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
A Community of Opportunity
Last fall I visited a state of the art precision die cast factory in Southern China. By my estimate they do a turnover of ~USD$400MM. This facility had two very sophisticated machines that were designed and manufactured by the Japanese and could essentially be used for highly technical military products although they were simply utilizing these for their advanced automation in making automotive (carburetor) parts. After a long lunch, the owner took us to their R&D building where they had something they wanted us to see. It was…a turkey fryer. That’s right. They had devised a turkey fryer that uses 80% less oil than deep frying. Already they had complete prototypes for cooking French fries.
You may be wondering where this story is headed. I had to admit I was a bit taken back by this “top secret” invention they whetted our curiosity over during our meal. But in their thorough marketing analysis, they had deduced there was no similar Western device yet on the market. It just so happened to be November and thus the American Thanksgiving holiday was just around the corner. This factory had a business plan in place, knew their total market universe in the U.S. of those who deep fried turkeys vs. oven, and even recognized this was a stronger activity in the South. In fact, they had determined that their distribution channel likely needed to begin with HSN or QVC and migrate into traditional retail.
What they didn’t have is a contact in the U.S. to assist with the launch nor did they know anyone who could introduce them into this market. They explained they were missing a key intermediary who could introduce this new product to a leading cookware company, someone familiar with infomercials, or a firm that could handle direct sales and distribution. If so, they believed annualized sales could reach USD$50-100MM. Have you seen this product on the market yet?
Sure there are low value added jobs that have gone offshore. And by the way, we haven’t stopped manufacturing in Central and South America and Eastern Europe. But there is an interdependency between China and the U.S. that can't be ignored. There is also a huge market in China for our goods and services. Take the story of Dais Analytic whose desalination and wastewater technology will add up to 1,000 jobs in Tampa, FL over the next five years. Just this week, Warren Buffet's Berkshire unit purchased Burlington Northern Santa Fe which is a huge bet on increased trade with China. And as a growing consumer market, the number of millionaires in China is 825,000 and growing, many under 40 years of age.
If you take this story out of the realm of turkey fryers, the Chinese are innovating every day but will rely on marketing expertise here to be successful. Likewise, there are Western companies who require cutting edge innovation and new product development to maintain and gain market share. Possibly this could lead to Eastern entities establishing beachheads in the U.S. The typical hurdle rates that private equity and investment banking firms require to do deals may be cast aside by Chinese courtiers who seek a foothold in the U.S. to incorporate their intellectual property, low cost labor structure and “can-do” spirit with U.S. brands.
It is truly a global landscape yet we seem to be protectionist by default. If we start embracing opportunities as a global “community” vs. simply a global business landscape, we have the chance to merge our creativity and assets to serve one another.
David Alexander is President of BaySource Global, specializing in project management, supply chain and cross border opportunities with China. www.baysourceglobal.com
Down on China? Not so fast
1.3 billion people. Or at least that's the most widely believed figure representing the population of China. There are many who believe the number is actually 1.5 billion and growing. China's GDP is back to 10% and thanks to the 2009 stimulus package there are tens of thousands of infrastructure jobs in progress. So why aren't more decision makers including China in their plans? One Tampa company did just that.
Dais Analytic got its start producing high-tech filter membranes to improve air quality and cut energy costs in homes and businesses. It has expanded to develop products for desalination, wastewater treatment and energy storage, among other things. Although it currently has only 18 employees plans have been inked to add 1,000 jobs over the next five years, thanks to a $200 million trade agreement with China. Born about 10 years ago from an idea for developing fuel cells at Rensselaer Polytechnic Institute in Troy, N.Y., Dais Analytic opened in Pasco County in 1998, lured by tax breaks and assistance. The company specializes in nanotechnology: crafting materials that work with matter on the atomic and molecular level.
Its first commercial product, called ConsERV, is used with heating, air-conditioning and ventilation systems. It uses a membrane with microscopic channels that allow molecules of water to pass through the filter.
Incoming and outgoing air pass through the membrane in separate channels, with the outgoing air helping to cool the incoming warm air. The humidity in the air is condensed to molecules, so it becomes vapor with no condensation. Using the membrane to bring fresh, filtered air into the home or business can save energy costs and reduce pollution, the company says.
BaySource Global assists companies in their offshore manufacturing strategies as well as working with U.S. companies who are looking to commercialize their lines within China.
www.baysourceglobal.com
Who is Responsible for monitoring Quality when utilizing low cost country sources?
China is notoriously blamed for quality issues in products sold in the West. But who really is responsible for ensuring quality can be found in products shipped abroad from China? In a former July post to 10 Linked In Groups associated with manufacturing, engineering, supply chain and quality control this was the question posed. Readers eagerly provided a total 104 responses of which 49 gave specific answers. The results could be summarized and compiled into 8 consistent categories. They were:
1. The Manufacturer – 11 respondents
2. Purchasing- the buyer- in house sourcing – 8 respondents
3. A reliable third party QC firm – 8 respondents
4. Cross functional teams (purchasing, engineering, & production) – 7 respondents
5. The company importing the goods – 7 respondents
6. In house QC – 4 respondents
7. The seller/customer – 3 respondents
8. Entire supply chain – 1 respondent
Readers also chimed in with these sage morsels of advice:
• Do not start LCC sourcing if you are not able to build the appropriate team. Consider outsourcing it to insure the quality of your supply chain.
