Head West and turn...
Sourcing from China can be a daunting and expensive undertaking for the inexperienced. Timelines are usually doubled and risk is imminent when going it alone. The internet of things has broken down many barriers to communication and there is a perception that information can be gathered and analyzed based on what is available on the web. Many have found out the hard way that details and quality can be lost in translation resulting in supply chain nightmares and missed deadlines. 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. 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
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.
Baysource Global President, David Alexander can be reached at email@example.com
In our four part series New Product Development and the Adaptation Curve dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product. Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.
Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer. Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.? You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget. While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.
Inventory Financing / Purchase Order Funding / Factoring
There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise. Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee. The caveat is that the invoices must be to reputable clients, i.e. Wal Mart to be considered.
These can be good options that allow you to purchase greater quantities thus commanding volume discounts. Another benefit is that you don’t have to give up equity to outside investors. Many times the factories’ terms require money down at the time of placing the purchase order. IFGs make it possible to abide by these terms. These companies will want to know:
- Your sales and marketing strategy (refer to Part I of the series) and about your team
- The quality of the products produced
- Your margins
- Inventory turns
- Your credit worthiness and track record
Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records. They may also not take a chance on a new client—one who has no real balance sheet to speak of. Another downside is that these lenders charge interest rates that can be as high as 40% annually. Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.
In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public. To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.
Crowdfunding is catching on and becoming more accepted as a means of raising capital. Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead. Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit. Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted. On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth. The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.
Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.
Seed Capital / Angel Investors
The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses. These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt. Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan. Seed investments are less administratively complex with less formal corporate contracts and governance.
Seed capital usually comes at a cost—Equity. There is risk on both sides. The investor may never recover their investment or you may give away too much ownership. Usually the latter results because it is just so tempting for the inventor to commence their dream.
Educating the Masses
How will you announce the arrival of your new product to the world? Magazines? PR campaign? Put an ad in the paper? Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity. It’s great to have a video on your web site but again, how will you drive viewers and a following?
David Alexander is Founder of Baysource Global, a contract manufacturing and project management group with offices in Tampa and Shanghai. Baysource focuses on product development, strategic sourcing, manufacturing, and China strategy. www.baysourceglobal.com
Nobody has an ugly baby. The same goes for new product developers. Whether an independent entrepreneur or seasoned marketing team, once a new product concept is developed and months, even years in some cases are invested, our babies become prettier every day. The same unconditional love and support that builds as our children mature and develop transfers into the professional mindset of innovators.
Creating a viable and robust market for a new product takes enormous resource, planning and resolve. The sheer capital to unveil and furthermore generate brand equity is often the most overlooked aspect of getting a product to market. Take the Segway for instance. This emission free, efficient mode of personal transportation has been around for over a decade. With some quick, simple training even children can master riding this marvel. Reaching top speeds of 12.5 mph it has a range of up to 24 miles on a single charge. Still commercial acceptance has been scant. Why wouldn’t every warehouse and airport have a fleet of them?
Recently two Swedish designers have developed an entirely new concept for biking safety in the form of the Hovding, an airbag which deploys vies-a- vie algorithmic intelligence protecting riders from head trauma in the event of a fall or crash. This revolutionary “bike helmet” is worn around riders’ necks and actually becomes a stylized accessory. At $520 prospects for commercial distribution of any scale in the next five years may be slim. However according to Forbes writer Jeremy Bogaisky this startup has already taken in $13 million in venture capital. He cites bicycle industry analyst Gary Coffrin who gives a great summation stating “The adaptation curve for such a unique product at this price point is not likely to be rapid.”
Taking the tech factor down a notch, in my own gym sits a clever form of a door stop called “James the Doorman.” I would imagine the designers, Black+Bum had their “Eureka” design moment and the wheels started spinning. Honestly I have never seen such a cool variety of a door stop and without knowing much about how they developed this unique version of an age old application, I can’t comment on what lengths they went to in commercializing their product. I do know that the one in my club is the only that I have ever seen.
Every week we hear from inventors and product developers who have put great thought into products which offer unique solutions to every day needs. Often though there are many missing pieces to their overall strategies. Below are the Top 8 Hurdles to Successful New Product Launches. In the coming months, I will be writing a series which individually expands on each of these, why they are often overlooked and how they are important for taking new products to market.
Product Development Costs
Most inventors underestimate the cost for designing a manufacturing ready product. Tools and molds can easily run into the five to six figure range and can dwarf first year profits. Developing engineering drawings—those that translate into production and material specifications require time and money.
Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor. It creates additional administrative work for the system, and most inventors don’t have the capital to market their products. Specialty and on-line retailers generally are better proving grounds for a products’ acceptance but you still have to generate interest and traffic. Oh, and did you get a UPC code yet?
Minimum order requirements (MOQs) by factories usually cause a lump in the throat. Even if you have the greatest gadget in the world, how do you plan on financing that first big order?
Educating the Masses
How will you announce the arrival of your new product to the world? Magazines? PR campaign? Put an ad in the paper? Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity. It’s great to have a video on your web site but again, how will you drive viewers and a following?
