Made in China – about international supply chains and alternative sourcing

Author: Konrad Schröter, Freelance journalist, Leipzig

From children’s toys via coffee machines to jeans: “Made in China” is ever-present. The “Made in China” label, often associated with cheap and low-quality products, illustrates the development of a globalised world. Where does China’s economic power come from? What impact does China have on the global economy? Where are trends in global sourcing heading? And how can European retailers respond to this situation?

“Since the 1970s, China has pushed ahead with economic market reforms, and in the course of the 1990s it opened up to direct investment and international trade. This created the basis for the relocation of production facilities to China and the integration of the country into the global economy,” explains Gunther Schnabl, Professor of Economic Policy at the University of Leipzig. Once capital began to flow into the country in the early 2000s and China joined the World Trade Organisation, the rise of the Asian country could no longer be stopped.

Since then, a large proportion of global sourcing has been channelled through China. The main reason is that due goods can be produced inexpensively thanks to low operating costs, cheap raw materials, stable energy supplies and low wages. The “Sourcing in China” study by msg systems ag has found that most companies continue to prioritise these cost benefits over any critical media coverage of the social and environmental situation in China.

China’s rapid rise after the turn of the millennium had some positive consequences: “Between 2000 and 2014, China was a major driver of growth for the global economy. Because the production of low-cost goods grew strongly, this brought considerable prosperity gains in industrialised countries,” explains Prof. Schnabl.

However, mass production is also associated with risks: according to the “Sourcing in China” study, 95% of all companies that purchase products in China occasionally report quality defects, particularly in production and the raw materials used. Retailers who rely too much on China also risk becoming dependent on the suppliers there: increasing geopolitical tensions, the growing influence of the Chinese state on the economy and rising labour costs could in future jeopardise the attractiveness of China as an export nation. “Just like Japan since the 1990s, China is likely to fail as an engine of growth for the global economy in the future,” predicts Prof. Schnabl.

Sebastian Herz, founder and Managing Director of Zignify Global Product Sourcing, confirms that this development is already underway. “There is currently a massive movement towards nearshoring,” i.e. the sourcing of products from locations closer to the market where they will be sold. Taking the German market as an example, imports are increasingly coming from south-east Europe, southern Europe and Turkey.

From a trade perspective, Sebastian Herz sees many reasons for China’s declining influence, including the punitive US trade tariffs imposed by the Trump administration on Chinese imports, which make China an unattractive production location for US companies.

The transport of Chinese products is also a key factor. Container prices are currently rising sharply, partly due to an artificial reduction in supply by shipping companies. The result is rising costs and falling margins. Last but not least, the long transport times are a problem for retailers and companies that rely on Chinese products. The risks resulting from such a long transport route were demonstrated in 2021 when the Suez Canal was blocked by a grounded container ship. Added to this is piracy, which poses a serious threat on major trade routes. Pirates force shipping companies to take longer routes, for example around the Cape of Good Hope, which massively increases delivery times and further delays production and supply processes.

What can retailers now do to keep up with the developments surrounding the uncertain situation in China as a production location? One effective tool is diversification of supply chains. 40% of the companies surveyed in the “Sourcing in China” study stated that they prefer to have a pool of 10-50 strategic suppliers to choose from. Companies which take a long-term view are also careful to spread their suppliers across several countries. Other Asian countries such as Vietnam, India and Thailand can be attractive alternative sourcing locations, as can countries in eastern Europe and the Americas. “Relocating production to other countries may involve costs, but it also helps to diversify geopolitical risks,” comments Prof. Schnabl. In addition to offering independence, switching to other countries also has the advantage of specialisation: different nations focus on different sectors in terms of both production and the training of skilled workers, which European retailers can take advantage of when they select their suppliers.

In his day-to-day work, Sebastian Herz from Zignify Global Product Sourcing observes that China will continue to play a major role, but adds: “There is a growing awareness of the need to move production closer to the markets.” Although production in other countries, for example in southern Europe, is associated with higher costs, it reduces delivery times and therefore the amount of capital tied up. Importing companies are becoming more flexible as a result of this development, not least because they can order smaller quantities more frequently instead of having to make bulk purchases in far-distant countries.

Retailers for whom the quality of their products is important can also introduce regular quality controls and audits to assess the performance of their suppliers, and so detect quality problems at an early stage. A focus on sustainable suppliers and production sites comes at a cost, but in addition to the ethical benefits, it can also strengthen the company’s image.

Professor Schnabl advises prudence in the current trade conflict with China: “Europe should not counter China’s export subsidies with import tariffs. This could provoke a trade conflict from which not only China, but also Germany in particular, which is dependent on exports, would suffer. In the past German companies have always been able to reinvent themselves when they were under great competitive pressure. Germany still has the know-how and highly qualified labour force which are required to make itself fit for the world again,” says the professor from Leipzig University.

What remains in the final analysis: over the past few decades a strengthening China shifted the centre of gravity of the global economy to Asia – but the Chinese rise does not appear to be unstoppable. By diversifying their suppliers, European retailers can avoid being dependent on individual countries and can also counteract geopolitical risks. Will the “Made in China” label still be everywhere in the future?