Faced with rising labour costs and an ageing workforce in China, apparel and footwear companies are reassessing their sourcing strategies across the Asia Pacific region, a new study says. And among the main beneficiaries of this shift are countries like Bangladesh, India, Indonesia and Vietnam, especially as regional integration and preferential trade terms take hold.

The research from accounting firm KPMG International makes the point that product sourcing is about striking a balance between speed, quality and pricing - but may currently be at a turning point that requires dramatic changes to strategies and business models.

The reason, of course, is that sourcing goods in China purely because of its ultra-low costs is a thing of the past. With the country's minimum wage levels up to four times higher than those in other parts of South and South East Asia, China can no longer compete on a low-wage basis, especially in labour intensive apparel and footwear industries.

"With demand still soft in many Western consumer markets, it is also proving difficult for companies to pass on higher costs to consumers," says Nick Debnam, KPMG's Asia Pacific chair, Consumer Markets and a partner in the China firm. "This changing environment is forcing companies to reassess sourcing strategies."

That's not to write China off through, according to the report on 'Product Sourcing in Asia Pacific.'

Researchers note it can still defend its position in many categories where it maintains an edge through productivity and the reliability of its infrastructure - which boasts nine of the world's top 50 container ports, including Hong Kong. Investment in high-speed road and rail networks also means new locations in China's hinterland are becoming more accessible.

Other low cost apparel manufacturing locations like Vietnam, Cambodia, Indonesia, India, Pakistan and Bangladesh are as yet no match for the scale of China's export production, which rebounded strongly in 2010. Exports of footwear jumped by 29% year on year, and exports of leather goods grew by 38%.

Among the main exporters in the region, only Indonesia and Bangladesh could meet China's dramatic growth rates. Indonesia's footwear exports rose 42% in 2010, according to UN Comtrade data. And buoyed by favourable duty rates with the EU, Bangladesh saw its exports of textiles grow by 43% to US$18.3bn in the fiscal year ending July 2011.

However, clusters of specialised production are emerging, such as footwear in Indonesia and Vietnam and hand stitched fabrics in India. As its infrastructure develops, Vietnam more than doubled its exports of footwear between 2006 and 2009.

Economic pressures
Likewise, the economic pressures facing producers are not unique to China. Wages are rising across the region - they've gone up by around 10% per annum over the past few years at Indian cotton mills, and Bangladesh's minimum wage levels doubled year-on-year in 2010.

"While wage levels are an easy point of comparison when assessing different sourcing locations, the age and quality of a country's workforce is important to understanding its future potential," Debnam adds.

"It's going to be impossible to avoid the challenge of rising wages entirely wherever you are in the region. It is relative increases that matter when measuring a country's competitiveness in labour-intensive sectors. That being the case, there will still be good reason to invest more in younger and cheaper countries such as Bangladesh, Vietnam, Cambodia and Pakistan."

China's sudden and serious labour shortages are due to its rapidly aging population; the size of its 18-30 year-old population is stabilising and will shortly fall as a result of the country's one-child policy. This has provided the workforce with the leverage to demand higher wages.

But while the average Chinese citizen is 34 years old, the average Bangladeshi, Cambodian, Pakistani, and Filipino, by contrast, is almost 10 years younger. Indeed, the demographics of these three countries look much like the demographics of China in the early 1990s, at the time its export manufacturing sector started to boom on the back of cheap labour.
Many Asian currencies have also strengthened markedly against the euro and the US dollar over the past two years. And higher costs of shipment and the demands for ethical, sustainable production are contributing to the need for entirely new thinking around sourcing models.

Confronting these headwinds
South East Asian countries are confronting these headwinds by making moves to remove tariffs and customs restrictions.

For instance, efforts by the Association of Southeast Asian Nations (ASEAN) to create a single ASEAN Economic Community by 2015 could boost the competitiveness of producers in this region. And specifically, the Source ASEAN Full Service Alliance (SAFSA) will help manufacturers across ASEAN collaborate by creating virtual vertical factories.

While consumer goods, sourcing companies and retailers will continue to reassess the role that Asian countries are playing in their supply chains, it's clear that new trade terms will enable South East Asian countries be as competitive as possible as companies explore new regions for sourcing.

But while China will remain a key part of the equation, the government's focus on infrastructure and higher technology industries suggest there are new opportunities for South East Asian textile and apparel producers to benefit from this shift.