The China supply chain is changing

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China has dominated supply chain thinking over the past few years – first as companies sought to source products there and more recently as a market for those products.

But the business environment is changing and that could have a significant impact on the decision-making process.

Li & Fung and the China General Chamber of Commerce have just put together a report looking the key issues facing China’s commercial sector in the coming year, entitled “What do the experts say?”

In particular, weakening export demand means that many Chinese exporters have begun to focus on the country’s lucrative domestic market. However, selling in China is no easy task and is fraught  with obstacles, particularly for the traditional processing trade factories.

“Our experts expect an increasing number of export oriented enterprises will embark on domestic sales strategy with the help of wholesalers and distributors in China. Indeed, after years of development, a number of competitive regional distributors have emerged. But of course, there is further room for improvement in terms of logistics, data mining, capital financing and brand management capabilities.”

The report also points out that real retail sales of consumer goods will grow at a slower pace which will make stabilising the economy by expanding domestic consumption becomes more challenging. A development plan for China’s domestic trade during the 12th Five-year Plan period (2011-15) is expected to be launched in early 2012.

On the positive side, there are plans for tax reforms for logistics designed to reduce the double taxation caused by separate VAT and Business Tax regimes.

The report suggests that an increasing supply of government backed wholesale and logistics facilities could lower distribution costs. “A major initiative undertaken by the government is to provide more affordable distribution facilities and infrastructures such as warehouses, logistics centres, wholesale markets as well as information platforms for the public.”

And it calls for government action to help lower the cost of doing business pointing out that increasing market competition has driven up overhead costs such as rental and labour; there are some structural issues behind the high transaction costs facing China’s retail and distribution sector.

The question is, will these changes make China a more attractive place as a source or as a market – particularly at a time when it is seeing growing competition from the emerging markets of India and Brazil?

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