Choosing the Best Sourcing Destination: China's Complex Advantage

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Economic logic dictates that if one does not manufacture where the production costs are the lowest, one may lose global competitiveness and therefore market share. Yet this is not only a question of low labour costs. Far from making a decision based upon a single criterion, entrepreneurs analyze a wider picture within which many other factors may influence the success of sourcing operations in a certain country. Such factors include set-up costs, labor supplies, export subsidies, import and export duties, tax incentives, proximity, country risk, political stability, the investment environment, abilities and qualifications of human resources, access to technology, infrastructure, logistics and consumption markets.

Labor costs are the lowest in countries such as the Philippines and Vietnam, for instance, yet the lack of existing infrastructure or an industrial base are likely going to increase the cost of business operations. On the other side of the spectrum, developed countries such as the US or Germany excel in modern transportation networks, but labor costs are extremely expensive and will predominate in an unfeasible cost structure.

In order to identify the best destination for a particular sourcing operation, one should firstly determine the critical performance indicators that may differ from country to country, and secondly compare those indicators between the selected potential sourcing countries. Following this logic one could build an 'Export Competitiveness Model' which could determine the likelihood of a successful managerial decision.

An enterprise would typically consider four critical performance indicators in its decision-making process:
  • Exports: The more a country exports the more competitive its production in global markets will be. A country with a high level of export implies a developed industrial base and related transportation infrastructure.
  • Labor costs: The lower the labor costs, the lower the production cost structure and therefore the larger the profit margin.
  • Country risk: The lower the country risk, the more sound and stable the legal environment will be to support business operations.
  • Political stability: The more politically stable a country is, the more sustainable its operations will be in the future.
Export Model.JPGAs shown in the graph above, China's profile is the thinnest and hence China remains the most competitive. China's country risk and political stability index is higher than that of Germany or the US, but with much lower labor costs it reaches a very similar level of exports. In addition, there is little difference between China's country risk, political stability index and labor costs compared to those of Brazil and Thailand, yet its level of exports notably exceeds that of these developing economies.

Ultimately we can find many reasons to choose China as the most suitable sourcing destination. Yet the full answer depends not on one or two factors but on a combination of different factors that together create a favorable environment for sourcing operations.

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