Buying from China or reasons not to...

Date

10 Nov 2015

Poste By

Andy O'Neil

The practise of sourcing products from abroad and locating manufacturing overseas may not be as attractive as it once was. There is now increasing evidence to support the view that the tide may be turning and that businesses are looking again to source domestically. It is not hard to fathom why hitherto businesses have looked east to provide their manufacturing needs. Low wages, a fraction of those mandated by law in this country, can easily be seen as a prerequisite to survival, let alone growth. However if history tells us anything it is that things change.

We are all aware of just how close sterling has come to parity against the Euro and its weakness against the dollar. This weakness is replicated when comparing to most other currencies and is set to continue given the state of the Country's debt mountain. What this means is that something will now cost 50% more if the exchange rate has moved against sterling by 33% and this is precisely what has happened if we look at the Euro.

Even though the price of oil has dropped from the heady heights of $147 per barrel in the summer of 2008 at current levels, of circa $80, it is still double that which it was five years ago. That means fuel prices are higher everywhere and that means the cost of shipping goods around the world has increased. It makes more sense to produce closer to market.

Wage inflation in the UK for the past 5 years has been at a level of 2% to 3%. In China wage inflation as reported by the Guardian rose 20% in 2008. Even though they have started from a very low base that level of increase will eat into the cost advantages that put the decision to source abroad into play in the in first place.

Quality and service issues have encouraged some businesses to rethink their sourcing strategies. Imagine the potential logistical issues associated with receiving a bad batch of product that is urgently required and that takes weeks to move by sea. Add to that the fact that it is a local holiday in the source country, language difficulties and an eight hour time difference and what once seemed a cost advantage can turn into the loss of a significant contract with an important customer.

Other issues that have led Companies to repatriate business to the UK include the notorious disregard for intellectual property in China and the propensity for suppliers there to replicate the product offering. One Company has decided not to source any further business in China because after trading with them for several years and using them to produce a range of products from a number of injection mould tools it found one day they were simply not there anymore. They were unable to obtain any response to any telephone calls, e-mails or faxes they made and they effectively lost access to mould tools they had paid for.

Manufacturing in the UK has been in decline for more than two decades and it will not become the powerhouse it once was overnight. There are likely to be some compelling reasons why for some it will continue to be the right thing to locate or source from abroad. However many of the factors that have led businesses to source from abroad no longer hold true and that presents a tremendous opportunity for those suppliers that are still around and who are committed to remaining so.