In a keynote to an AAFA sourcing and logistics integration conference, New Balance VP Duncan Scott said Asia’s engineering and logistics prowess will offset lower labor costs in other regions.
A sourcing executive for the footwear manufacturer New Balance expects Asia to overwhelmingly remain the world’s key sourcing hub despite rising manufacturing costs in the region.
“Asia is getting more expensive, so we have to think about what the next step is after being so dependent on Asia,” Duncan Scott, vice president of external products for New Balance Athletic Shoe, Inc., said at the American Apparel & Footwear Association’s Strategic Sourcing, Customs, and Logistics Integration Conference in Washington, D.C.
“Asia and India will remain sourcing hubs,” Scott said. “I don’t expect a shift away from there. Africa will emerge as a strong hub for low-cost commodity items, where speed-to-market is not crucial.” Latin America and Turkey will play niche sourcing roles in product categories where speed-to-market is important in North America and Europe, respectively, he said.
Meanwhile, Scott said a “dramatic” shift in purchasing power in Asia will force companies to rethink their sourcing strategies. “The scale of disposable income in Asia and India will dwarf that of the EU and U.S.,” Scott said. “It will affect how we source.”
He cited statistics suggesting China’s and India’s contribution to global middle class consumption will rise from 5 percent currently to 50 percent by 2025.
Asia will remain the primary global sourcing region despite positive manufacturing trends in the United States.
“It’s inevitable that a concentration of engineering techniques will shift to Asia,” he said.
He said sourcing executives will have a decision to make about their continued use of Asia. They can either re-shore some production to sourcing regions closer to the end consumer, move to cheaper labor markets (most likely Africa), or leverage Asia’s manufacturing efficiency.
“It’s difficult to replicate the advantages of Asia,” he said, noting the region’s political stability and engineering expertise.
Complementary manufacturing industries, like steel and chemicals, in Asian markets like South Korea and Taiwan have aided manufacturing innovation. That, he insinuated, would be difficult to match in a newer sourcing region, even if the labor costs were lower.
“China will evolve and offset the advantages of cheap labor through better end-to-end logistics and advanced manufacturing,” he said. “It doesn’t mean they will get it all. But they will keep a big chunk of it.”
As for Africa, Scott said the potential is enormous, but it comes with challenges. He noted that a poll of sourcing executives at a key industry conference in Hong Kong last month predicted Africa would be the fastest growing sourcing location by 2020. The continent is forecast to have a population of 1 billion by 2030.
“That growth is staggering, but the disposable income won’t keep pace (with Asia),” he said. “I think it will develop similarly to Latin America, with pockets of export manufacturing centers. With risk comes opportunity.”
Scott was alluding to political instability in the region, but said that doesn’t necessarily preclude a region from becoming proficient at export manufacturing.
“Indonesia is the case study,” he said. “There were raids there in the 90s over income inequality, but (footwear factories) there still met their deadlines like clockwork. In terms of Africa, you’d probably want to look at a diversified strategy where you’re in two or three countries.”
The advantages are Africa’s duty free status with Europe and the United States, quick transportation times between West Africa and North America, and from Egypt and Morocco to Europe. That said, if India and China lower duty levels with developed markets, it could erode Africa’s duty advantages, he said.
Scott also does not expect a major shift of manufacturing back to developed regions. “There’s not much incentive for the U.S. and E.U. to move back to manufacturing when the growth of services is much faster,” he said. “Some manufacturing will return, but not on a grand scale.”
Scott spoke briefly about the impact of omni-channel distribution on sourcing, saying it would put a premium on manufacturing innovation, product design, and rapid customization. The latter is particularly applicable to the footwear industry, where more and more manufacturers are offering online customers the ability to design their own models and have them shipped direct-to-home.
Innovations in distribution and customizable products will not induce footwear makers to abandon the make-to-stock manufacturing model in favor of an order-to-stock model.
“The need for speed still requires the make-to-stock model,” said Scott. “But customizable efforts will have to become faster to complement MTS.”
New Balance sourcing exec touts Asia’s manufacturing expertise
