Is your offshore operation staffed by U.S. based professionals?
One of the greatest perceived disadvantages of Chinese based manufacturing firms is the lack of having a U.S. contact who is knowledgeable about and engaged in your business. Our firm, with its intimate understanding of China is based in the U.S. with a China based operating staff.
Things can and do go wrong and having the peace of mind that you have a contact in the U.S. is invaluable. This goes a long way, particularly in the start-up phase of a project as you require hands on involvement with your project. It is important that you have a day to day contact in your time zone for trouble shooting, planning and preparation. Too often small but critical details can be lost in translation as operators try to work through cultural barriers, time zones and misunderstandings. Even those dealing with a satellite factory right in the U.S. have to deal with production issues, timing and other miscues. If you’ve ever played the secret game as a kid, where one person begins a story, then passes it around a ring of people until the last one hears it, then you have seen how details are lost and the story is altered from its original concept. The same is true when passing along instructions to your offshore manufacturing partners. Unless you have a consistent source, who speaks your language and understands the objectives, you can end up with a mess.
Dramatic Bottom Line Reduction
There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings. Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:
1. Freight costs—Freight and logistics should not exceed 10-12% of your total cost of goods. In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port). So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.
2. Carrying cost of capital—Cash is king in any business. It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.
3. Warehouse space—every square foot of a warehouse used to store products has a fixed cost. Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue. Otherwise the savings will be offset by the additional cost of warehouse space.
4. For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components. Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress. Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.
5. Start-up costs—your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.
Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas.
Interested in learning more? You can right here.
Diving into the China Pond
Diving into unknown waters
Many have asked me what it's like doing business in China. I've always said that if you are doing it by yourself it can be as dangerous as swimming with croccodiles. I finally came across a photo that captured the essence of this concept.
There is No Next China
What is something you can think of that can’t successfully be outsourced in China? Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph. It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?
If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”
Rising labor costs in China
In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”
In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.
In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.
A shift by coastal manufacturing regions
The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says "pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading."
Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “
The role of appreciation in Chinese currency to U.S. job creation
Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.
Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it's an issue. But the reality is that jobs from China won't come to the U.S. They'll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”
Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”
China as a market
Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.
In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.
Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?
Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”
The next five years
China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.
David Alexander is President of BaySource Global www.baysourceglobal.com
How are you going to get to China?
Can you tell me how to get to China? David Alexander
Head West and turn...
Let’s be clear on one thing. This piece is a completely self-promoting call to action. If you were in charge of business development for your organization; and here is the one qualifying caveat—for a product or service you absolutely knew would help other businesses reach their targets while delivering a heady ROI, would you not pound the war drums?
In a January 31 API wire the #1 manufacturing country was reported. Many would assume China leads the way by a commanding margin yet it trails the $1.7 trillion output of the United States by a whopping 40% meaning we produce more with less labor. It also indicates that low value added jobs with less profit margin have gone overseas. So what does that mean for us? It means that China is still the factory to the world and if operations decision makers haven’t developed a competent model to outsource redundant, high labor and low value add processes, they are tempting fate. Is it finally time for your organization to embrace a synergistic offshore-onshore manufacturing & distribution strategy?
Consider Sure Power of Portland who increased their employment by 53% after embarking on a manufacturing outsourcing strategy to free up valuable plant space. They increased sales 188% by re-dedicating valuable assets to R&D and higher margin products. This translated into a 204% increase in tax contributions to the state of Oregon in one year. Getting to China however can be a daunting and expensive undertaking for the inexperienced and timelines are usually doubled when going it alone. Does your company have any KPIs for lost opportunity cost?
Assume for a moment that you are the SVP of Operations for a U.S. firm in Des Moines that manufactures some sort of metal and plastic assembly. Sales have been flat and finally in that Monday morning meeting the inevitable question arises. “What are we doing about China?” your boss asks. You have a solid team of purchasing professionals, none of which can point to Hong Kong on a map. However, through the internet one of your go-getters, Bill, has begun to put a spreadsheet together of die cast and injection molding companies in the Guangdong Province, which he’s researched as being a hotbed for these industries. Since Guangzhou is a FTZ (Free Trade Zone) Bill with his Operations Management degree, has identified this as the logical place to start. He’s shared a couple of months of emails with “agents” posing as direct factory managers and is ready to take his associates to China. Just say the word.
