China is not only one of the leading economic powers, but also still the uncontested number one for promotional products imports. Whereby the country has long since ceased being a cheap Eldorado and in the course of an ever faster market pace longer delivery times are also turning into a problem. In spite of this there are good reasons for sticking with China as a production location.
It is the largest economic investment project since the Marshall Plan, albeit the investment sum is much higher: China is building a new Silk Road under the catchphrase “One belt, one road” which has been heard frequently over the past few days. From Central Asia to Europe railway lines, motorways and pipelines are being constructed along the old trade route. At the same time, China is surging forward across the oceans with the “21st Century Maritime Silk Road” and is setting up a network of ports, canals, streets and railways. The total volume of the economic package: Around 900 billion Dollars – in comparison: In the scope of the Marshall Plan around 13 billion Dollars (that would be approx. 129 billion today) was invested. The gigantic and much-discussed project impressively illustrates China’s metamorphosis from an emerging country into a world power – as well as the role it plays in the globalised trade and the one it intends to play in the future. According to estimates, China exports goods to the value of 2,000 billion Dollars a year. Yet, the huge Republic has built up gigantic overcapacities – construction companies, steel groups and other architects of the Chinese growth are under pressure and are pushing to sell their products and services on the international markets. At the same time, China has been transforming its industries for years – it no longer wants to be the “workbench of the world” for cheap products. They are to be produced elsewhere – in countries that China can in turn supply the infrastructure, energy sources and raw materials to.
For example, in the Pearl River Delta one is focusing on “Sunrise Industries” such as electronics and high tech. In some cases Chinese companies are already playing a major role here. The city, Shenzhen, which has a population of twelve million and is one of the centres for the worldwide electronics and computer industry, is already considered to be the “new Silicon Valley“. Already before the crisis, the government prescribed a structural change, cut the tax advantages of the manufacturers of toys or clothing, increased the minimum wage and tightened the environmental protection regulations. “China no longer wants the production branches that demand a lot of manual labour and is orienting much more in the direction of digitalisation, high-end products or robotics,” according to Kaspar Benz, Managing Director of the Swiss promotional products agency, Pandinavia. The dominant position of China in the digital sector is already noticeable now in the promotional products industry and is facing importers with totally new challenges, as Ralf Dickopf, Managing Director of mcs promotion, reported: “More and more products have a digital interface – catchphrase: The Internet of Things. For example take a trend product like the fitness tracker. The import of such a wristband raises a host of questions: Where is the related app developed and by whom, where is the user data saved? Which influence do my customers have on the development of the app? Who takes care of the necessary updates? Is the whole thing compatible with all of the necessary software applications? This cannot be seriously sold to our customers. In order to be certain, I have to develop my own app in advance and make it available to the producers of the wristband. Such a process is of course much more complex than importing ‘normal’ products.”
Focus on the domestic market
However, things are also changing in the “analogue” area – the days when Chinese production could be put on a par with badly made copies are long gone: “‘Made in China’ still has a negative reputation – wrongly so,” commented Stef van der Velde, CEO of the Dutch importer, Giving Europe. “Nowadays, the product quality in China is good, especially when compared to other production countries like India, Vietnam or even Turkey.” There has also been a lot of development in terms of their own design performances, as Dickopf reported: “In the meantime, China is one of leaders in terms of design. Many products that one sees at the trade fairs in the Far East are ready for sale, including the appropriate highquality packaging. Furthermore, the Hong Kong fairs offer current trends in such abundance that even surpasses those presented at the PSI Show.” Many local production companies for goods of all kinds – from household items to clothing through to outdoor and travel accessories – are orientating themselves towards profitable business models for their products. “Enterprises have no better solution than to shift their pivot from ‘Original Equipment Manufacturer’ to ‘Original Design Manufacturer’ and ‘Original Brand Manufacturer’,” as Benson Pau, Chairman of the Hong Kong Exporters‘ Association (HKEA) recently put it. Large amounts of these products are sold on the domestic market in the meantime – where in the course of the increased standard of living in many regions, a huge domestic market has arisen, and the Chinese government has a great interest in further expanding it. At the People’s Congress in March earlier this year, the head of government, Li Keqiang, stated that the enormous domestic demand must be extended.
