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Industries:  General 

Procurement Strategies for Cookware –China vs India

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By: Govindarajan Parthasarathy
Principal Analyst, SWAT Directs

calender23 Aug 2018

procurement-strategies-cookware-china-india

Introduction

The global market for cookware is in a constant state of flux. There are an increasing number of shifts within the industry in terms of raw material, pricing and consumer preferences, which are reflected in suppliers’ activities such as product innovation. Therefore, development of an optimal sourcing strategy is paramount to ensure cost-effective procurement.

This whitepaper analyzes the current landscape of the cookware market in China, challenges in procurement for end-users and how the challenges necessitate a shift in terms of best-cost country sourcing. In addition, feasibility of an emerging region such as India as a cost-effective procurement alternative is examined. This paper also looks at best practices that must be adopted by end-users to cut costs while retaining the same degree of quality in the procured products.

Problem Statement

China is the largest global producer of cookware made of aluminum and stainless steel. However, steel prices in China have been rising because of capacity cuts and strong demand from downstream industries. Aluminum prices in China are also supported by the high export demand. Because of these factors, this whitepaper examines the feasibility of an emerging region such as India as an alternative for sourcing cookware.

This whitepaper proposes a solution for the following questions:

  • What are the main challenges in sourcing cookware from China?
  • Can India be considered a cost-effective alternative to China?
  • What is the outlook for raw material prices in both countries?
  • What are the major factors in the cost-optimization of cookware manufacture in India versus China?
  • What are the best procurement practices to attain cost-effective sourcing?

Main Challenges in Sourcing Cookware from China

It has been noted that China is the world’s largest region for sourcing cookware owing to its steel and aluminum production. China is the world’s largest producer of both steel and aluminum, accounting for 49.2 percent (1,691.2 MMT) and ~53.8 percent (~60 MMT) of global production, respectively. Therefore, most of the world’s top suppliers of aluminum and stainless steel cookware are located in China. The presence of a burgeoning middle class in China with increasing disposable income is also causing an increase in the demand for cookware. However, sourcing from China is currently fraught with several challenges.

Rising Steel Prices

  • Chinese steel prices rose by 21.6 percent in 2017 as compared with the previous year. Raw material cost is the most significant component of cookware production cost.
  • Despite the global glut, this price rise occurred because the country experienced reduced production of steel resulting from the crackdown on substandard quality.
  • China has a target of reducing its capacity for steel production by 150 MMT before 2020. Thus, China ensured capacity cuts of 65 MMT and 50 MMT in 2016 and 2017, respectively, ensuring that 76.7 percent of its target reduction was met.

Aluminum Supply Risks

 

  • China is the world’s largest supplier of aluminum, but there may be perceived supply risks.
  • The U.S. has levied import tariffs of 25 percent on Chinese aluminum, and there are also antidumping and countervailing duties.
  • There are also shifts in the product mix, which could cause concerns with respect to quality.

Consolidation of
the Market

 

  • The Chinese cookware supplier market is very mature, and the government has been encouraging market consolidation to regulate the industry.
  • Medium and large players are anticipated to consolidate the market in the near future.
  • This factor, coupled with high labor and production costs in the country, could increase the overall procurement costs for the end-user.

Cookware Sourcing Opportunities in India

Cookware end-users are continuously seeking cost-effective alternatives to China because of the country’s sourcing challenges. In terms of viable alternatives, India is an emerging region for cookware with a market value of over $850 million in 2017. The increased demand and supply levels have led to opportunities for procuring cookware. Some of these opportunities are detailed below.

Raw Material Availability – Stainless Steel

  • India has a healthy demand for cookware, with the industry accounting for ~60 percent of the stainless steel consumption in the country.
  • The company has invested over $5 million to increase stainless steel supply over the past five years, with production rising by ~9 percent to 3.6 MMT in 2017.
  • The steel ministry plans to remove import duties. This could bring down the production cost of stainless steel further, thus potentially reducing stainless steel cookware prices as well.