• Specifications must be clear as to the quality standards expected and the acceptance test regime and what happens to the rejects - you do not want them to appear in the local street market if it is a branded item!
• Be present at intervals throughout the production process. The factory you visit may not be the one producing the goods.
• Establish a personal rapport with your supplier. It is good business and makes communication a lot easier.
• Arrange for acceptance testing - either by your own staff or by an outside agency in the country of origin. Nothing is shipped without inspection.
• Develop a supplier approval process.
• Allot resources for site visits.
• Get references for third party teams.
• Determine their ability to complete the contract. Determine if supplier is financially stable. Assure that they have systems and certifications, such as ISO-9001, in place.
• Ensure that they are motivated to provide quality and on-time delivery.
• Be clear why you are using a low cost country and take all costs into account - it may not be so low cost in the end.
So in summary, everyone has a stake in quality even though it is easiest to point the finger at the manufacturer (China). If we capture all the great advice from industry experts, heed the wisdom and incorporate all these due processes, everyone will come out a winner.
Linked In Groups:
GVRT Council of Supply Chain Managers
Global Sourcing
Innovative New Product and Service Innovators
ISM Purchasing and Supply Chain Managers
Offshoring & Outsourcing Forum
Procurement and Supply Chain Leaders
Procurement Professionals
Retail Global Sourcing
SME Society of Manufacturing Engineers
Strategic Sourcing and Procurement
David Alexander is President of BaySource Global, a leading China consulting firm specializing in project management, sourcing, establishing China procurement, and selling into China. He can be reached at david.alexander@baysource.net
www.baysourceglobal.com
Embracing Global Resources for Local Advantages
David Alexander
In the midst of these economic challanges, decision makers need to understand the advantages of looking globally for positive domestic results. While jobs shrink in the U.S. it has been easy to cast a dark shadow with manufacturing outsourcing as the key culprit. Too often though we sit back and scratch our heads wondering why low value add jobs have moved offshore rather than strategize on how to effectively incorporate the benefits of low cost labor with supply chain initiatives here. For marketers in the U.S. the value propositions of product innovation, speed to market and service have to be the platform which separates winners from their competition.
In the April 8 Wall Street Journal, writer Tim Aeppel features Craftmaster Furniture and their story of winning market share while competitors flounder. By combining a solid offshore sourcing initiative for high labor components and unique upholstery with the need for quick turnaround time and service, CEO Roy Calcagne has "increased revenues by 4% in an $80 billion industry that has declined by 20% in the last six months. Craftmaster has even hired 75 additional workers in a factory that employs almost 500 according to Aeppel's article."
http://online.wsj.com/article/SB123879125297987681.html
Basically the company takes the approach of a nimble and responsive partner to their customer base, while maintaining margins through low cost country sourcing. This collaborative strategy is one that has continually proven effective in the U.S. and not immediately stereotyped for the demise of overpriced, low value jobs. See
http://www.baysourceglobal.com/PortlandBusinessJournal-BaySourceWhitePaper.pdf
A Conversation on doing business in China
The following is a recap of a January 21, 2009 panel discussion hosted by the Orlando Chapter of ACG (Association for Corporate Growth) on the ins and outs of doing business in China. David Alexander, president of BaySource Global www.baysourceglobal.com was one of the featured speakers along with Brian Su of Artisan Business Group and Jim Gaynor, CEO of Lightpath Technologies.
ACG Moderator: Discuss how this global recession has impacted doing business with and in China
Alexander: The Credit crisis affecting all industries. Volumes are down and many factories dependent on U.S. retail and consumer volume have closed. People are strongly revisiting “In-Sourcing” due to attrition in volumes. A local trade association predicts that by late January, Dongguan and its neighbors Shenzhen and Guangzhou will lose 9,000 of their 45,000 factories.“Many factories are looking at completely empty order books," warned Stephen Green, head of China research at Standard Chartered, who believes the export sector may even shrink next year. Green believes China will see 7.9% growth in 2009 - well below the double digit figures of the past five years.“Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year,” said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year’s end, he said, more than 100,000 plants will have closed. The wave of factory closings began in Guangdong province, where the nation’s economic reforms were launched three decades ago. The region accounts for about 30% of China’s exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.”Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, a trade group with 3,000 members, has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days. “Once workers go home, they can close down the factory quietly,” he said in an interview in Hong Kong.
ACG Moderator: Given this recession, specifically, how has the outsourced manufacturing space been impacted?
