Friday 10th Jul 2020 - Logistics & Supply Chain

High-cost China

The West has never really got the hang of China. Perhaps we are just too young. As the Terracotta Army exhibition just opening at the British Museum reminds us, the Emperor Qin created a modern, unitary state, complete with its civil service, at a time when our ancestors were still slapping on the woad.

And that state knew how to trade. Standard weights and measures, systemised internal tariffs and tolls and later, paper money and nationwide banking systems, not to mention rigorous accountancy and a comprehensive mercantile law code, mark China out as a great commercial nation even if, as in the West, trade was somewhat déclassé socially. The only anomaly is that, except on rare occasions, the Chinese declined to use trade to create overseas empires. It was left to the Europeans to attempt to force opium on China as a medium of exchange because we”d run out of silver.

The historical perspective helps to put the current angst about China into perspective. This summer has seen a spate of scare stories about the safety or legality of Chinese products and production – many of them blown up by political interests who have never read Adam Smith and conceive that balanced, mercantilist trade is the only desirable position.

Lead paint on toys, dodgy pharmaceuticals and other ”scandals” apparently prove that reliance on Chinese manufactures is not only short sighted but also immoral.

There are supply problems looming, but they aren”t the ones that are making the headlines. After all if, as in the UK, 90 per cent of the toy market is sourced in China, it is a reasonable expectation that 90 per cent of supply problems and irregularities will originate there. That doesn”t mean there is something endemically wrong about Chinese sourcing.

The big problem is that the Chinese economy is overextended. Reputable companies with long-term and successful relationships with Western buyers are let down by sub-contractors because they have taken on more business than they can manage. Despite its huge population, skilled labour in China is as hard to find as in the West and for the same reasons – who wants to work in a factory?

Costs, and not just those of labour, are rising fast. China”s own demand is forcing up commodity prices. If you define a middle class as families with income to spend on luxuries, the Chinese middle class is probably equivalent to the entire population of the European Union.

More wealth chasing limited goods can only mean inflation, and that may soon become China”s biggest export. Commodity prices are already rising; but soon our buyers will be in price competition with the Chinese domestic market. Already, it is not unusual for shiploads of goods, expected by but not yet owned by Western buyers, to be diverted on the high seas to more profitable markets, or indeed auctioned in transit.

This poses big supply chain challenges. Clearly, firms with sound, long-term relationships will be less at risk but even so, some practices will have to change. In particular, Western buyers may need to pay for goods at the Chinese factory gate rather than when landed in the West. That increases financing costs and also involves accepting greater risk – not all ships arrive safely in harbour. Relatively soon, these increased costs, plus cost inflation in China, may take China out of the low-cost country category. Where do we go from there?

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