Assuming that Bill and the others now have passports and visas in hand, they begin booking flights, hotels, trains, and ferries to venture out into the Middle Kingdom. In all they’ll be gone for just under three weeks. Since this is the company’s first sojourn to Asia, you’ll undoubtedly accompany them on this exciting new foray into the land of the dragon along with your Ops VP. Now you and your four valuable employees will be out of pocket the majority of a month leaving yours and their day to day responsibilities to others or to simply take a break from existing projects. How much time and capital do you think this will require? You may be surprised.
The following lists conservatively typical expenses by line item for a 2 ½ week trip to China.¹ Remember, you’ll require a full 24 hour day of travel to and from and a day of recovery once you’ve arrived.
Cost for single trip, five personnel, to China
T
The good news is there are competent firms in place to assist in your project management initiatives. In a recent poll on Linked In, 150 Supply Chain professionals weighed in with their response to the question, What is the best way to manufacture outsourcing in China? (See diagram below). 57% of respondents chose “Establish a trusted partner in China.” Perhaps a good portion of the voters had already been through the trial and error process. Or it could be that those who have succeeded in tandem with a firm watching out for their best interests can easily quantify the decision to engage a reputable partner for monitoring manufacturing, quality control, packaging, labeling and logistics.
Linked in Poll-150 respondents
In his article 10 tips to better sourcing William Atkinson of Purchasing Magazine explains that regardless of their China story, those who have enjoyed a successful relationship with China have done so through proper guidance and preparation. In this critical juncture of global commerce, fluctuating currencies, and competitive pressure, it is imperative to select a reliable partner whom you can trust, knows the local governments and regulations, has engineers on staff who understand your products and who can help you gain a foothold in this valuable region of the world.
¹Airfares, four star accommodations and RMB exchange rates as of February, 2011 for travel in March, 2011
Baysource Global President, David Alexander can be reached at david.alexander@baysourceglobal.net
The $6 Haircut
There’s a great commercial running now for Office Depot featuring an independent barber, Dan who walks out of his shop one day to see “Nitro Cutz” has opened across the street offering $6 haircuts. http://www.youtube.com/watch?v=9UiIVImKsRk&feature=email
Unflappable, Dan, walks into an Office Depot to prepare his counter strategy which we later learn is simply to put up a sign that reads, “We Fix $6 Haircuts.” Brilliant.
In 2005 when we began to offer our clients our sourcing and project management services in China, we assumed our only competition would be others who jumped on this bandwagon. Were we wrong. Our greatest barrier to acquiring new clients became the honorable but misguided efforts of those managers who had been led to believe that a web search and a few returned emails from China meant they were well on their way to implementing their companies’ low cost sourcing initiatives. $6 haircut indeed.
In the past decade technology has enabled much more efficient information transfer between continents. FTP sites and inexpensive phone rates via Skype, Vonage and other VOiP carriers have improved the cost and speed of sharing data. Social Media, blogs and email have given us the perception that barriers to communication have fallen. Airfares to and from China are reasonably priced and with over 1 billion people in a country the size of the U.S. there are plenty of agents ready and willing to take on your manufacturing project. All of these new advantages, highly valuable as they are, present no assurrance that your new found business associate in Asia has the know-how, experience and resources to deliver you a quality product and service.
Now, even some of the top private equity firms in the U.S. have followed the models of Fortune 1000 companies opening offices in China to centralize sourcing and purchasing. I write about the “Five Things You Should Know Before Launching in China” http://bit.ly/c5eeBg which lists key considerations prior to investing in this front-loaded, fixed cost model.
Faced with the downturn in our economy, manufacturers and distributors are re-thinking which initiatives make the most sense for offshore manufacturing outsourcing. This is a good practice and new criteria have been distilled into this decision making process. What is clear now however, is that many are finding the “$6 haircut” actually costs triple that or more when you leave this vital decision in the hands of those without the know how or qualified personnel in place. What are the true costs of poor quality, defects, and missed product launch deadlines? How many personnel on your payroll have to get involved to solve the various challenges that result in poor execution? Need to airfreight and rush that order in? You just doubled, tripled or worse your shipping cost of goods.
When taking a project to China, it is imperative that you confirm you are working with engineers who understand Western quality standards, tolerances and material specifications. Be sure you have a dedicated team of advisors who have an interest in your success, respond to your project timelines, and share your same sense of urgency. Are your China contacts truly invested in your business and do they have only your best interests in mind?