 

Raw Material Availability – Aluminum

  • While aluminum is generally more expensive than steel, in India, this is tempered by its competition with the latter.
  • Aluminum faces competition from low-cost stainless steel of grades other than 302/304, which have very low nickel and chromium content.
  • Therefore, it is likely that suppliers exclusively manufacturing aluminum cookware will offer competitive pricing, a factor absent in China.

 

Supplier Landscape in India

 

  • India is an emerging region. Thus, even major cookware companies such as TTK Prestige, Stovekraft and Butterfly Gandhimathi are seeking to expand their business overseas.
  • Indian suppliers try to promote their products abroad, competing with suppliers from China, Japan, EU and the U.S. They also offer original design manufacturing and original equipment manufacturing (OEM/ODM) services.
  • Considering market consolidation by Chinese, EU and U.S. suppliers, it is likely that Indian suppliers will offer competitive prices to capture the market share, thus enabling cost-effective procurement.
  • The supplier landscape is also sufficiently diversified in India, with a number of large to medium scale suppliers potentially leading to competitive pricing.

 

In the current scenario of Chinese market domination and the potential price rise of cookware, it is necessary to devise an optimal sourcing strategy for cost-effective procurement. Thus, India, which possesses the advantages of abundant raw material (stainless steel) supply, diversified supplier base and potentially competitive prices, can be considered as an alternative. The cost and price drivers of the Indian cookware market must be assessed vis-à-vis China to determine its suitability for cost-effective sourcing.

Analysis of Cost and Price Drivers for Cookware – China

The cost and price drivers for cookware are highly dependent on raw material, which accounts for the bulk of production cost. Three major factors drive the raw material and final product prices in China—state-imposed environmental restrictions on raw material supply, high labor costs and the impact of U.S. tariffs on raw material export.

Parameter

Description

Implication on Cookware Prices

Effect on Cookware Price

 

 

 

China

Emergence of State-Owned Suppliers

Government crackdown on pollution has caused aluminum producers to shut down smelters, reducing annual output by 1 MMT. Steelmaking hubs have also reduced steel supply. Therefore, state-owned smelters could emerge in regions not subject to output curbs and squeeze out private companies.

Although overcapacity of aluminum is currently reducing its price, state-owned smelters could consolidate the market, which can increase their supplier power. In addition, environmental restrictions could curb steel supply and support raw material prices. Cookware prices may thus trend upwards.

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Energy Prices

Chinese power consumption is forecast to rise by 5.5 percent in 2018. The government has announced cuts in electricity prices for commercial and industrial sectors, which could offset the potential price rise due to demand.

Energy prices constitute 40 percent of production costs for raw materials such as aluminum. Government cuts in electricity prices could prevent raw material prices from rising due to high energy costs, thus keeping cookware prices stable.

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Labor Cost

The approximate monthly labor wage for this sector in China is $715.89/MT. This wage is ~50–80 percent higher than that in other Southeast Asian regions. This is attributed to inflation and shortage of highly skilled workers.

High labor costs in China have increased cost of production, which in turn could raise cookware prices.

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Trade Tariffs

 

 

The U.S. has imposed tariffs of 25 percent on steel and 10 percent on aluminum imports from China.

Despite tariffs on steel and aluminum, Chinese exports have risen to new highs. U.S. sanctions on Russia’s company Rusal could further support Chinese exports. However, generally, higher availability of steel and overcapacity could cause prices to trend downwards.

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While current prices of cookware raw material in China are trending stably, there is ample potential for upward movement due to trade tariffs and restrictive measures by the government. In addition, labor cost in China is higher than in most Southeast Asian regions. This implies that sourcing cookware from China could incur proportionally higher costs.

