Ms. Li Hui has over 20 years of extensive experience in the sourcing industry. She previously served as the Sourcing Director at GAP in the U.S. and moved to Hong Kong in 2010 to join the retail company Lands' End, where she oversaw their sourcing operations in Asia. She also held the position of Executive Vice President at Li & Fung Group, managing their business in mainland China and Hong Kong. Currently, she is in charge of the Asian division of SC Sourcing. She spoke to Global Sources Chief Executive China in June 2024.
Continued from part 1.
CEC: Can you share your views on the trend of moving manufacturing to Southeast Asia? Where do you think is the optimal location for establishing a Southeast Asian sourcing office, and what are your reasons?
Li Hui: I believe the migration of manufacturing to Southeast Asia is not just an inevitable trend but a continuing process that has been happening for quite some time. Even prior to the trade tensions, the shift was already in motion due to cost and labor market considerations. The trade war between China and the US has only expedited this transition. However, the challenge lies in transferring the entire supply chain, not just the suppliers themselves.
Take the apparel industry as an example; it's not just about relocating the sewing process but involves the entire supply chain from yarn manufacturing to dyeing and weaving. This comprehensive shift is complex. Thus, for all buyers, the Chinese market remains pivotal because the supply chain is still rooted there, with only the final manufacturing phase moving elsewhere.
When it comes to the location for a sourcing office, it should be determined by the specific products and the buyers' needs. So there is no one-size-fits-all answer; it depends on the industry you are engaged in. For instance, if you're in the apparel industry, Vietnam might be a strategic location for your office. If you're in the grocery business, with a significant portion of your business in the domestic market, Hong Kong could be a better choice for your sourcing office.
Moreover, despite many raw materials and intermediate goods originating from mainland China, having a sourcing office in Hong Kong can be more advantageous than mainland China. This is partly because I feel the mainland’s information landscape is not as globalized, with some information being restricted, which can limit the global perspective and the breadth of information available to the sourcing team. Additionally, mainland China may not be the most tax-friendly location for businesses.
CEC: Do concepts like environmental protection and carbon neutrality impact suppliers? What challenges and opportunities do they present?
Li: There are two main impacts on suppliers regarding environmental considerations.
One is the regulatory impact from the Chinese government. With China's entry into the WTO, there have been environmental obligations, and the government has set stringent environmental standards since a decade ago or even earlier. This has already influenced suppliers, with many factories relocating from areas like Dongguan to the north. Thus, domestic environmental regulations affect suppliers' costs and locations.
The other is the brands' commitment to environmental protection, which is a promise to their overseas consumers, and suppliers need to demonstrate their environmental ethos. Using eco-friendly materials and reducing carbon emissions can be a significant advantage for suppliers.
I see environmental protection and carbon neutrality as a double-edged sword. It's a challenge because upgrading to new environmental standards can be costly. It's also a philosophical challenge for Chinese suppliers. How many of those entrepreneurs do environmental protection out of a sense of duty to the world, rather than due to customer demands or order pressures?
However, challenges also present opportunities. Environmental protection and carbon neutrality are significant industry trends. Understanding customer requirements and competitor strengths in this area can turn a challenge into a competitive edge. Companies that excel in this area may secure customer orders even when other conditions are not as favorable.
CEC: What is your outlook on the future development of China's manufacturing industry? What advice would you offer to suppliers?
Li: I am optimistic about the future of manufacturing in China. There are two unique aspects that cannot be easily replicated outside of China, or would take a considerable time to do so.
One is the completeness of the industrial chain. Previously, China functioned as a comprehensive manufacturing hub, covering everything from the sourcing of primary raw materials to the completion of finished products. However, it is conceivable that in the future, the latter stages of this production chain could be relocated to other places.
The other is China's production capacity, which, even when you combine the capacities of Vietnam, Cambodia, Bangladesh, and India, does not reach half of China's capabilities.
CEC: What advice do you have for suppliers at the Global Sources trade shows and platform?
Li: For suppliers looking to grow with China's manufacturing industry, the key is to create irreplaceability and uniqueness. This uniqueness can manifest in various forms, such as specific technologies or comprehensive assessments, which build the enterprise's capabilities and value.
Suppliers must also diversify. They should diversify their customer base, markets, and not limit themselves to the US or Europe. They should explore the Middle East, Asia, Russia, and other markets. An excessive number of suppliers are overly focused on the US market as their sole business domain for the long term. Yet, even within the US market, there's a need for diversification.
Whether you're engaging with retail chains, branded entities, or specific industries, it's imperative for businesses to continually refine their customer assessments and adopt a strategic approach. This involves reducing reliance on a single market or customer group, thereby diversify risk and safeguarding business interests.
Continuous innovation is crucial; businesses that stand still are effectively failing. Some suppliers have been too comfortable with their large orders and have neglected smaller customers. When the trade war hit, they lost their major orders and scrambled to find new clients. It's a reminder to always be proactive and innovative.
Too few people are currently contemplating the risks at hand, even though the reality is fraught with peril. Yet, the circumstances we face today were something that could and should have been anticipated half a decade ago. When business operations are running smoothly, it's crucial not to become complacent. One must reflect on the impermanence of the current comfortable conditions and strategize for the future. It's essential to project forward, contemplating a vision for the business in not just the immediate, but also over the next five to ten years.
I've interacted with numerous Chinese suppliers and have observed that they often don't understand their customers very well.They seem to be out of touch with the actual operations of their clients and what actions on their part would truly be valued. Instead, they tend to be overly preoccupied with their own products and the offers they make, neglecting the broader picture.
So why do agents still exist? We often say that end-to-end is sufficient, where customers can place orders directly with suppliers. Why are there still so many importers in between? The direct, end-to-end model of customers ordering from suppliers is often seen as ideal, yet many importers, particularly from Europe and the US, still rely on a network of middlemen. This is largely because these agents have a more profound grasp of the customer's needs and operations than the factories do. As a result, while factories may only receive a small fraction of the profits, intermediaries can earn a margin of at least 5% to 20%.
However, if factories can excel in understanding the market and customer needs, they could capture that profit margin for themselves, eliminating the need for intermediaries. Top-tier suppliers go beyond mere product knowledge; they possess a comprehensive understanding of the market and consumer behavior, enabling them to offer high-value services to their customers.
In closing, I encourage everyone to keep moving forward with optimism. The future holds great promise for those who are proactive and adaptable!
Established in 2022 by Global Sources, the Sourcing Elite Board (SEB) is a collaborative initiative dedicated to advancing the sourcing industry through shared expertise and innovative strategies. Senior executives, from buying offices to retailers and brands, are welcome to join this distinguished community.
Header photo by Abd Katon from Pixabay
