Purchasing in China is Becoming More Expensive
Pricewaterhouse Coopers | April 2008
Thanks to its massive
workforce and low labor costs, China
has become the twenty first century's leading global production plant. Even for
German companies, China
has long been a fundamental market for supplies. Yet an inquiry released by
PricewaterhouseCoopers reveals some astonishing facts: for many businesses, China is not as
cheap as one may think. Indeed, on some products, there is a price advantage of
up to 50% in comparison to Germany;
but a third of the companies that buy from China actually suffer losses during
the purchasing process. At the same time, other regions too are acquiring
increasing significance as areas of production.
German companies effect around about 10% of their international purchases in China. In doing so, big price differences arise. While some companies manage to save considerable amounts in comparison with the cost of supplying themselves in Germany, others achieve a mere 5% advantage at the most. If you add transport costs to this, the price disadvantage can reach up to 16%. Altogether, the additional costs for freight and logistics (such as custom duties, insurance, storage...) can end up making up in between 12 and 15% of the total purchasing price.
Why then do German companies still supply themselves in China? Often, there are strategic reasons for this. Companies with a turnover of over a billion a year deliberately choose to make their purchases in China even if they could do so for cheaper in Germany. They take on this price disadvantage at the supply level because they hope for improved market penetration and investment possibilities in China. In addition, in the case of affiliated enterprises, free capacities should be used since this then has a positive effect on the profitability of the parent company. Besides, the companies wish to see a development process in China which in the long term would lead to a sinking of costs below the German level.
The inquiry enables to deduce four trends concerning the future of supply activities in China:
- Despite improved infrastructure and additional competition, the logistical costs will keep rising. High fuel costs and increasing labor costs will sap the advantages.
- The rising costs will lead reinforced cooperation among companies dealing with logistics. In some branches in particular, such as the chemical industry for instance, enormous sales and revenue opportunities will arise for specialized foreign logisticians.
- Companies will commit themselves more to cooperation with strategically important suppliers in China. For this reason, it will be especially difficult in the future for the Chinese companies which no German companies are cooperating with.
- China will keep the lead but other emerging markets will open up. The significance of Eastern Europe including Russia, India and other Asian states like Vietnam, Thailand and South Korea will grow. While procurement from China, Eastern Europe and Russia, and India should reach 40% of all imports by 2013, imports from Germany are more likely to stagnate.
The rise in logistical costs in China will become increasingly noticeable for German companies. The rate of price increase and the escalating salaries will increase the pressure on consumers as well. This is the reason why they should start thinking intensively about additional ways to lower their costs...
This summary was prepared by the Atlantic Community editorial team from "Beschaffungslogistik im China-Geschaeft: Kosten - Prozesse - Strategien" published here in Pricewaterhouse Coopers March 2008.
Related materials from the Atlantic Community:
- Eckart von Kaeden: India's Changes
- Hans F. Bellstedt: Bangalore and the Challenge of Inclusive Growth
- Michele Schmiegelow: What Europe Can Learn From Asia