Many of our new clients are now those who assumed the $6 quotation they received would net them a $12 profit. There are multitudes of willing entrepreneurs in China willing to take your $6 time after time. Buyer beware the $6 haircut. There is great peace of mind knowing you can walk out with both ears, without a mowhak and ready to face the day with confidence.
David Alexander is President of BaySource Global www.baysourceglobal.com a leading sourcing and project management firm with offices in Shenzhen and Shanghai.
The Top Books on China
Recently I posed the question asking what the best books available on China were. My intention was to highlight both Western and Eastern perspectives on topics ranging from everything from business culture and protocol; political climate; culture, and basic life in China. There was a great response which is compiled below. Overwhelmingly there was sentiment that there is no substitute for the experience of living and working in China. However, for those without this limited or practical experience here is the top 30 that members from three Linked In Groups--China Trade Group, Business in China, and Procurement Professionals said: (listed by title and author)
Mr. China, Tim Clissold top 4
Managing the Dragon, Jack Perkowski top 4
The China Price, Alexandra Harney top 4
China Inc, Ted Fishman top 4
One Billion Customers, James McGregor
China StreetSmarts, John Chan
The Art of the Deal in China, Laurence J. Brahm
The Art of War, Sun Tzu
Chinese Business Negotiating Style, Tony Fang
Inside Chinese Business, Dr. Ming-Jer Chen
Chinese Business Etiquette, Scott D. Seligman
The Chinese, Jasper Becker
Business Leadership in China, Frank T. Gallo
The Coming Collapse of China, Gordon chang
Luxury China, Michael Chevalier
Elite China, Pierre Xiao Lu
Where East Eats West, Sam Goodman, Michelle Ree
Poorly Made in China, Paul Midler
Factory Girls, Leslie T. Chang
All the Tea in China, Kit Chow, Ione Kramer
China Shakes the World, James Kynge
China: Fragile Superpower, Susan L. Shirk
The Tiananmen Papers, Liang Zhang, Andrew Nathan
Gifts Favors and Banquets, Mayfair Mei-hui Yang
Capitalism with Chinese Characteristics, Yasheng Huang
The Great Wall, William Lindesay
What does China Think?, Mark Leonard
The Search for Modern China, Jonathan D. Spence
Chinese Religiosities, Mayfair Mei-hui Yang
When Asia Was the World, Stewart Gordon
Four ways China and the U.S. could build brands together
A question was recently posed on a Linked In Group asking why there aren't more Chinese companies selling brands into the U.S. Rather than taking a myopic view on the question or dismissing the notion that Chinese brands per se' have little to no chance of overcoming the stereotype of the U.S. consumer, it strikes me that the real opportunities continue to lie in synergizing and combining strengths, resources and talents. The skills for identifying and penetrating the best distribution channels in the U.S. are here. If a Chinese entity wants to lever this market they are wise to understand that this can't be done (yet) with a Chinese brand or with Chinese sales and marketing.
Conversely however, through innovation, low cost labor and subsidies, China remains the factory to the world in multiple categories. There are facilities in China that are far superior to our own. What has been increasingly evident is China's transformation from merely an OEM to an ODM supplier meaning that in addition to offering strictly manufacturing China is now becoming a low cost design and engineering hub. So don't think cheap cost is the only driver for China's potential here.
Beijing has taken note of the dearth of Chinese brands. "
"We've lost a bucketload of money to foreigners because they have brands and we don't," complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. "Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast."
So according to Tom Pomfret's Washington Post article titled, "Beijing tries to push beyond Made in China Status," the government has responded in lavish status by embracing a "going out" strategy http://bit.ly/going-out backing firms seeking to seeking to buy foreign businesses and gain a foothold on innovation.
If China wants to deploy its assets by capturing a piece of a market here OR if a U.S. company wants to sell into the Chinese market here are four key considerations.
1. A brand is a very different thing between our two countries. Most brands sold into China are Western. For the Chinese it is more cache' or prestige that drives demand. For the U.S. a brand is many things but mostly involves years of exposure and dollars spent positioning the brand to its respective markets (assuming high quality and value are the cost of admission). Only in the last 10 years or so has there been demand for consumer brands in China yet there is almost built in demand for established brands from the West.