Price vs. Value
In the initial phase of your product’s life-cycle there will likely not be the scale (volume) to drive down production cost. Unless you can convince consumers they should pay a premium retail price, break-even may be longer off than you expect. Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category.
Regulatory and Testing Requirements
With your product in the public domain, most retailers will require some sort of regulatory or product safety testing and compliance with groups such as the Consumer Product Safety Commission (CPSC), Underwriters Laboratories (UL) and others. Depending on what industry you are in, your item may require testing and certification by default. To you this means additional time, red tape and money.
Patent and Intellectual Property Protection
This is perhaps the most critical and misunderstood area of product development. In many cases developers could have saved themselves months of work simply by doing some basic research and analysis. The United States Patent and Trademark Office site has become more navigable and efficient thanks to improvements in their search functions. There are three ways to begin your inquiry using key words, designs or a combination to see if someone else has registered a similar product. Even if they have you may be able to make some functional changes to distinguish yours but again, many underestimate the time and capital required to protect the investment of your innovation.
Aftermarket Sales and Support
Now that you’ve got a patent pending, finalized your business plan, raised early stage capital, have product on the warehouse shelf and are starting to generate traction don’t forget the basic administrative requirements. If you hit the lotto and are selling to Wal Mart, using retail link is a requirement. This entails sending a staff member for training and ultimately using their on line tool daily or weekly. Is someone manning the phones for product questions and concerns? How robust is your web site? Oh, we haven’t even discussed how much this will cost to build.
While these hurdles aren’t surmountable, it is critical to factor in all the critical and time consuming elements of bringing a product to life. Even this list is not comprehensive enough to account for the unexpected turns in the pathway to new product development. If it were easy, everyone would be doing it.
Be on the lookout for “The Adaption Curve” the follow up series which explores the product development lifecycle. We will break down each topic in greater detail. To sign up for our mailing list go to http://baysourceblog.com/contact-us/
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David Alexander is president of Baysource Global www.baysourceglobal.com and has a decade of experience with new product development and contract manufacturing.
As companies weigh the pros and cons of working directly with a factory vs. dealing through an agent for their China sourcing needs there are many points to consider.
Here are my top ten:
1. The scale or dollar volume purchased annually. (I published an article in M&A Magazine which argued it requires $40-$50MM in throughput for any ROI on a direct sourcing office.)
2. The number of varying categories and SKUs being sourced.
3. The complexity of products being sourced. Cotton socks are a lot less difficult to make and package than electromechanical items with sophisticated firmware and specialized components.
4. Experience levels, competence and proficiency with the language of the country with whom they're dealing.
5. The sheer number of factories the buyers/agents have worked with including access to the owners or very least factory bosses and relationships with those individuals; the length of time and history with those factories and dollars of business placed with them; the ability to get production bumped forward in the schedule; the ability to receive favorable payment terms which impacts cash flow of any business.
6. Competency with provincial government regulations and requirements. (How would a New Yorker fare in an Alabama factory or vice versa?)
7. Ability to travel to/from factory within one day for urgent matters, product/packaging changes, and production oversight.
8. Quality Control-Generally considered the most critical. The standard process for measuring QC and the depth of practices such as random and in production sampling, testing equipment and facilities, reports, photos, and now video.
9. Experience with logistics, freight terms and all export documentation and activities.
10. Does the agent or factory (for direct) share your sense of urgency and same philosophies and principals? Are they vested in the outcome and long term success of the business?
We continue to hear about the dynamics affecting China’s place as factory to the world. Increased labor costs, currency fluctuations, and shipping cost increases have affected decisions about whether or not offshoring strategy makes sense. Certainly there are products that simply aren't feasible for contract manufacturing scenarios. Here are the top five reasons China is still an ultimate destination for products that are highly labor intense or are in the startup phase.
Labor vs other countries
Labor costs may be up to 30% lower in other countries like Viet Nam and India. However this is offset by superior supply chain advantages such as roadways and utilities. Skill levels are also higher thanks to Western training and a little osmosis over the past 15 years. This means China’s productivity continues to rise other countries in Asia are less efficient overall.
Because China’s manufacturing base tends to be cellular, meaning a production or assembly line can be producing one thing today and another tomorrow, China workers are frequently adaptable to ever changing tasks. Much of this can be attributed to the highly seasonal nature of Western retail needs such as Christmas lights or plush toys. China also presents many options for qualified suppliers whose initial minimum order quantities are less than traditional manufacturers. Often a China manufacturer will begin with molds having less cavitation than is generally required until volumes reach a critical mass. This all translates into less startup cost, quicker return on investment and greatly reduced risk.
Availability of materials and manufacturing
Because China now makes a fifth of the world’s manufactured goods, there is a ready source of supply for various components, parts and necessary materials. China is also home to thousands of industrial parks thanks to investment by not only the Chinese government but also foreign direct investment by Western firms. Shanghai and Guangzhou are known manufacturing hubs and have some of the heaviest investment and infrastructure along with some of the largest workforces in the country. Special Economic Zones created by the PRC have attractive tax incentives for FDI and are given more independence on international trade and economic activities.
