Questions & Answers Section Given in HKICPA Seminar on 23 Jun 2012

Question 11:
So it the infrastructure in South East Asia – Thailand, Vietnam, and Indonesia – is not as competitive as China - What do we do as an international buyer, even if we want to de-risk by not relying too much on China by spreading our sourcing to other countries in South East Asia, Vietnam etc. I wonder what else we can do? You might consider having more sourcing areas in China. For example, the German manufacturer of transformers is locating in Shanghai to minimize the corruption risk associated with their joint venture operations in Dong Guan.

Bigger picture – Developed country governments might start to encourage the return of manufacturing to help with employment to overcome the deterioration in their own country both economically employment wise and socially – or at least there is a trend towards less outsourcing or manufacturing in the country of demand. The trend of the past has been for international manufacturers to move operations to the Far East for the purposes of reducing costs especially Labor costs, but this factor is not a clear dominating force anymore.

Moving forward on the supplier side, I highlight the fact that suppliers who had developed a brand name and or went niche in terms of having a focused product were able to dictate the terms of the relationship with their buyers. On the other side what should buyers do? De-risk by having a multi-province strategy, rather than a multi country strategy. Once you go to the rest of Asia you suddenly have 12 different governments and customs authorities to deal with. Yes there are regulatory headaches associated with working with different provincial authorities, but at least the infrastructure is more stable – ie one less uncertainty to deal with. In one sense labor costs is a small part of the location decision. There are political risks associated with changes in regimes as well as provincial headaches in South East Asian countries.