Alexander: People have been forced to re-analyze bringing manufacturing back due to lower volumes. Less scale means reduced leverage with factories. Reduced demand = longer lead times with higher volume/less frequent orders. Carrying costs of capital increases; customer response times impacted. IKEA for instance has recently opened a plant in Virginia.In an April survey of nearly 1,000 companies by RSM McGladrey, the number planning to move offshore fell by 20% from a year earlier
ACG Moderator: Further explore the costs of shipping/freight as they impact this model
Alexander: Increased energy costs toward the end of 08 meant freight as a % of COGS increased. There were fewer containers coming into port—first declines since 2006; down 1.5% from Nov 07. At $150 barrel 40’ container $8,000 vs. $3,000 a year ago or $100. At $200 it would be $15K. Through July 19, U.S. railroads had carried 5 million shipping containers, down 3.4% with the same period last year. Containers that slow to 23mph from 29MPH save 20% but this means freight lines have to add containers. However, freight increases alone not cause in wholesale trade pattern shift back to US mfg. The Economy is key driver. Higher fuel costs will also cause a shift in Lean inventory. May see proliferation in warehouses to be closer to customers. The Freight Transportation Services Index dropped 1.4 percent from October to November to 107.6, the lowest level since January, 2004. The index is down 4.9 percent from its historic peak of 113.1 reached in November, 2005, the Department of Transportation's Bureau of Transportation Statistics reported.
ACG Moderator: Discuss the Chinese economy both how it's being impacted by this economy internally and how externally the commodity markets are being impacted around the world.
Alexander: China's exports fell in November for the first time in seven years and manufacturing activity shrank in December for a third straight month. Material costs will always fluctuate globally and are consistent around the world. With fuel and energy costs subsiding a bit and with material costs softening, Labor is still the key driver for the feasibility of offshore manufacturing.
Still it seems like the economy is chugging along normally though. In the city where one colleague lives there were more than 4000 cars newly registered in the first week of Jan alone. This is a city of 3M people and the roads are already crowded. We are not sure how many weeks like that one in Jan. we can survive and still keep cars moving along. Also, remember, the Chinese are good at saving money. The China economy is predicted to be as large as U.S. by 2030. All this said, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest. Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China’s fortunes remain tethered to those of the United States. And the reverse is equally true. The Treasury conducts nearly daily auctions of billions of dollars’ worth of government bonds. For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt. The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American spending habit.Many firms in the auto, luxury, travel & tourism and real estate industries have begun reporting a significant decline in spend. Where the greatest opportunity lies, is in the rural economy. It is the economy that has lagged far behind the others - It is the economy that has more than 700 million people - It is the economy were small nominal gains can equate to large.
ACG Moderator: Discuss the idea of building markets in China coming from the U.S. or Europe
Alexander: According to The Kiplinger Letter, for 2009, trade will shrink worldwide by 2.1 percent to $115 billion and U.S. exports will drop 0.5 percent. It said the hardest hit areas will be machine tools, chemicals, plastics, mining gear and turbines, while medical products, farm goods and construction equipment should weather 2009 relatively well. Kiplinger predicted no worldwide growth for gross domestic products in 2009, and negative growth in the U.S. There are still good opportunities for growth. Certain products that sell well in China and come from USA are mostly niche items. Examples: Zippo Lighters, cosmetics from famous names like Estee Lauder cars, and famous brand clothing. Western brands will always be in demand.
ACG Moderator: Discuss how the Chinese government is impacting companies that want to either invest in China financially or via a joint venture or with manufacturing facilities - VAT rebates, and clean industry versus smokestacks
Alexander: In July, 07 VAT rebates were rescinded for 553 industries. The gov't just increased the VAT refund for exported goods to help with the economy. The price of raw materials is way down now so batteries, and other items have gone down in price about 30%. China will increase the export tax rebates for some machinery products as of Jan. 1, 2009, in a bid to alleviate cost burdens on exporters (back to 17%). The most recent increase took effect on Dec.1, covering 3,770 items of labor-intensive, mechanical and electrical products, or 27.9 percent of the country's total exports.
ACG Moderator: Discuss product quality concerns in Chinese manufacturing
Alexander: Any U.S. concern marketing a product manufactured in China is ultimately responsible for product/project management. This means clearly stating product specs and tolerances, material specs, defect rates, etc When we leave too much in the hands of Chinese manufacturers is when we run into issues.China does need better IT and process control. There is a lot of opportunity for IT/IS but also the Chinese don't know they need this. They don't even use part numbers in most businesses... Our biggest opportunity from US to China is to engrain our production management know-how. One of the main problems in producing quality here is that the workers and managers themselves don't know what to expect in a quality product because they don't consume such items. "They have no feel for what quality is."There is also little accountability for goods that fail after some time in service. Example: If you buy a new house, everything will be perfect when you buy it but things will soon start to break because they weren't made well. They might try to fix it but how can you fix a tile floor if all the tiles were installed following a standard that is not up to par? Example: they paint bare wood or walls without priming the wood first. The paint looks great for a year, then it lifts off in big sections but it’s too late for anyone to be accountable then. Your average Chinese homeowner has no idea how to paint or do other home repairs compared to the average American.This is why you need to have your interests well looked after. Also, a serious weakness of Chinese engineers is their reluctance to ask questions. This has to do with the cultural myth of “lose face.”Because of the importance of relationships and family sometimes they will hire their friend/family member instead of hiring the best person for the job. This also limits their success in some ways. Take Auto parts for instance. The Speed at which China has been industrialized means quality concerns and recalls are growing. Their revolution happened in a quarter of the time that ours did.The Chinese are unfamiliar with or don’t care about U.S. auto quality standards. Under federal law the importer of record is responsible for recalls and quality concerns. Many small importers (anyone can be importer) aren’t familiar with regulations and suppliers don’t have the capital to handle recalls.We also have to communicate the long term implications of the business opportunity to the Chinese factory. If they think a project is ‘one and done’ then this impacts price Everything is a negotiation.
