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The Great Sourcing Hedge: China Plus

When a sourcing executive considers placing orders, price, delivery, quality, and reliability become critical in purchasing decisions. Also on the list are shipping rates, tariffs, input costs, and sustainability. But, of course, there are other factors considered, too. Often neglected, however, are broader geopolitical concerns. Let me explain.

Although many companies consider sourcing to be a strategic undertaking – after all, without product, there's nothing to sell – in reality, the sourcing process can be quite tactical. There is a checklist of items to be ticked off when placing orders. For years, the list could be recited by rote. And there lies the problem.

Punch card sourcing. Many companies phoned in their orders for years, confident they would be fulfilled with minimal fuss or trouble. For sure, occasionally, the sourcing train would jump the tracks (Rana Plaza comes to mind), but by and large, things ran smoothly. Underscoring this was the hyper-efficient, logistically sophisticated, and well-financed Chinese industry.

A One-Stop Shop

China had it figured out. No question. Needed product? Not a problem: so-and-so will make it. Here are the samples; there are the terms. Are prices a problem? No worries, we'll figure it out. Behind the scenes, a vast infrastructure of raw material suppliers, spinners, weavers, knitters, sewers, and logistics personnel moved extraordinarily efficiently – a ballet of manufacturing prowess and subtlety. There's a good reason China became the world's largest supplier of textiles and apparel. They earned it.

Check this out (data are in square meter equivalents):

Once China joined the WTO in 2001, all bets were off. Trade soared. For a long time, China remained a sure bet. And for many, sourcing from China was a self-fulfilling prophecy. Growth was established, along with confidence. China was so successful, in fact, that U.S. imports from China were nearly equal to the sum of all other countries combined. That was the case for more than a decade. And guess what? It made sense until it didn't. The history is clear. What needs to be understood is a possible future, as a new trend is emerging.

A Series of Events

The success of China’s textile and apparel industries set in motion its inevitable decline: costs rose, which reinvigorated the search by sourcing companies for cheaper producers elsewhere. Then the global financial crisis happened. Trump got into office. Covid-19 hammered the world. Biden doubled down on trade with China. And Xi locked down everything. Notice what has happened to the import data since 2020 – global imports have continued to rise, while China’s share has fallen. There's lots of cause and effect happening here, with many factors at play. The China engine sputtered while the rest of the world sped ahead.

Consequently, although China remains the largest supplier to the U.S., imports from China have waned as other suppliers increased their market share. Put another way: sourcing executives are well into the transition of diversifying their sourcing to other suppliers around the world. This diversification is stunning; China drove aggregate import growth for the last decade. Unfortunately, that's no longer the case, as more than two-thirds of imports now come from a broader range of suppliers – and growing.

See what I mean here:

It's odd when considering anecdotal feedback from the market about how hard it is for companies to find new suppliers. The complaints include, "They don't make what we need and are unwilling to adjust their production to meet our needs." Some reporting in the media echoes that sentiment. Except, based on the statistics, that's not the case. Were that the case, explosive growth in India, Bangladesh, the ASEAN bloc, and the Western Hemisphere would never be possible. Spoiler alert: someone has figured it out.

When contemplating the recent tensions between Washington and Beijing, the safe hedge is to diversify sourcing to different parts of the world. Taiwan looms large. From a risk management perspective, getting those eggs out of a single basket is prudent. Indeed, the politics between Washington and Beijing are simply the latest incentive to diversify sourcing.

The School of Hard Knocks

What may have reversed China's fortunes as a supplier to the U.S. coincides with Beijing's Zero Covid policy which began in 2019 with the initial outbreak in Wuhan; U.S. imports from China declined in 2020 and rebounded in 2021, only to fall by more than 10 percent in 2022 from 2021. Trade faltered during the pandemic; Chinese policy slammed the door. It wasn't a case that China didn't have the ability to ship products through the pandemic, instead government policy made that incredibly difficult. By doing so, ironically, sourcing companies shifted to other suppliers – on an accelerated basis. And supply chain disruptions didn’t help matters. The smart move was to diversify.

Trade diversification began before the pandemic. Before that, the peak sourcing consolidation in China occurred in the 2010s. From 2010-2019, U.S. imports from China grew by more than 25 percent. On the other hand, from 2019-2022, imports from China grew at a more modest 11 percent; over the same period, imports from the rest of the world grew by 49 percent. So something has been going on: more suppliers entered the market. Rising costs in China primed the pump. Chinese government policies settled it.

Now the question for China is if its industry can recover to regain lost market share to suppliers elsewhere. There's nothing to suggest that China won't regain its mojo. But it's important to acknowledge that the confluence of events that compelled sourcing companies to diversify their buying to other countries in the first place still affects decisions to source everything from China. Because of this, a strategy of sole sourcing from China may no longer be viable. The risks may outweigh the benefits for companies burned back during the pandemic.

Making Sense of What’s Happened and Looking Ahead

For many companies, sourcing from China was a no-brainer. It made sense – while the system ran smoothly. But now, the industry is grappling with a more complicated sourcing matrix. Multiple sources make more sense than sole sourcing from one country. The hedges are in. We've seen it documented in the numbers; now the question will be whether the past couple of years' trend will become a harbinger of the future. These days, companies are less interested in phoning it in. Instead, they have to be more focused on staying ahead. What worked before worked great until it didn't. And that's the point: the world is changing, and those who fail to change will lose out.

Finally, there’s so much buzz these days about de-globalization. As we’ve seen with China’s story, our industry began to move away from China before the pandemic and before tariffs. Simple economics (higher prices) drove those initial decisions. And guess what? Other countries benefited from the shift. Look no further than Bangladesh and Vietnam. Sure, much of the expansion in those countries is due to Chinese companies expanding their base of operations beyond Mainland China. But in so doing, these investments, along with the muscle provided by local and regional investors, have kept globalization alive and well. It’s just different from what we knew before, like in the 2010s, as an example. And included in this realignment of globalization are regionalization, near-shoring, and on-shoring. It’s happening in tandem. The world is changing.

Originally published on on March 24, 2023.


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