Producing for the own market is definitely interesting for the Chinese manufacturers, because it is uncomplicated, as Benz explained: “It certainly happens that suppliers concentrate on the domestic market, because it offers larger order volumes and at the same time less stress because the legal requirements are not as strict.” And yet the export still remains attractive for many companies – the turnover figures of the sourcing portal Alibaba alone speak volumes: The company reported a 60% increase in turnover for the first quarter of 2017. “It is true that a huge domestic market is emerging in China, but many producers are still very much exportoriented – there are simply plenty of incentives,” assessed Mike Oxley, Lesmar. “A deceleration in exports was observed a few years ago and some market players encountered problems,” added Dickopf. “However, at least from our perspective these problems aren’t ongoing – on the contrary: The amount of Chinese companies that can provide the certifications demanded by our market is exponentially increasing and surpasses my expectations by far – that is a strong indication that there are indeed companies that are prepared to trade in our very demanding, hence difficult market.“
However: The observation that the times of “cheap China” are long gone is meanwhile old hat. The prices have been continually increasing for years due to the social-economic upheavals in the Middle Kingdom. “The prices are continuing to spiral upwards and there is only one direction,” stated Benz. “This applies to all product groups, but particularly to those products that are work-intensive and which require many work steps, such as bags for instance.” “The main developments that influence the import business are still the increases in the labour costs – which effects the final prices – and the stricter labour regulations – which effects both the production lead-time and the prices,” stated Valentina Circo, CEO of the Milan-based company, CIPI. “All of these factors were pre- 64 China Report dictable and they are also desirable if we zoom out to the bigger social and economic picture.” Since better living and working conditions are of course in the interests of everyone, who demands an ethically responsible production and more corporate responsibility. Nevertheless: Only a small share of the Chinese population is benefiting from a better life so far, as Circo explained: “There are two types of employees – the ‘white collar workers’ and the ‘manpower’. It is common that after a certain period of time the white collar workers have learnt everything about the business and then go on to open their own trading company. China’s industry-oriented economy relies on the manpower, migrant workers, who still represent the majority of the actual workforce. But it still seems that this is not enough to stop deallocation to third countries.”
Changing labour market
Since in those places where the living standard is improving, new fields of employment for example in the service sector are arising and more people than before are gaining access to higher education, and particularly the young qualified employees no longer want to work on assembly lines. “At one of our partners, a supplier of plush, almost all of the employees are over 50. One asks oneself the question how things will continue,” reported Benz. Together with the increasing labour costs and the structural change prescribed by the government, the lack of unskilled workers is leading to the relocation of the production centres – a trend that has been observed for years: “Many companies located near to the coast in fact have their production sites elsewhere. Companies are actively looking for sites abroad – i.e. in Vietnam, where there is a large population of people with Chinese roots. If one travels to inland China, one sees that new economic and production centres are emerging everywhere, reported Benz. “But that is only an option for us to a limited extent – the proximity to the ports is decisive for us due to time considerations.” “The relocation to the provinces that are located further away from the traditional production centres near the coast, such as Yunnan, Hebei or Hunan for example, is ongoing,” added Oxley. “This is, of course, unfavourable especially for last-minute orders, which are quite common in our industry. We have got used to longer delivery times – they are the new norm. At the same time, we have become much choosier as far as sourcing is concerned and more careful – we check exactly in advance whether a supplier can stick to deadlines and constantly try to have further factories up our sleeve as a back-up.”