ACG Moderator: Discuss the cultural differences especially as it relates to building relationships in China.
Alexander: The Chinese always consider their relationship with another person when they do business with that person. For example, they can never turn away from doing business with a friend even if there is a better product they should be seeking. At least they can't do it in front of everyone so they might do it secretly. The Chinese prefer to deal with people they know and trust. Western companies have to make themselves known to the Chinese before any business can take place. Furthermore, this relationship is not simply between companies but also between individuals at a personal level. The relationship is not just before sales take place but it is an ongoing process. The company has to maintain the relationship if it wants to do more business with the Chinese. The relationship sometimes begins based on money then moves to integrity and trustworthiness. Frequent contact is important.
ACG Moderator: Discuss other emerging markets such as Vietnam, South America and Mexico briefly as they relate to the evolution of the Chinese markets and increased shipping costs.
Alexander: Much is predicated on fuel costs. Also higher expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.Despite its huge pool of unskilled rural laborers, China's supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 percent to 15 percent a year.Inland cities like Luoyang and Wuhan, outside the traditional export zones of Guangdong and the Yangtze River Delta, near Shanghai are emerging. In inland China, wages still lag far behind the richer eastern and southern coastal areas.
Outsourcing to China not always simple
Sign Manufacturer Cuts Manufacturing Costs in Half by Outsourcing to China
By John Harney, Business Writer January 2009
Outsourcing manufacturing work to China is a cost-saving but often not a hassle-free undertaking, especially if your company does not have a liaison in place. This liaison must understand the manufacturing practices, expectations, culture, and pricing in China and how they differ from those in the United States and be able to effectively communicate that information to the U.S. office.
Creative Mailbox & Sign Designs is a manufacturer of mailboxes and signs that does $8 million a year in revenues and employs 65 personnel. It has three lines of business. The Residential line manufactures mailboxes and street signs for master plan communities; the Commercial lines does signage for office buildings; and the Department of Transportation line takes care of Department of Transportation signage for interstate and other highways.
It sounds like a simple enough business -- design a sign, send the design to China, and have them make it and send it back in quantity. Jamie Harden, CEO of Creative Mailbox & Sign Designs, says it's not that easy. "We had a relationship with a stamped aluminum outsourcer and manufacturer in China. We found quality inconsistency issues, poor communication, and lack of connectivity into their Asian organization," he says.
Harden might convey specs and other data and instructions to the U.S. liaison but had no direct communication with the Chinese portion of the business. The result was miscommunication and mistakes, which cut into Creative Signs' margins and held up manufacturing schedules. "We felt like we were buying a product instead of being in a situation where we could go through a more collaborative design process. It was not a real partnership," says Harden. "No pun intended, but we often felt like something was lost in translation," he adds. As a result, the company sought an outsourcing partner elsewhere.
Collaboration is key
Understandably, says Harden, "we were really looking for a service provider that would help us develop a partnership that would give us reliability, quality, effective communication, and good connectivity into Asia." Harden's company found exactly that when it phased out the existing outsourcing contract and teamed with BaySource Global www.baysourceglobal.com in June 2006. The company used BaySource to manufacture mailboxes for distribution into its Residential market, and BaySource proved to be both consultative and communicative from the get-go. "From the beginning they went out of their way to understand our needs," says Harden.
"We had e-mails and conference calls not only with David Alexander, president of BaySource, who runs the domestic side of things, but also with his partners in China; so we really had great connectivity right into that organization," says Harden.
Creative Mailboxes has in-house graphics designers who come up with images of the product, which they send via the Internet to Alexander. His team takes engineering drawings and specifications, and drops them as CAD drawings into BaySource manufacturing program. This helps the Chinese supplier determine the tooling process, which is necessary to be able to get a quote, according to Harden.
If the buyer can't provide CAD drawings, BaySource’s China team -- all trained in professional CAD shops in China -- can develop them for the client. BaySource then comes back with a proposal that states the tooling costs as well as the cost of the product. The supplier also provides a timeline, including how much turnaround time it will take from delivering initial drawings to providing a sample to finally delivering the product.
According to Harden, "We gave them the specifications but said, 'If you can add any value to the process, feel free to offer it.' So they came up with a few tweaks here and there to help us come up with a superior product. For instance, they designed a new latch for the mailbox and even went out of their way to find the paint we wanted to use."
