business/2010-11/19/content_21378120.htm
5. https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
6. https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
7. http://www.whitehouse.gov/the-press-office/2011/01/19/fact-sheet-us-china-commercial-relations
8. http://news.yahoo.com/s/ap/20110118/ap_on_re_us/us_us_china_state_dinner
9. http://www.state.gov/r/pa/ei/bgn/18902.htm
10. https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

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