China Innovation and Investment
Because as we mentioned China’s skill levels have vastly improved, China is now focusing more on innovation and creative manufacturing practices. Also, with labor increases have come increased capital investment in the form of automation—something that used to be last resort if a task or function could be completed manually. So what does this all mean?
Ideal Product Development
China continues to be an ideal partner for new product developers and innovators. While labor costs have increased over the past five years, China’s productivity has increased tenfold. China offers the flexibility required to take on a variety of new projects and with lower minimum order quantities. There is a steady supply chain for materials and different manufacturing services and China continues to invest in technology, facilities and innovation. While China may not be suitable for some manufacturing due to increasing freight costs and currency fluctuations, every project must be carefully weighed and evaluated on its own merit.
Could we be striking a balance?
People fall into two schools of thought these days. There are those that think China outsourcing has run its course. They subscribe to the notion that the appreciation of China’s currency (RMB), labor shortages and cost increases and increased fuel prices mean cost savings opportunities have substantially diminished. In contrast, the other side of the coin spells out what others have believed for years—startup costs and tooling are less in China, products with high labor content have to be outsourced and China will always be “Factory to the World.” For several reasons, they are both correct.
In a December 15, 2011 Wall Street Journal article it was reported that China's Ministry of Human Resources and Social Security, announced 21 provinces and municipalities had, on average, instituted annual minimum wage increases of 22% by October of last year. Officials in Shenzhen, in China's southern manufacturing heartland, said in November that they would raise the city's minimum wage by 15% in January, to attract more workers. While wage hikes are nothing new, they have reached a point where factories are no longer able to absorb the increases meaning higher costs are passed on to consumers. However, with last year’s economy taking a turn for the worse, demand dampened driving commodity costs down. The result was China’s digging in its heels on allowing currency to rise against the dollar.
Since the mid-90s companies sought out the labor machine that China represents with its nearly 800 million strong workforce to remain competitive in Western markets. China’s family planning practices in place since the 1970s translate into a tightening demographic of available workers. This has also meant that China has moved more inland to expand its available workforce. Even so, the average hourly wage earner still makes only around $70 per week on the low end and up to $80 at the high end. While this is nearly double what it was around 2001, compared to the 2011 U.S. Federal minimum wage of $7.25 per hour/$290 per week the 275% premium speaks for itself. Add to that mandatory unemployment taxes, healthcare benefits and other layers of overhead U.S. companies have to absorb and the costs begin to add up.
U.S. Manufacturing on the rise
According to a February 1, 2012 Bloomberg report in which she sums up the U.S. manufacturing landscape, Caroline Baum states that “manufacturing employment peaked at 19.5 million in 1979, when it represented almost 22 percent of the workforce. Last year, the 11.7 million manufacturing workers accounted for less than 9 percent of total employment, according to preliminary data from the Bureau of Labor Statistics. During that time, the value of U.S. manufacturing output kept increasing, thanks to strong productivity growth.” So in other words, Advantage U.S.
And she goes on. “Manufacturing employment has increased 334,000 since the low in December 2009. Southern, non-union states offer an increasingly hospitable environment for factories. NCR Corp. opened a new plant in Georgia to produce automated teller machines. Caterpillar Inc. plans to build a new construction- equipment factory in the U.S. Ford Motor Co. is bringing 2,000 jobs back from China and Mexico after reaching an agreement with the United Auto Workers union. Even a family-owned North Carolina furniture manufacturer decided to reopen a factory that has been shuttered for more than a decade.”
What comparative advantages China may be giving away in labor and productivity however is being bolstered by innovation which takes China to an entirely new level on the global playing field. China has doubled the number of international patents created since 2005 and is launching products at a fraction of the time as its Western counterparts. Mckinsey Quarterly's February report cites their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence. And the report goes on to say that because of its large market, much of China’s innovation is staying there.
Striking the balance-bringing it together
Because of the cross pollination of U.S. industry standards, quality processes and knowledge transfer, more and more firms are combining China’s vast low cost labor machine, ingenuity and speed to market to become multi-national in scope. Solar power companies, the auto industry and a new medical initiative sponsored by the Chinese and U.S. governments are creating opportunities for both our countries to leverage their strengths. Read the joint statement here.
China wins because they gain access to medical innovation and improved standards of healthcare. The U.S. gains access to an untapped market for highly profitable products and services. This bi-lateral agreement fosters long-term cooperation with China in the areas of research, training, regulation and the adoption of an environment that will increase accessibility to healthcare services in China. Participating U.S. companies initially include 3M, Abbott, Chindex, Cisco, General Electric, IBM, Intel, Johnson & Johnson, Medtronic, Microsoft, Motorola, and Pfizer. Supporting organizations include AdvaMed, the Alliance for Healthcare Competitiveness, the American Chamber of Commerce in China, and the American Chamber of Commerce in Shanghai, PhRMA and the U.S.-China Business Council.
As we continue to increase trust, enhance communication, and cooperate in developing life improving technologies and innovations, a new frontier of collaboration is emerging that will change the world as we know it.
David Alexander is the founder of Baysource Global and Executive Vice President of Direct Source China, a strategic sourcing and strategy firm with offices in Miami, Tampa and Shanghai.
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.
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
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.
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