Basically, Harden adds, "As they were doing design, they were sending us pictures to see if it looked right. Sometimes what happens is you lose so much time to market because the manufacturer wants to just do a sample -- with no pictures beforehand -- and send that to you." This is an advantage because if the sample is not right, the manufacturer has to repeat the new sample process.
The price is right
Harden readily admits that BaySource delivered "a quality product." What's more, the pricing was "extremely competitive." By outsourcing to China, his company was able to keep design/manufacturing cost of each unit to just $8. Harden estimates that if he'd have attempted manufacturing in the United States, it would have cost twice that.
The lower cost also gives Harden's company a healthy sales margin to work with since it sells the mailboxes for $30 a unit. Better margins obviously keep the company more competitive since it's now also coping with a weak U.S. economy.
A one-stop shop
According to Alexander, his company takes over the project from the start. "All we need to understand is whether a customer has ever outsourced a product before or if it's a product that's currently something its procurement department is obtaining from a domestic distributor." This gives BaySource a baseline from which to estimate its own and the customer's needs.
The China office handles the specs, engineering drawings, and samples as well as sets cost targets and annual volumes and the like. Then, says Alexander, "we take that project and match it with a capable factory in China."
BaySource therefore acts as a liaison between its customer and any of 50 factories it has bid on jobs. And Alexander acts as liaison between American customers and the BaySource Chinese operation.
The China team is manned with Chinese-speaking personnel as well as engineers. When BaySource visits the factories to explain the job and later to confirm that the factory is making products to the customer's specification, the personnel have to talk to one another in the same language. "I don't mean Chinese," says Alexander, "so much as one engineer talking to another. Because of the specialized terms, it takes an engineer to talk to an engineer."
For its efforts, BaySource nets a profit margin in the high single digits to low double digits. This keeps its services cost-competitive, particularly in an underperforming economy.
As Alexander is quick to point out, "More companies are doing business in China, so competition is increasing. The market will dictate what the costs will be. If we gouge a customer, we may lose them for good." At BaySource, therefore, good business strategies dovetail with ethical business practices, a situation that is increasingly rare these days.
Lessons from the Outsourcing Journal:
• Customers that outsource manufacturing to China should have an outsourcing supplier there that understands Chinese manufacturing practices, expectations, culture, and pricing and how they differ from those in the United States
• Ideally the outsourcing supplier should be a company that helps the customer develop a partnership that gives the customer reliability, quality, effective communication, and good connectivity into Asia.
• The supplier should present the customer with designs throughout the design and manufacturing process to ensure that the sample that results is correct. Otherwise, if the sample is defective, the customer loses valuable time to market in the process of creating a new sample.
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Publish Date: January 2009
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Copyright © 2009 - Everest Partners, L.P.
Instead of worrying about China, companies are better off embracing the opportunities.
Solutia Inc. Chief Executive Jeffry Quinn on Monday signed $182 million in contracts with companies from China, a country that looms large in his corporation's future as well as in the minds of many American executives.
Quinn was in a line of local industry leaders who put pen to paper and sealed deals with Chinese customers during a trade delegation conference at the Ritz-Carlton hotel in Clayton.
Among these, Ferguson-based Emerson sold $70 million in telecommunications and power-related equipment. And locally based soybean trade groups, representing companies such as Bunge, Cargill and ADM, closed deals worth nearly $5 billion.
"Solutia obviously is very pleased to participate in this event and have a small role in demonstrating the vitality of the St. Louis region, as a source of economic development and as a trading partner with China," Quinn said. The company, based in Town and Country, makes specialty chemicals and performance-enhancing window films.
As the U.S. economy lags, rapid growth and an expanding middle class make China an irresistible market for domestic companies.
Solutia, with annual sales of nearly $4 billion, said that 58 percent of its total revenue growth between 2006 and 2011 will come from China. That translates to total Chinese sales of $439 million in 2011, up from $166 million in 2006. These sales stem from lines of business that are becoming increasingly profitable as Solutia raises prices and improves logistics and manufacturing efficiency, Quinn said.
Solutia exports nylon resins and polymers to China from a plant in Pensacola, Fla., which played host to nearly 30 members of the trade delegation on Sunday. Solutia's products fill the holds of cargo ships returning to China after bringing loads of low-cost manufactured consumer goods to American shores.
The Asia-Pacific region is key in Solutia's strategy of transforming its under performing domestic nylon carpet-fiber business into a global supplier of resins and polymers for plastics.
Gone is the view of China as simply a place to outsource jobs and lower the cost of manufacturing. The booming nation is a market in its own right — in Solutia's case, for goods manufactured in the United States.
"We look at China not as a place to outsource production and find cheap labor, but as a vibrant market that needs and desires the quality products that Solutia produces around the world," Quinn said.
But that's not to say the company lacks investment in China — that was a key point in Solutia executives' closed-door remarks to that country's trade officials, the CEO said.
