As costs increase, manufacturers may be forced to re-assess working with China: Report

By Kacey Culliney

- Last updated on GMT

Related tags: Consumer protection, China

As costs increase, manufacturers may be forced to re-assess working with China: Report
Food and beverage companies may be forced to seek other Asian countries to source, produce and manufacture products from as China’s low-cost advantage diminishes, a new report suggests.

Minimum wage levels in China are now four times greater than elsewhere in Asia – eroding the competitive advantage China offered in terms of production and raw materials sourcing, according to the new report from consultants KPMG.

KPMG said: “Cost alone is not the only factor driving some companies to source elsewhere. An ageing population and labour shortages in some regions of China are important factors for securing other sourcing destinations.”

However, Shaun Rein, managing director of China Market Research Group (CMR) and author of upcoming book ‘The end of cheap China’​ claims that food and beverage manufacturers do not need to uproot and work elsewhere, just adapt.

He told FoodNavigator-Asia: “Food manufacturers will just need to find a way to absorb the price increases of China in final consumer prices or elsewhere…margins are going to get cut and producers need to decide whether to cut margins or transfer these higher costs to consumer.”

Rein said that to succeed in the changing landscape, the focus needs to be placed on transferring higher costs downstream, perhaps through packaging reduction or content reduction or with a shift towards premium produce.

There is consumer demand for premium food products and rising incomes in China and so manufacturers producing products for China will be able to successfully transfer the higher costs to the consumers, he said.

“Chinese consumers are not so price sensitive with food; they are willing to spend more due to concerns over safety and more disposable income... manufacturers will just need to think of ways for premium brands to command loyalty,”​ said Rein.

But chairman of KPMG’s Asia Pacific consumer markets, Nick Debnam, said that companies will have difficulties in passing on higher costs to consumers in many Western consumer markets.

He said that companies manufacturing from China for the West will be forced to instead reassess sourcing strategies and work elsewhere.

More than just cost

According to the KPMG report, for the time being, China will continue to be a preferred location for sourcing due to its infrastructure, the completeness of its supply chain, its speed to market and a growing presence in global shipping.

Rein agreed: “It is hard to move an entire ecosystem… a lot of companies have tried moving from China but it hasn’t worked. China continues to be a strong choice as it has a great infrastructure and an efficient workforce.”

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