2. For U.S. companies wanting to tap into the China market they should consider brands like Loreal, Buick, Coke to see what has been successful and what has failed. You can't simply put a known label on a piece of junk and believe you'll capture the loyalty of the Chinese market. The Chinese want prestige yes, but they also focus on safety and quality too. Are you speaking to a younger audience; the decision influencers of the future? See http://bit.ly/caWdra .
What about distribution channels ? We may understand traditional retail here but it is a completely different game in China. According to the China Chain Store and Franchise Association, the number of stores of the 100 largest retailers in China increased 18.9% in 2009. The 100 largest retail chains sold only 11% of all consumer goods in China. How is your experience marketing to kiosks and neighborhoods? Have you ever set up a sales force to tap into a billion person market?
3. If a Chinese investor(s) wants to sell goods into the U.S. they will have to have reasonable expectations for investment in gaining market share. They won't necessarily understand or be patient with the initial burn rate of capital for their ROI so tell them to fund the endeavor, put it the hands of U.S. marketing professionals and apply their expertise and focus on the supply chain and manufacturing. This isn't to suggest in a cavalier way that they should be totally hands off. As principals they have every right to monitor their investments.
4. There are enormous opportunities in the creation of funds that don't necessarily follow the typical M&A or PE models when it comes to risk or multiples. There are many well known companies who through their years of staying power still maintain significant brand equity yet may only be doing $10-$50MM in sales--not enough to fly on the radar of big deal makers yet still very viable with the right investor profile.
Take that state of the art factory you have in Shenzhen and manufacture AND OWN an old U.S. brand putting together a "newco" re-launch model. There has never been a better time and available talent here.
We are not going to see Chinese or U.S. brands in the future but rather well funded global brands that offer businesses or consumers the best return for their investment.
David Alexander is President, North America for BaySource Global, a strategic solutions provider specializing in specialized sourcing, project management, distribution and fulfillment in China. www.baysourceglobal.com
China News
Each day we read and hear more and more about the co-mingling of China and the U.S. as these two interdependent nations refine their geopolitical position with each other and the rest of the world. China is a vast nation teeming with industrious minded entreprenuers who are seeking their fortune much in the same way as U.S. pioneers in the early 1900s. Our countries are indissolubly linked from an economic standpoint and nothing on the horizon seems to contradict this long term description of our relationship. China, while still "factory to the world," will forge ahead in Western style to build consumer brands, capitalize on the meteoric rise of a middle class market, and play a vital role in world financial markets. It is a story that will be amazing to see unfold and in no way does the ending have to be a negative one as both nations continue to innovate and lever their strengths and resources.
If you or your colleagues and associates have the need for a competent and experienced partner to manage your company's China business, we want to be just that. We have a China staff of over 30 who have working knowledge of hundreds of industries and disciplines. Our specialties are complex manufacturing assignments, supply chain management, fulfillment and distribution in China, greenfielding, and highly competent project management. We are integrity driven, quality focused and have an ardent desire to see our clients succeed in every undertaking.
Thank you for allowing us to continue to reach out to you with newsletters and emails. Should your business plans include any aspect of dealing with China, please don't hesitate to contact us for a free, no-obligation consultation.
China to continue RMB exchange rate reform Chinese President Hu Jintao reiterated on May 24th that China will continue to steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress. Hu made the remarks at the opening ceremony of the second round of China-US Strategic and Economic Dialogue in Beijing.
Hu said China will continue to pursue a win-win strategy of opening up. The country would expand market access in keeping with established international economic and trading rules, support the improvement of international trading and financial systems, and askance trade and investment liberalization and facilitation.
On China's effort to accelerate the transformation of its economic development pattern, he said, "We will make great effort to expand domestic demand and increase household consumption, vigorously promote sounds and balanced growth of external trade, and reject protectionism in all manifestations."
China's trade back into surplus After a US$7.2bn deficit in March, China's trade retuned to surplus in April but shrank 87% from a year earlier due to faster growth in imports. The trade surplus stood at US$1.68bn in April, according to the General Administration of Customs. Exports rose 30.5% you to US$119.92bn in April, while imports surged 49.7% to US$118.24bn.
Harley Sales Up Harley Davidson Inc has reported that sales in China doubled last year, according to Rodney Copes, VP of international sales. Since it entered China in 2005, Harley has developed four dealers nationwide - one in Shanghai - and plans to open four new dealerships this year in Wenzhou, Xiamen, Dalian and Chengdu.