In China, Solutia produces tinted window films and, through a joint venture, makes heat-transfer fluid. Solutia recently disclosed plans to build a rubber-chemical plant. And its automotive and architectural window films are sold through more than 5,000 retail locations.
Zhou Lin, general manager for Liaoning Yinzhu Chem-Tex Group Co., said his company buys a type of nylon pellet produced at Solutia's plant in Pensacola and spins it into fibers. His company chose Solutia for the high quality of its products, but will deepen the relationship by seeking its advice on how to make technical advances.
Kingfa Science & Technology Co. also buys the nylon pellets for melting into plastic materials. It is mainland China's largest domestic engineered plastics compounding company, and is growing at a rapid clip — which will mean more business for Solutia, said Li Nan-jing, Kingfa's vice general manager.
The products of these companies — along with Hangzhou Youngchang Nylon Co., which also signed a contract with Solutia on Monday — are found in everything from industrial products to non-stick spatulas, and from electrical-outlet covers to under-the-hood car parts.
Solutia's drive to do business in China doesn't mean it is neglecting the American market, Quinn said. North America remains the company's biggest market in many product lines. However, China's economy is growing fast, as is demand.
"China is still a work in progress, and, like many of the developing economies around the world, there is certain room for improvement" in its openness to American goods, said Quinn. "But we have found the Chinese marketplace to be a very receptive market."
10 tips to better China sourcing
Best practices in low-cost country sourcing
By William Atkinson -- Purchasing
Everyone in the supply chain seems to have a "China story" these days. Either they found dramatic savings and saved their company a boatload of cash, or they got burned by a fly-by-night supplier and vow never to source overseas again. But, as in most things, when it comes to sourcing in China, success is as much dependent on the preparation as the execution.
One bit of good news is that, if you have experience with any type of sourcing overseas in general, it should give you a leg up when sourcing in China specifically, according to James Ullum, managing partner with Louisville, Ky.-based Source International, a global manufacturing outsourcing company. "I was at a conference recently on sourcing in Latin America, and it was striking to me just how much similarity there was to sourcing in China," he says. "I think, in general, the tips for buying offshore are almost universal."
1. Set a clear China strategy
Gordon Smouther, senior industry advisor with the Center for Supply Chain Management at Rutgers University in Newark, N.J. says most companies are sourcing in China and similar countries for two reasons. "One is the long-term goal of establishing a market presence in the country in order to serve the economy," he states. "The other is a more short-term goal to take advantage of some of the low-cost capabilities and labor in the area."
2. Consider going direct
In the past, a lot of companies that were sourcing in China were going through brokers, because they didn't know the players in China, and they didn't have the ability to manage quality, according to Bob Sullivan, a director with Southfield, Mich.-based AlixPartners, a consulting and financial advisory firm. "One of the big pushes these days is to go direct," he states. One reason is that some brokers were charging a 10–12% fee, which dramatically reduced the savings potential of sourcing overseas. "We worked with one client to help them go direct and were able to take almost 30% out of the cost structure," he states.
A second reason for going direct is control. "When you're dealing with highly engineered products, you don't know what the broker looks at in the factories," he notes. "You need to have your own eyes on the process."
3. Improve supplier evaluation
The most critical step is to select the right partner, according to Source International's Ullum, who adds that buyers "need to check references, verify that the suppliers have adequate capital, quality systems, and capacity, and that they buy from reliable sources." Then find out what the priorities are for the supplier's factory. For example, some are focused more on quality, some on price, and some on fast production.
4. Build relationships
Ullum points out that building and maintaining a strong relationship with the supplier may be more important in China than anywhere else because business is based more on relationships there than it is in some other countries, especially the U.S.
Jan Palmen, new-product development commodity manager for Ingersoll-Rand Security & Safety in Colorado Springs, Colo., agrees. "While it is not unique to sourcing in China, you first have to establish relationships," Palmen says. "For example, as a commodity manager, I can call almost any supplier in the U.S., introduce myself, and then ask if they would be willing to put together a quotation. This tends to be a straight business transaction."
In China, he says, it is necessary to establish a relationship first, and this is usually done through an intermediary, such as a U.S. representative of the Chinese company.
5. Convey clear expectations
According to Palmen, buyers need to be very clear about what they want from Chinese suppliers due to things like language barriers and metric conversions. "It is particularly important to have robust and thorough documentation," he emphasizes.
Ullum agrees. "Be sure to clearly define your expectations and specifications," he states. Some companies in China, he says, don't understand the requirements of the U.S. market, such as the importance of things like cosmetic appearance. "A lot of U.S. companies aren't used to having to do this, because they have either made things in their own factories or have purchased them from other U.S. suppliers that understand the market better," he says.
In addition, it is important to put requirements in writing. The more you assume, the more problems you will have. Conversely, the more reference points you can provide, the more likely the factory will deliver what you expect. Source International does this in three ways: a written bill of materials and quality specs, physical samples, and mechanical drawings.
"You also need to create and explain performance requirements," continues Ullum. "This includes information on what the product is supposed to do and what the testing protocol is." In sum, consider: What will your customer do with the product once they receive it? And does this product meet those requirements?
