Rising costs and Covid delays: Is China’s manufacturing hotspot under threat?

Rising costs and Covid delays: Is China’s manufacturing hotspot under threat?

Analysts say the impact of Covid-19 on manufacturing in China is a short-term concern as regions such as Shanghai prepare to reopen after months in lockdown. A long-term impact on brands is still rising manufacturing costs, which have been increasing prior to the pandemic, as a result of rising material costs, inflation and rising labour costs, says Antoaneta Becker, director of consumer economy at China-Britain Business Council (CBBC).

Manufacturing after the Covid-19 pandemic

Southeast Asian countries are rivalling China for the new manufacturing hotspot. “Manufacturing of clothing has been moving away from China to some other Asian countries,” says Adam Cochrane, retail and luxury equity analyst at Deutsche Bank Research. “Over the years, bands like H&M have taken their production away from China towards Bangladesh, Vietnam, Malaysia, Indonesia, etc. because wages have been rising at 10 per cent a year in China for a number of years.” However, he argues that, for some brands, manufacturing in China still has its perks — for example, logistics tend to be better in China than other regions. Prior to the pandemic, getting goods from the ports to the endmarket is a much more streamlined process than elsewhere.

Manufacturing costs in China may be rising, but CBBC’s Becker says the reality is that some manufacturers have highly integrated global supply chains that cannot easily be moved either to the UK or South Asia. “It’s probably easier to move across Mainland China,” she says. “When it takes years to build up the supply chain and supporting infrastructure, it’s harder for countries in Southeast Asia or South Asia to emulate and maintain that product quality.”

Ultimately, it’s not so easy to pick up and leave. Ponder.er currently has no plans to move its production outside of China as doing so could impact its growing momentum in the area. “With our studio and most of our clients located within China, it would be challenging and impractical to move our production outside of China,” says co-founder Cheng.

In the short term, the three-year-old brand says it has implemented new strategies to overcome pandemic-induced disruptions. These include planning months in advance and placing orders more strategically — it now factors in the longer estimated delivery times and is sourcing materials produced within mainland China in a bid to avoid rising import costs and delays.

The effect the pandemic is currently having on manufacturing in China is not enough to diminish the region’s historical track record. “The reason for China being ‘the factory of the world’ is the extensive supporting supply chain and logistics,” says Mark Tanner, managing director of China Skinny, a research and marketing firm based in Shanghai. “Many companies have explored moving manufacturing out of China in recent years, but found supporting infrastructure came up short in most instances.”

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