Foreign Investment Reflecting the determination of China's central government to attract additional foreign investment-and to direct that capital towards industries and regions that serve the government's broader social and economic goals-the State Council issued Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions) on April 6, 2010. The Foreign Capital Utilization Opinions set priorities that encourage foreign investment in research and development centers, high-end manufacturing, high and new technology, alternative energy, and other environmentally friendly industries while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China.
Shanghai Pudong - new policy on JVs On 13th April 2010, The Shanghai Pudong People's Government issued the Tentative Measures On Setting Up A Sino-foreign Equity Joint Venture ("EJV") and Cooperative Joint Venture ("CJV") In Pudong ("Tentative Measures"). The Tentative Measures have been introduced to allow domestic natural persons to establish EJVs and CJVs in the Pudong New Area. The Tentative Measures came into effect on 1 May 2010 for a trial period of 2 years.
The Chinese laws on joint ventures, which were initially issued in 1979 and 1988 respectively, do not allow domestic natural persons to set up EJVs or CJVs with foreign companies or individuals. Such restrictions do not conform to the principle of "national treatment" and so have been seen as being an obstacle to domestic individuals hoping to cooperate with foreign entities and/or individuals. As the Chinese people are becoming more prosperous, pressure has increased to abolish the existing restriction.
The usual way to circumvent the restrictions is for a Chinese natural person to set up a limited liability company (normally a one-person company), and to use the new company as a vehicle to partner foreign parties. However this route is very inconvenient and the issue of the "invisible investor" has led to many disputes between contracting parties.
Foreign investors have encountered difficulties when trying to partner with a Chinese citizen they trust. There has been rapid growth int he need for cooperation between individuals from SMEs and foreign individuals in high-tech and creative industries. As the officials from Pudong said, "We have changed because such change is required."
Highest Level of Confidence Chinese consumer confidence rose int he first quarter of the year to the highest level since 2007 as people became more optimistic over their future, a survey by Nielson Co and the National Bureau of Statistics. The Consumer Confidence Index in China climbed to a three-year high, bolstered by better employment prospects. However, people's willingness to spend fell slightly due to soaring asset prices.
World Expo Opens Shanghai kicked off the 2010 World Expo with an extravagant opening ceremony and fireworks show. The two-hour performance at the new US$270m Expo Culture Centre ended with a spectacular outdoor multimedia show punctuated by a parade of hundreds of national flags carried by boats along the city's Huangpu River. The city has spent US$45bn, more than Beijing spent not he 2008 Olympics, to put on what it says will be the biggest Expo ever.
David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com
Playing Football in the Rain
Growing up in Ohio, I was fortunate enough to play football on a pretty decent high school team. Our season began in the dog days of summer and ran into the first autumn frost. At some point during those four months a good solid downpour during a game was inevitable which meant a contest mired in mud and the need for a revised game plan.
Now the pessimistic coach might consider this to be a disadvantage to his chances of winning the game. But a more strategic and forward thinking leader would understand both teams faced quarterbacks with wet hands, blockers bogged down in soggy clumps of turf and receivers whose completion numbers were going to be anything but stellar. The conditions of the game while presenting new challenges, would be equitable for each participant. So in the end it would be a level headed strategist who understood and exploited his team’s strengths—advantages even we may not have known we had, who would be celebrating victory after four quarters of play.
In low cost country sourcing, I have heard grumblings for the past five years about jobs lost to China. Indeed, the groundwork laid by Kissinger and Nixon in the 70s to open up free trade with China could have been perceived as an overcast forecast for some players. However, just as we discovered, the right plans and execution meant we could be quite successful rather than assuming failure was looming.
Global Impact
China is set to become the world’s second largest economy. Those Western companies, who have built the equity of their brands over the past several decades, should recognize the opportunities that exist in China and other parts of Asia for marketing their goods and services. The investments U.S. firms have made in intellectual property, trial and error and innovation are unmatched anywhere in the world. So why haven’t more companies embraced this vast market that exists?
Whether we are talking about cosmetics, heavy equipment, apparel, software, consumer goods, or electronics, there is an insatiable demand for Western products overseas. Even in today’s depressed economic times, the needs for world class technology to complete huge infrastructure projects provide rare market opportunities to international companies.