And an equally important step: Get the supplier's agreement. "I have never seen anything more powerful than—as simple as it may seem—having a reliable person in the factory actually sign the specifications," points out Ullum. This may require a bilingual document, because there may be some misinterpretations in an English document.
6. Address intellectual property issues
It is important to ensure protection of intellectual property when sourcing in China, especially in terms of design and tooling. While legal documentation and contracts can help, AlixParters' Sullivan believes it is actually more important to have commercial leverage.
"Getting a contract enforced in China, even with good legal representation, is a challenge," he cautions. Commercial leverage means having other business there, such that if the company compromises your intellectual property, they risk losing a lot of other business.
7. Create technology teams
When moving technologically driven business into China, it is very important to have teams focused on the process on both sides of the ocean, according to Sullivan. This requires a great deal of coordination. "You need your technical guys in the U.S. working with the technical guys at the factory," he says. "They often don't speak the same language. However, my experience with engineers is that, once you get them working together, even if they don't speak the same language, they figure out how to work together on their own after a while."
8. "Trust, but verify"
You may be surprised to know the words of Ronald Reagan apply to global sourcing, but they do. "You want a good partner and a trusting relationship, but you need to check on things," Ullum explains. A complete quality monitoring program, either conducted by a third party or your own company's personnel, is essential to ensuring that the product shipped meets all of the specifications and performance criteria that are agreed to. "Even one bad shipment can do serious damage to the procurement department's credibility and wipe out projected savings quickly," he cautions.
Sullivan agrees. "You need a local presence, where you can get to the factories on a regular basis," he states. Relationships matter, but it's more than just that. It gets back to control. You need to qualify the actual pieces of equipment and tools that your products are running on. "If you don't have your own eyes on these, then you really don't know what's happening," he notes. "A Chinese company can promise that your products will run on certain equipment, but you may find out that things have changed once you actually go there and look."
9. Be open to R&D projects
According to Sam Datta, regional director, sourcing and procurement practice lead, southeast region, for Chicago-based Grant Thornton, a lot of companies want to involve suppliers more closely in R&D, but have been nervous about doing so with Chinese suppliers.
"It is possible to do this in China, but you have to be careful and work very closely with those suppliers," he says. The biggest challenge is finding qualified suppliers to handle the needs of U.S.-based firms. "You need to look at their processes, technologies, innovation, and other capabilities," he suggests.
Once you select suppliers, you have to treat them as though they are next door to you, and you have to have your own people over there to make sure they are doing what you need. Working closely also helps to resolve the potential problems related to intellectual property (patented information) and concerns that they will do reverse engineering, according to Datta.
10. There's more to global sourcing than China
Finally, don't just automatically assume that China is the best place to source everything. The global supply and business landscape is constantly changing and it is important to keep up with these changes as you are making current and future sourcing decisions.
Certainly, China is an excellent place to look first. "Even though there are other countries getting involved, China still has the overwhelming majority of low-cost country sourcing business," says Sullivan.
Smouther suspects China could be getting to a tipping point, where labor costs are increasing, so the low-cost labor advantage is beginning to erode a bit. "Other countries, such as Vietnam, are gaining popularity for low-cost labor," he notes.
Sullivan adds that the Chinese government is also revising the tax structure, reducing value-added tax rebates on a commodity-by-commodity basis. The strategy is designed to try to push very low value-added business out of China and focus on the higher value-added business. Sullivan also echoes one of Smouther's comments. "There are a lot of other rising stars, particularly Vietnam, where labor rates are about half of what they are in coastal China," he states.
In addition to Asian markets, Sullivan adds that now "we are finding that Mexico's star is rising again, and some business that went to China is now coming back to Mexico." In addition, new business that would have once automatically gone to China is now giving Mexico a hard look, not only because it is becoming more competitive, but because of logistics costs and the inventory impact.
Five things you should understand before launching in China.
By David Alexander
You’ve just climbed in the taxi and are on the way back to your hotel after the closing dinner with the principals of your latest deal. As the QB in the deal process you’ve spent months cultivating a relationship with the owners, convincing them that out of all the groups courting them, your firm was the best fit in terms of culture, business philosophy and opportunities for future growth. With new resources in place, one of the first priorities identified is implementing a China strategy—something your firm could certainly make happen. Right?
Firms with multiple funds under management constantly consider the idea of opening a sourcing office in China, leveraging volume across multiple companies to drive costs down and margins up. No brainer, right? Here are some considerations when determining if such an investment is worthwhile.
1. Get to Break-Even
For any business of scale, it conservatively requires $1.5MM annually to operate a functioning “in-house” sourcing office in China today. This takes into account travel, relocation costs, salaries for just one expatriate staff member and a Chinese support staff typically consisting of sourcing individuals, project engineers, Quality inspectors, supply chain coordinators and the necessary admin support. This estimate does not even include the opportunity cost of valuable human resources and set-up dollars needed to get it up and running. In five years this means a firm will invest $7.5MM in incremental fixed costs.
