The end of cheap China. But what next?

The global consumer goods industry is in a state of crisis. For decades, it was enough to simply look for the next cheap place to manufacture. But the old rules no longer apply. To put it simply, there isn’t another China. We have run out of low-cost countries that can replicate the scale of production taking place in China today.

But even as factories in the East struggle to cut costs, consumers in the West continue to look for bargains. It’s an impossible position that has put the global supply chain under huge stress.

Eventually prices will have to rise, but until then the global consumer goods industry finds itself in a horrible position: do you chase $0.30 of savings by producing jeans in Bangladesh or do you rethink your supply chain management and stay in China? It’s a decision that will determine job prospects for millions of factory workers.

I hosted a panel on global sourcing a few weeks ago in Hong Kong and was joined by executives from some of the world’s biggest lifestyle and sportswear clothing companies, as well as global manufacturers of dress shirts and bathroom accessories. Together, they operate in almost every corner of the world from Asia to Latin America to eastern Europe.

The debate clarified some of my own observations on the changes in the industry. Four key points stand out. They also have a great deal to say about changes in the global economy and commercial opportunities more generally.

1. Sub-Saharan Africa is big and young. But is that enough?

It’s fashionable to talk about setting up factories in Sub-Saharan Africa. The continent’s huge population is also on average eight years younger than in Asia. Wage costs are unsurprisingly low and there is plenty of cotton and leather for the clothing industry.

But Asian manufacturers won’t move to Sub-Saharan Africa by themselves. The change needs to be driven by a global buyer guaranteeing multi-year contracts. The full supply chain must also be ready to invest and move with you. If not, then it’s easier to stay in China.

2. Why aren’t we talking about India, Indonesia, and the Philippines?

There’s a lot of talk about relocating factories from China to other parts of Asia. But which Asia? I find it striking how few sourcing executives talk about India, Indonesia, or the Philippines. And yet, together these three countries account for a huge 40 percent of Asia’s population.

There is movement at the margin. Indonesia’s Central Java is increasingly attractive for some manufacturers. But it’s still small change. It also underscores the limited alternatives, as Cambodia and Vietnam are good options, but have a GDP smaller than a single Chinese province.

3. Thinking about total cost, not just price, is key to long-term success

Too often buyers still focus on the acquisition cost of a consumer good, i.e., Factory A is offering $3.50 but Factory B charges just $3.20. Yet that’s only a partial indication of the overall cost whether related to inventory management, shipping costs, or returns.

And so leading companies are increasingly focused on finding other ways to cut costs, such as working more closely with factories to manage inventories more efficiently or consolidating their sourcing decisions, rather than leaving it up to local distributors.

4. It’s the East’s shoppers that will increasingly matter

Much of this debate focuses on products sold in the West. Yet many of the world’s biggest brands are increasingly selling to the East. So why move your factory from China to Ethiopia, for instance, if it’s customers in Beijing or Shanghai buying your clothes?

Growing domestic markets are also a reason for manufacturers to stick closer to home rather than venture abroad. That’s especially true for smaller manufacturers without the capital or relationships necessary to make the jump into foreign markets.