Managing Your China Sourcing in the Age of Shrinking Factories

Just a few weeks ago, the South China Morning Post published an article about how some of China’s factories are downsizing to the extreme, all in an effort to survive the dynamics of our present global economy. How will that affect everyone who’s importing and sourcing from China? And the bigger question is, what can be done to manage the China sourcing problems that may arise from this?

Here’s our take on the topic of China’s shrinking factories and how you can make this change work to your advantage if you’re sourcing from China.

The Shrinking Giants Phenomenon

Just a few years ago, The Taiwanese light Manufacturer Pascal Lighting had a roster of about 2,000 employees, all working on their big campus in Southern China. Fast forward to present time and those 2,000 employees have shrunk to 200 (that’s a 90% downsizing!), plus, the company has turned to leasing most of their space to a mobile phone maker, a liquor brand, a logistics group, and those facilitating lamp workshops.

What brought all of that on?

We can blame higher real estate prices, rising labor costs, more automation, smaller order volumes, and less than favorable government policies; however, is that all there is to this phenomenon?

China’s factories are downsizing because they are reacting to the realities of the marketplace, specifically, the following factors make the support of a huge operation no longer profitable when sourcing from China:

– Rising manufacturing costs
– Increasing competition from other Chinese factories
– Purchasing trends moving towards smaller orders from most buyers

Let’s keep in mind that Chinese factories are run mostly by entrepreneurs who are solidly ground in reality and deprived from deep pockets and endless loans. Theirs is a multi-faceted challenge with no solution in the near future other than to adapt. You see, these businesses have to stay competitive and this means lower overhead cost, and if the way to do that is to operate on a smaller and on a different scale, you can be sure that the company experiencing that will go for the downsizing route. They have to change to survive.

Change is inevitable. And China has always been a place where change occurs fast. These days, businesses in China have adapted by foregoing the seemingly traditional behemoth factories of years gone by and focusing on smaller plants. This strategy ensures that their business survives the Chinese economic slowdown.

Good for them, but how about those companies who are sourcing from China? How will these changes affect their China sourcing performance? Will it be “business as usual”?

Dealing With The Change of Sourcing from China

There is no doubt that this trend will cause a lot of worry for importers who are sourcing from China, their materials and merchandise. Are the factories going to be able to handle their order like they did before? If not, will they reject orders or will they sub-contract? And if they sub-contract, what control will they have over sub-contractors? Will the importers even know they have sub-contractors? How can they check? Can you imagine having to deal with more companies and more red tape instead of the already challenging “business as usual”?

This is bound to be an absolute nightmare! Or is it?

For all we know and what we can speculate on, this trend of shrinking factories in China will continue for the foreseeable future. If factories adapt, then importers must adapt too. Change can be good if the ability to handle change becomes an opportunity for you to outperform your competitors.

Easier said than done?

Well, if the current situation means that there are emerging new issues when it comes to sourcing from China, best be aware of them, and be more proactive in handling the inevitable change. Keep in mind that this affects everyone, including your competitors!

The fact is that China is changing. All the time. Get used to it. There are smart and inexpensive ways to manage the supply chain despite these changes. Want to know more? Read on!

Managing China Sourcing The Smart Way

Here are some steps you can take to stay ahead:

– Get a sourcing office in China

Yes, that sounds expensive and complicated, but so is sourcing from China. This is what the experts are doing and it is worth looking into. Having a team of professionals working for you may make all the difference – and this may not cost as much as you think.

– Stop paying commissions

Yes, commissions are easy: they get buried in the price. But how much are you really paying? How transparent is that cost? How does it affect sub-contractors? What return are you getting on that investment?

– Embrace the changes

If you can’t beat them, join them. If Chinese companies are shrinking, if a multitude of subcontractors are rising, now may be a good time to analyze suppliers systematically, benchmark, separate the weal from the chaff, and find the good ones. And lead on.

Nobody likes changes. But China importers are not afraid of it: this is the environment we are in. Ask yourself: What is the most cost-effective way of managing your sourcing from China without making drastic changes in how you run your business? How can you take better control of your supply chain?

China is still an export behemoth, and will continue to be one for years to come. In fact, China’s exports are expected to grow by nearly 7% a year for at least the next 5 years. That means that a lot of people will continue to buy from these factories. Should you be worried about China’s shrinking factories? If you’re not prepared to adapt, then yes, otherwise the answer is NO! Adapt and thrive, just as the Chinese factories are doing. In the end, it is all about clearly assessing the reality of the arena you are in, and finding better solutions.

Post by: Dianne Mandal