China Sourcing: Robots to beat tariffs?

The impending tariffs and the trade war with China have been an ongoing and popular topic in the press, and an especially important issue in our business. One of the benefits of this kind of activity is that importers are focused on reducing COGS (Cost of goods sold).

A recent and interesting article from The Economist, Robots will help Chinese firms cope with wages and the trade war, brought to our attention many of the questions and inquiries we field from our own clients about reducing costs and softening the impact of tariffs.

Many importers are nervous and are revising their options, including the possibility of shifting production to some other country. But moving a supply chain is proving to be hard and very disruptive. The good news is that the conclusion reached in both in the Economist article and our own blogs (see here and here), is that many importers do not need to move out of China despite the tariffs because there are new ways to save money and stay competitive. Higher productivity in China is offsetting the increased labor and tariffs costs.

Cutting Costs through Automation

Labor costs have been rising in China, and this has a direct impact on production for items where automation is difficult, such as the garment industry. Often times, when cost rises, garment importers have no choice but to flee to places like Bangladesh, where labor is cheaper. But Esquel, a Chinese sustainable garment company, plans to keep much of its operation in China. Many well-run companies like them are betting on automation to stay competitive, even with rising labor costs. They increase productivity by increasing automation – and that means robots. Installation of industrial robots in Chinarose 59%, more than the US and Europe.

Company Size and Production Scale

There are a number of factors that are likely to keep importers like Esquel rooted in the China supply chain. One of which is size: large companies can take advantage of economies of scale to keep costs low.  Another is the wealth and diversity of accessory suppliers linked to the chain. This makes the sourcing process flexible, easier and fast.

The trade war forces Chinese firms to become more efficient rather than accept defeat. Although some may move production to other countries and take their clients with them, many stay put and just become more productive.

Only time will tell how the trade war will affect China-based factories, but it seems obvious that China is finding a way to adapt and that it will continue to serve as the World’s Factory. What are your thoughts? Share them with us in the comments below.

 

By Jocelyn Trigueros