China is the hot place for low-cost manufacturing today, but even the most popular sourcing locations fade with time. The question for producers: When will that happen? And what are the early-warning signs that China is losing its luster? Some think the change will come with an inevitable rise in wages and the growth of a Chinese middle class. But Chris Gopal, former vice president of worldwide operations with Dell Computer, said companies ought to be keeping their eyes on political issues as well. They include controversies over patent protection, engineering changes and intellectual property. As companies turn to China for more sophisticated products, the risk of piracy and unauthorized technology transfer increases. And that could damage the country's reputation as a reliable producer of consumer goods for global markets. Labor costs are important, said Gopal, "but the longer-term cost of protecting intellectual property is getting more and more onerous." So is the price tag of complying with new U.S. security rules, especially those of the (so far) voluntary U.S. Customs-Trade Partnership Against Terrorism (C-TPAT) initiative.
Gopal spoke on a panel at the recent Supply Chain Directions Summit in Redwood City, Calif., sponsored by eyefortransport. Another panelist, Raymond McGuire, former vice president of logistics with Saks Fifth Avenue, noted that China's labor rates are far from the lowest in Asia. Its average of 65 cents per hour can't touch Vietnam's 29 cents. And production in China could become a more complicated matter, if the government mandates industrial development in remote inland provinces so as to alleviate overcrowding on the coast. Still, said McGuire, "for at least the next seven to 10 years, China will be the driver for production for the rest of the world." He was more concerned about infrastructure crunches in the U.S., where few seaports are big enough to handle the latest generation of mega-containerships. Internal congestion along rail lines and highways pose additional problems, he said.
Michael Waithe, manager of supply chain modeling and solutions with Intel, cited other political concerns, including the status of Taiwan. But any meaningful shift away from China will likely be driven by considerations of overall cost and logistics, he suggested. At what point, he asked, do higher shipping costs and longer lead times begin to influence sourcing decisions? "You try to always keep in view a combination of these multiple factors," he said.