Be sure to double the timeline and halve the payback. Setting up is the easy part. Becoming operationally efficient proves a little more elusive. Expect your operations leader to be hands-on, which could affect timelines on other domestic restructuring programs. On the ground support during the nascent phase is critical to long-term effectiveness of the Far East operation. In reality, if your goal is to achieve 20% savings (net of working capital adjustments) on components you have to be able to push $8MM in projects through each year for years 2-5. Do you have the $40MM in transfer projects to China from US manufacturers needed to get to break-even? If not, consider the variable cost option of a strategic sourcing partnership until such time that the in-house volume justifies the investment.
2. Beware those who claim they are “China Experienced.”
After purchasing a valve and fitting company, you inherit “Bill” who is quick to inform you that he has traveled to China numerous times and has even learned a few words of the local tongue. Single handedly, he’s “saved the company millions” overseeing outsourcing projects on behalf of the organization. With more China experience than anyone in the firm, he has impressed a number of partners with his knowledge and has even volunteered to move to China to establish your operation. Who better, right?
Bill might be proficient with his industry-specific knowledge of say, castings and forging suppliers, and may even have enough supply chain knowledge to be dangerous. However, how his ability to transfer his knowledge and experience to other products and to the critical elements of managing the new sourcing office can test his learning curve (at best) and inhibit execution speed. When you consider other daily administrative duties such as recruiting, personnel issues, financing and taxation details AND managing relationships with the Chinese and local governments, there’s hardly anytime left for sourcing! He has also relied heavily in the past on his company’s Quality personnel as well as those extensive resources provided by the handful of suppliers he’d worked with in China. Is Bill fully prepared and qualified to monitor these Quality details for your other operations?
Bill has never set up a business from scratch, let alone one in China, and probably lacks the broader business acumen to get the China sourcing company off the ground. Does Bill understand the difference between a “Rep office” and a WOFE (Wholly Owned Foreign Enterprise) and the tax implications of each?
Running a China sourcing office is a broad-based leadership role and requires solid general management instincts and experience. If integrated into the business effectively, the China sourcing office will interface with all elements of your US operations. Bill’s a great nuts & bolts guy but you need a heavy hitter.
3. Location, Location, Location
Manufacturing expertise tends to cluster in China. Should you really be in Zhejiang or is Guangdong Province better suited for your products? You have heard that manufacturing is moving north and west in China. Should you be going there? What type of product categories do you anticipate supporting from your new office, now and five years from now? What’s going on in the Mekong Delta? This region in Southwest Vietnam where the Mekong River meets the sea via distributaries could likely be the preferred next low cost sourcing hub in Asia. Could Cambodia and Laos be additional low cost frontiers? Many products are coming from India lately. Maybe you should have an office in Mumbai? Did Bill sign that five-year lease yet?
4. What does the Chinese government think about your business?
Regardless of the aforementioned, China remains the low cost factory of the world today and will continue as such for many years ahead. Did you know however, that the Chinese government has a clever system to encourage and/or discourage different industries to manufacture in China? Big cost advantages through generous VAT rebates can still be enjoyed by companies in “encouraged” industries while VAT rebates for businesses now falling in “discouraged” categories were eliminated last year, with a generous one week notice from the central government in Beijing.
Delivering a speech to the 1st session of the 11th National People's Congress (NPC) in March this year, Premier Wen Jiabao made known China's determination to end its position as a global center of “smokestack industries” or those energy-intensive, polluting and resource-based ventures. As a result VAT rebates for 1,115 commodities in these sectors were ended. Add in worldwide commodity price inflation, today’s soaring energy costs and a 15% appreciation of the Chinese RMB in the past 18 months and suddenly that 25% savings Bill got for your pipe fitting company may not be realistic across the board.
5. Scale
Flash forward to year-five and let’s assume your office has developed a business rhythm. You have a few successful projects under your belt and are finally realizing some savings on behalf of your portfolio companies, albeit not quite what you were promised. The sourcing team is working with 20 or so decent manufacturers. Independently though, each of your projects represent a small fraction of these factories’ overall volume since you are supporting only your U.S. businesses. You need to continuously look for opportunities to leverage scale. How can you do more business with fewer suppliers to ensure you have their ear on important schedule and quality issues?
The good news
PE firms with small and mid sized portfolio companies should do their homework before taking the plunge into China. There are firms in place today who have absorbed startup costs, are highly capable and experienced in running a China office, and are staffed with experienced sourcing experts, engineers and Quality personnel. These firms have a working knowledge of and ability to navigate China, the flexibility to respond and adapt to the changing landscape and command significant volume leverage with the factories with whom they work. When choosing a solution, carefully consider the variable cost option and work with a team who has only your best interests at the forefront of their activities—whose success depends on your success.
David Alexander is President of BaySource Global®, www.baysourceglobal.com a U.S.& China based Project Management firm who oversees Strategic Sourcing Initiatives on behalf of clients worldwide. BaySource is based in Tampa, FL and Mr. Alexander is a member of ACG.
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