Analysis of Cost and Price Drivers for Cookware – Contrasting the Outlooks of India and China

The cost and price drivers for cookware are highly dependent on raw material, which accounts for the bulk of production cost. The major factors that drive prices in India are low labor costs and displaced raw material exports that could be diverted to India, thus flooding the market with cheap raw material.

Parameter

Description

Implication on Cookware Prices

Effect on Cookware Price

 

 

 

India

Price versus Cost

Indian steel prices are likely to present an upward trend due to demand. However, any rise in the prices of aluminum and steel could be offset by the fact that India is among the lowest-cost producers of these metals in the world due to easy raw material availability and low labor costs.

Price hikes for steel are likely caused by shrinking inventory; aluminum prices are also experiencing a healthy demand. However, these rises are likely to be offset by low production costs of cookware manufacturers, which could ensure competitive prices compared with China.

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Supplier Operations

India is an emerging market for cookware. While there are many established local brands, suppliers are actively trying to expand their market overseas, by either selling their own brand or offering OEM/ODM services.

 

Most suppliers in India are likely to offer competitive prices for cookware compared with those in other countries owing to the current trend of overseas expansion. Sourcing cookware from India can thus lower procurement costs.

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Labor Cost

 

The approximate monthly labor wage for this sector in India is $161.56/MT. This is ~77.4 percent lower than that in China.

Indian cookware suppliers are likely to incur much lower labor costs than Chinese suppliers. This could ensure competitive pricing of Indian cookware in comparison with Chinese cookware.

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Impact of U.S. Trade Tariffs on China

U.S. tariffs on Chinese exports of aluminum and steel could lead to retaliatory measures by China and other countries. It is predicted that countries exporting to the U.S. could shift their exports to other consuming regions such as India.

Retaliatory measures against U.S. tariffs can potentially result in 27 MMT of displaced exports globally, a significant amount that could be routed to India. Flooding of cheap raw material imports into the market could lower cookware prices.

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India is an attractive market for sourcing cookware compared with China because of lower labor costs. This can offset potential price hikes and/or high supply of raw material due to domestic production and also from potential displaced exports resulting from the U.S.–China trade war.

Analysis of Cost and Price Drivers – Assessing the Need for the Shift to India

The current market landscape for raw materials used in cookware facilitates an outwardly bearish outlook for prices in China. Therefore, it is necessary to analyze the microscopic factors determining the need for a shift in the procurement strategy from China to India.

Cost/Price Driver Analysis-1

Does the situation of U.S. tariffs on Chinese steel/aluminum negate the need for a shift in the procurement strategy? 

Issue: U.S. tariffs on Chinese steel and aluminum can limit Chinese export of commodities,  thus reducing domestic prices and increasing raw material availability. Lower raw material costs for Chinese cookware manufacturers could lower cookware prices. Thus, there will be no need to source from India.

Analysis: Despite the tariffs, Chinese exports of products have currently reached new highs. While the overcapacity of steel could result in high supply of raw material, it is completely offset by high labor costs, which are among the highest in Southeast Asia. Furthermore, in the case of aluminum, capacity cuts due to environmental restrictions and high demand for exports have supported the prices. Thus, high supply of raw material due to export tariffs is not likely to lower cookware costs to levels comparable with India.

Insight: U.S. tariffs on Chinese steel and aluminum are unlikely to bring down Chinese cookware prices to a level competitive with India due to high labor costs.

Cost/Price Driver Analysis-2

 

Can automation of production facilities in China be the solution to the high labor costs for cookware production?

 

Issue: Chinese labor costs are currently ~77.4 percent higher than Indian labor costs because of which procurement costs for cookware are higher in China. Can automation of facilities by Chinese cookware suppliers such as ASD negate this advantage for India sufficiently? 

Analysis: In Guangdong and Hebei, 40 percent of the factories are automated. Guangzhou province has set a target of automating 80 percent of its industrial facilities by 2020. However, there are a few challenges. First, the automation process is at a nascent stage in China compared with that in countries such as Japan and South Korea. Thus, it could take a few years before the benefits are realized for the buyer. The automated supplier base is not diverse enough to offer competitive pricing based on automation. Second, Chinese automation firms are often subsidized even if their technology is not up to par. This could be a risk if an automated Chinese company is a mid- to small-sized player.

