Product Global

The Next Sourcing HotSpot: From China to...Madagascar?!

Well, not really...

I'm currently on another sourcing trip in China.  I'm headed to Vietnam in a week.  My first week in China has been very busy and has provided a lot of food for thought on the manufacturing shake-up that is taking place in China right now.  Is it really a shake-up?  Yes and no.  It's not as if all hell's breaking loose over here.  But, almost every supplier I have met with has groaned about increasing material, energy, and labor costs, as well as the impact of the currency exchange rates.   Many of these things are not unique to China.  Nevertheless, it's never fun to report increases in costs to your customers--and they certainly don't enjoy it.   

One of the tough spots Chinese suppliers find themselves in, is it's not atypical for foreign businesses sourcing in China to consistently apply pressure to lower costs.  Hence the erosion of quality in materials and product--or the practice of quality fade by suppliers to preserve their margins.  In addition to constant cost pressure from many customers, there is often pressure to improve working conditions for laborers and decrease negative impacts on the environment. 

What foreign buyers often miss or conveniently ignore, is the fact that improving labor and environmental conditions costs money.  The burden of these improvements are typically placed on the supplier.  Finally, China has enacted labor laws that should improve the average factory worker's security.  Thus, as we are seeing now, costs are beginning to rise, and the most inefficient, energy intensive, high-labor, low value operations are either shutting down or moving elsewhere.  This is really neither good or bad.  It is good, because, like many have asked for, working conditions will begin to improve in China. 

But what will many businesses do?  Many will begin to look elsewhere for lower cost labor.  Currently, there is no "next-China" on the horizon.  Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa.  Many of these destinations may make sense currently and will likely become more prominent in the future.  But China is far from being dislocated as the epicenter of manufacturing soon.  Remember, it's not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination.  This will not be easy, as demonstrated by the extreme case of...Madagascar.

The most exotic destination I've heard of a company moving to, to date, is Madagascar.  That's right--the exclusive home of the Dwarf Lemur and the Aye-Aye.  One of my supplier's other customers has actually set up a source in Madagascar to assemble product.   Contrary to intuition regarding a supply chain like this, the company claims they are saving money.  While I find it hard to believe, I know very little about their situation.  I do know that supply chain flexibility and responsiveness must not be critical to the business model.  Keep in mind that Madagascar has little to none in the way of a manufacturing base.  This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar.  They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China. 

Wonders never cease...

Is the World Flat? Or is it Spiky?

Fast Company's latest issue covered a great perspective on the "world is flat" idea, discussed by Richard Florida (originator and advocate of the "Creative Class"), in his book Who's Your City?.  The general premise?

The world is not flat, a notion widely popularized by Thomas Friedman, but rather spiky.  Florida proposes that the geographic regions of the world at large, can be classified into four general types or clusters, based on population and socioeconomic circumstances.  What are the four clusters?

Four kinds of places make up the landscape of our spiky world: first, the tallest spikes that attract global talent, generate knowledge, and produce the lion's share of global innovation. Second are the emerging peaks that use established ideas, often imported, to produce goods and services. Some of these cities, such as Dublin and Seoul, are transitioning into places that generate innovation, but most, from Guadalajara to Shanghai, function primarily as the manufacturing and service centers of the 21st-century global economy. The two remaining types of places are being left behind: third-world megacities distinguished by large-scale "global slums," with high levels of social and political unrest and little meaningful economic activity; and the huge valleys of the spiky world, rural areas with little concentration of population or economic activity.

A few interesting, additional observations made by Florida are that 1) the world is much more "flat" and connected for those in the "spikes", or areas of innovation and concentrated talent.  Thus, those that inhabit and frequently travel between cities like London, Paris, Shanghai, New York, San Francisco, Los Angeles, Chicago, Tokyo, Singapore, etc. are much more likely to be connected in the way that Thomas Friedman alludes to.  2) The divide between these areas and the bottom two areas, the developing world and rural areas, is growing dramatically. 

This spikey/cluster concept was first introduced to me a few years ago in a talk by a futurist at the Commonwealth Club.  I think Florida's depiction paints a much more accurate portrayal of the world with respect to socioeconomics.  I live in and frequently travel in cities that would be considered spikes, but I have also lived in and traveled through places that would be at the bottom of the rungs.  From a cultural standpoint, there is a shift in the way someone like myself might connect to people in the rural areas of my own country and people in the spikes of other countries.  It largely depends on context.  My ability to relate to a farmer in Nebraska might be much stronger in areas of politics, family, and issues that ring home in my American upbringing.  However, in certain contexts, my ability to connect with the young, technologically hip, professional in Shanghai is markedly stronger than a farmer in Nebraska.  This would be apparent on issues of business, lifestyle, and world affairs, etc...

This also helps to bring a more accurate description to the socioeconomic circumstances of very dynamic, emerging economies like China.  Many of the China-hype articles that have been published in top business magazines over the last few years, depict China as a country ready to challenge the world in areas like innovation, design, and other cutting-edge capacities.  These articles are most assuredly talking about an extremely small, handful of people and companies in the spikiest of clusters like Shanghai.  Articles like this often serve as a reader's only impression of China, if they have never done business there.  It's no wonder that hype like this has fostered fear and suspicion of China's imminent challenge to other economies in these areas.  In reality, China, in many ways, is still a country of rural peasants.  There are world-class talent and capabilities there, but believe you me, it's a relatively small group of people in the spiky clusters.

So many products today are often truly global when considering who and what places are involved in developing, producing, marketing, and buying them.  Not only does this process bring together people in different geographic areas, it involves adept management of people across several of the clusters at one time, to capture the benefits and strengths of each in the process.