China’s rebound for the first 3 months of 2009 is considerable. Expectations for economic growth for the next quarter are at 12%, so economists generally expect 7 to 8% overall growth this year.
Why then, is China poised for a rebound when the rest of the global economy is experiencing its worst performance in decades?
According to reports out of China, retail sales have continued to increase strongly with the help of the government which has offered China’s 800 Million farmers VAT exemptions on big ticket purchases, namely electrical appliances. The resulting effect is a replacement of exports through domestic consumption without a loss for the state. Retail sales went up 15% this past March compared to the same time a year ago.
China announced its stimulus investment program last October and took extraordinary measures to make it happen. Just prior to year end, 2008, USD 58 Billion of pending projects were approved within one week. Because the Chinese save most in the world they created the largest bank in the world (in deposits) passing American and Japanese rivals JPMorgan and Mitsubishi-UFJ. China is now home to the top 3 banks, reflecting the confidence of investors in Chinese banks. In the first quarter of 2009 new loans accounted for more than all new loans in 2007.
Exports are picking up too. From a monthly all time high of USD 136 Billion in September 2008, exports fell every month to a low of USD 65 Billion in February (25% less the 2008 figure). But, in March they rebounded to 90 Billion.
New Market Opportunities
China’s size and growth create enormous opportunity in 2009. As a growing consumer market, the number of millionaires has grown to 825,000, many younger than 40. According to an April 30 Wall Street Journal article, the $585 billion stimulus program has "quickly funneled money into everything from bridges to consumers' pockets." There are countless municipal projects which now need to be completed including high speed trains, power plants, telecommunication systems, hospitals and water treatment plants--all which will be built in second and third tier cities. Business processes outsourcing (BPO), and high-technologies have been singled out as fast investments on the coast. Hi-tech will continue to rebound driving demand for components - all which will be made in China. Imports have started to recover since the beginning of the year.
Heavy equipment sales have increased as is evidenced by the attendance of almost 200,000 visitors to the China International Machine Tools fair in April. Caterpillar Inc. CEO James Owens, according the WSJ article, says "the company's excavator sales in China have returned to record levels in recent months." He goes on to say that "China continues to start work much more quickly than the U.S."
Lower Manufacturing Costs
According to a recent report by Supply Chain Digest, "between lower wage pressures and the fact that most Chinese factories operating at low levels of utilization, Western buyers are gaining more pricing clout than they have had in years. The Chinese government, for example, says the value of China's exports fell 25.7 percent year-over-year in February, accelerating from a tough 17.5 percent decline in January."
Estimates of Hong-Kong based manufacturers in China indicate that business activity is stabilizing 20-30% lower than before the crisis. Forced to reduce prices in an over-supplied environment, Chinese producers have no other choice but to become the most competitive, even against other Asian producers.
"Deflation [in China pricing] is here to stay," believes William Fung, managing director at Li & Fung. "Buyers have more of an upper hand again."
That’s because export volumes to the weak economies of the US, Europe and Japan show no signs of recovering soon. However, there are signs that China’s manufacturing sector is recovering on its own, without much help from export customers, as the country’s economic stimulus plan and focus on bolstering the internal economy start to pay off.
By February, the producer price index went down 4.5% year on year, to its November 2007 level. The trend accelerated in March with a 6% drop. The consumer prices naturally followed, resulting in an actual deflation (-1.6% in February and -1.2% in March).
The World’s Second Largest Economy Emerges
According to Daniel Meckstroth, economist at the Manufacturers Alliance in Arlington, VA, "the hope is that China would become an engine of growth to drive the local economy." China’s proactive response to the crisis has enabled it to be the first to bounce back. This flexibility will not only result in China becoming the world's second largest economy, but will also let it take its rightful place atop the value chain. Therefore it will have to invest to improve and maintain its cost competitiveness, as both a viable market and as a manufacturing leader. Should the U.S., Europe and other trading partners be able to weather the current storm, China will play a major role in world economic recovery.
A Winning Season
Those U.S. companies who spend their time, energy and resources embracing this new China market rather than disparaging others who offshore low value added labor, will actually enjoy playing on the muddy playing field that our global economy has become. In the end, the sun will still rise in the East and set on the West. The soggy ground will firm up and those who respond to all elements of the season accordingly will record a win.
David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com
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