Insight: Automated firms within the cookware industry could eventually result in pricing that is in competition with India a few years down the line. However, currently, the automated supplier base is not diverse enough, and automated suppliers such as ASD are established brands with a dominant market share, which implies higher supplier power. Thus, sourcing a portion of procurement needs from India can increase buyer power.

Conclusion

 

Chinese labor costs effectively negate any reduction in raw material prices arising from U.S. tariffs. Automated suppliers constitute a viable solution to lower production costs and thus cookware prices. However, the automated supplier base is not diverse enough to offer competitive prices in comparison with India. Thus, it is recommended that India be considered as a cost-effective alternative to China for sourcing cookware.

 

Best Practices for Optimal Sourcing – Shift from China to India 

Focus on Diversification of the Supplier Base

Too much dependence on Chinese suppliers gives them great bargaining power. At the same time, it is likely not feasible to immediately shift entirely to India, an emerging region for cookware, without ascertaining its supply sustainability. Hence, it is recommended that a minor portion of procurement volume be sourced from India, while incumbent Chinese suppliers be retained for the major portion. This could ensure higher bargaining power for the buyers.

Assess Supplier Capability and Quality

A major factor determining the potential sourcing shift from China to India is the suppliers’ ability to meet requirements in terms of volumes and capability. To ensure adequate volume sourcing, it is recommended to focus on major cookware suppliers that are likely to possess the requisite capacity levels. High quality standards can be ensured by sourcing from established brands in India such as TTK Prestige, Stovekraft and Nirlep. These brands also supply to European clients and thus could potentially satisfy the quality requirements.

Determine the Sourcing Strategy based on Raw Material

Currently, there is an overcapacity of aluminum in China. In India, several stainless steel grades are competitively priced in comparison with aluminum. Based on these trends, it may be prudent to source aluminum cookware from China and stainless steel cookware from India.

Negotiate Short-Term Contracts

The cookware market is dynamic and growing. There are many emerging regions and suppliers who could offer competition to established players in the market. Raw material prices are also fairly volatile. Hence, it is recommended to negotiate short-term contracts with suppliers for sourcing cookware.

Take on Green Initiatives and Social Responsibility

The actions taken by suppliers to reduce the supply chain’s carbon footprint must be considered when all other criteria are satisfied. Buyers and consumers can take the environmental impact into account when they choose suppliers. Because of the Chinese government’s crackdown on environmental pollution, it is necessary to consider this factor to ensure supply chain sustainability without disruptions.

Conclusion

India is an emerging market for cookware. Because of the need to determine the capacities and quality standards of Indian suppliers vis-à-vis Chinese suppliers, it is not feasible to completely shift sourcing activities from China to India. However, the presence of several reputed Indian suppliers, cost-effectiveness of cookware manufacture in India and low prices of stainless steel compared with China make India an attractive alternative country for sourcing. It is thus feasible to source a part of the procurement volume, particularly cookware made of stainless steel, from reputed Indian suppliers to cut down on costs.

The outlined sourcing strategy is thus a roadmap for cost-effective sourcing in the competitive cookware industry.

References

https://www.metalbulletin.com/Article/3775717/2017-REVIEW-Chinas-steel-prices-boosted-by-capacity-cuts-healthy-demand.html

http://www.globalsources.com/gsol/I/Cookware-set/a/9000000136018.htm

https://www.reuters.com/article/us-china-economy-trade-aluminium/chinas-march-aluminum-exports-rise-to-highest-since-june-as-tariff-impact-limited-idUSKBN1HK1LH

https://www.cnbc.com/2018/04/11/reuters-america-can-china-fill-aluminum-shortage-after-rusal-sanctioned.html

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