The factory owners that have stayed in the regions close to the coast are for their part inventive when it comes down to keeping pace with the radical changes on the labour market. “A few years ago the migration of workers was a major problem, particularly when the factories expanded very quickly. There are still a lot of people, who like working in factories and the situation has relaxed slightly, especially as far as the export market is concerned. Chinese manufacturers are good at remaining competitive and know where they can recruit additional workers from – for instance by picking them up from other parts of the country,” said Oxley. “On top of this, there is an increasing degree of automation in Chinese factories too – machines are increasingly completing jobs that were exclusively done by hand in the past.” “Some companies are partly relying on new materials in order to compensate for the costs that result from the higher wages through lower raw material costs. One of our production partners now offers beach bags made of straw for example,” reported Benz. “Furthermore, the producers are simply forced to be good bosses and treat their employees well – that is very positive in itself and all in all what everyone is striving for.”
Omnipresent theme sustainability
First and foremost, that is what the user wants – at least on paper. “CSR has become a very hot topic over the course of the last years,” said Circo. “Most of the customers nowadays not only ask for product security and conformity, but also for CSR compliance and supply chain tracking. This trend is running parallel to the fact that some Chinese factories have improved their working and environmental conditions in order to meet the requirements of the Western customers.” Demands that are carried over to the market in China, which are also being complied with – at least as far as obtaining certifications or member certificates is concerned. “The number of factories that are BSCI or Sedex members or indeed both is continually rising. This makes me optimistic – from an ethical point of view, but also because it is an indication for professionalism and seriousness. However, for a serious China business it remains essential to keep an eye on the processes on-site,” Oxley pointed out. “There are factories that have export licenses, but at the same time work as agents for other non-licensed producers, others carry out audits as an ‘obligatory task’, but don’t follow up on the necessary improvement processes. There are further points beyond this that have to be inquired about, i.e. capacities, quality, commercial documents or terms of payment. We check all of this carefully – in this way, we also convey to our partner that we are a serious and important customer.” Van der Velde said: “It is true that there is a slow, but continuous improvement with regards to the working conditions in China. However, to be really sure, you have to check everything with your own eyes – this costs a lot of money and implies longer lead times. Unfortunately, there is too little awareness for this on the market, because a lot of importers and distributors don’t stick to the rules or simply don’t have the necessary resources. In the connection, we as importers guarantee for what is written in the certificates – this means we can’t just rely on the legislation, but in fact have to act ourselves.” Alone because the legal requirements change constantly, as van der Velde elaborated: “The EU is changing regulations on a weekly basis. If we ourselves employ four people alone to take care of norms and legislation, how could a Chinese factory possibly keep up with this? What we need is more exchange between the EU legislative and the Chinese Government.”
Not that the Chinese legislation is idle, the regulations of the Chinese Government are definitely becoming stricter, also regarding environmental protection. “The Chinese Government keeps on pushing through new environmental requirements at short notice,” reported, Marcin Pawłowski, badge4u. “I know of several suppliers of sheet metal, who recently had to close down, because they weren’t able to purchase a special machine to reduce emissions within the given time frame. In some cases, this in turn causes longer delivery times or bottlenecks. But in general it is of course positive that environmental protection is being pushed forward, because the level of environmental pollution in many regions of China is serious.” Beijing is in the meantime also taking a closer look at other areas, as Oxley explained: “The customs controls have become much stricter and more accurate. The customs authorities are very aware of their role concerning China’s reputation and are meanwhile frequently paying precise attention to trademarks and the observance of regulations and laws.” These are of course small steps, but together with the increasing professionalism of the export market they contribute towards the fact that a majority of the importers still like operating in China. “The entire sourcing process has matured,” said Oxley. “Today one finds more reliable and more professional producers than a few years ago. The quality at the trade fairs is constantly improving too, especially in Hong Kong. Even Alibaba has simplified several processes – the portal is at least suitable for initial research and rough price comparisons.” “It is relatively simple to work together with Chinese producers,” added Benz. “They are interested in the business and in good partnerships and very solution-oriented. It is always about the matter at hand and never becomes personal, one very rarely falls out with a production company. The problems in other countries are disproportionately higher.”
It is a truism in the important business that close relations to the producers is the be all and end all for successful projects – some people have built up and groomed their relationships for years. “Partnerships and working close together are very important, this also entails face-to-face contact. Especially in the case of special designs, several meetings are often required beforehand – frequently over dinner – before all necessary details have been clarified and an order can be sent into production,” explained Pawłowski. “Things can quickly go wrong with contacts one doesn’t know very well. We don’t swap a supplier just because another one is more favourably-priced. It has happened that a new contact has provided good samples up front, but then delivered a different quality altogether when it came down to the finished product. Reliability is more important than the price, we have learnt this in the past.” That is why even professionals refrain from abandoning the paths they have trodden for years to merely improve the margin. In many cases it is worth putting up with higher costs in order to stay in the established production regions. “It is neither necessary nor possible for us to move away from China,” stated Pawłowski. “There are too many uncertainties in other countries – in terms of the working conditions, but also the reliability: A year ago for example I got to know an Indian supplier at the drupa – I still haven’t received a quote for my enquiry up until this very day.” Oxley: “We always look at the bigger picture too, but newly created production centres like Bangladesh, Myanmar or Vietnam also bring a multitude of challenges with them. That is why the bottom line is: Yes, a migration is taking place, but many companies will stay in China and we will continue to import from there in spite of the rising costs.” “The formula is simple: If cheap is the main priority, companies will continue to migrate,” elaborated Benz. “However, if the customer accepts higher prices, I see no reason for leaving China, especially when one considers the positive progress that has taken place from an ethical point of view. We are in good hands in China for the time being.”
No more price discussions
It is no wonder that importers, who take their job seriously, are refusing to continue giving in to price discussions and are demanding a process of rethinking instead – first and foremost among the users. Van der Velde: “At some point in time, the limit has been reached and it doesn’t become any cheaper any more. It’s time that the market accepts a certain price level – which is, by the way, often still too low to be really fair.” According to Dickopf, however, there are in the meantime many users, for whom a favourably- priced and at the same time safe sourcing is the same as squaring the circle: “’Cheaper and cheaper‘ is no longer an option today. The price is not irrelevant, but it is no longer the no. 1 criterion. The prices are open anyway: Every customer can look up approximately what a product costs on Alibaba for instance. He who can convey to the customer potential savings elsewhere, has a competitive edge – reduced process costs are the new prices. What is additionally important for customers today is durability, reliability, quality of the supply chain, constant availability as well as – primarily – as short lead times as possible. Time is our K.O. criterion today.” Against this background, European markets are in turn coming under focus. “In many cases it simply takes too long to have an item produced in the Far East,” stated Dickopf. “Depending on the article, production regions in Eastern Europe offer an enormous lead-time advantage for just a minimum surcharge.“ Circo: “The delivery times from the Far East have become longer due to the manifold legal requirements and the corresponding certification processes. At the same time, the insecure economic situation in Europe is leading to many customers not being able to plan their budgets long-term and to them ordering at very short notice. As a result of this we are in some cases also having items produced in Europe, where, particularly in Southern Europe, the economic situation has led to the prices dropping – as such even Italy for instance is becoming interesting as a production country again.” “The pace on the market is getting faster and faster and it becomes more and more difficult to explain to the end users why a product has a lead time of four months. Therefore, production in Europe is becoming more and more important,” stated van der Velde as well. “In the long run, I would deem it desirable if the distinction ‘EU vs. China‘ became less important. There should be no difference between the two origins in terms of quality, ethics and sustainability – only in terms of lead time.” It is still a long road ahead. But the importers of the future will think carefully whether they are going to take to the Silk Road or one of the many detours – incidentally these are not built by China.
// Till Barth
photos: flickr.com/dcmaster (1); flickr.com/Nagarjun Kandukuru (1); Shutterstock (1), Thinkstock (1); Illustration: Jens C. Friedrich, © WA Media