Are China and the U.S. Striking a Balance?
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.
Rising wages
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.”
Advantage-U.S.
China’s Innovation
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.
Advantage-China
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.
Dramatic Bottom Line Reduction
There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings. Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:
1. Freight costs—Freight and logistics should not exceed 10-12% of your total cost of goods. In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port). So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.
2. Carrying cost of capital—Cash is king in any business. It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.
3. Warehouse space—every square foot of a warehouse used to store products has a fixed cost. Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue. Otherwise the savings will be offset by the additional cost of warehouse space.
4. For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components. Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress. Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.
5. Start-up costs—your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.
Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas.
Interested in learning more? You can right here.
There is No Next China
What is something you can think of that can’t successfully be outsourced in China? Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph. It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?
If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”
Rising labor costs in China
In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”
In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.
In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.
A shift by coastal manufacturing regions
The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says "pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading."
Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “
The role of appreciation in Chinese currency to U.S. job creation
Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.
Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it's an issue. But the reality is that jobs from China won't come to the U.S. They'll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”
Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”
China as a market
Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.
In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.
Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?
Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”
The next five years
China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.
David Alexander is President of BaySource Global www.baysourceglobal.com
The Great Firewall strikes again!
Not that 60 million users wasn’t proof enough. But when the most noted business social networking site in the world gets blocked from 1 million of its subscribers, you know you count. That’s what apparently has occurred in response to the recent Jasmine Protest gatherings which coincidentally got a guest visit by potential U.S. presidential candidate John Huntsman at a Beijing McDonald's.
Via Tech Crunch
“The idea that China could succumb to the kind of unrest rocking authoritarian governments across the Middle East was absurd,” a senior Chinese official said. According to a Reuters report, “Long-term disruption to the site would exclude the company from the world's biggest Internet market by number of users -- about 450 million and growing. That could hurt its planned initial public offering in New York and anger the United States, which has criticized Chinese Internet censorship.”
According to a report in the February 24 edition of Wall Street Journal Asia many Internet users are becoming increasingly aware of the extent of the censorship system, as well as how it works, and are either seeking new ways to get around it, or becoming increasingly frustrated at their failure to do so.
One of the most damning critiques of China's censorship system came Tuesday from Murong Xuecun, a popular Chinese Internet author.
"Our mother tongue has been cut into two parts: one safe, and the other risky," he told an audience at the Foreign Correspondents' Club in Hong Kong.
"Some words are revolutionary, and others are reactionary; some words we may use, and others belong to our enemies."
via Tech Crunch
The Top Books on China
Recently I posed the question asking what the best books available on China were. My intention was to highlight both Western and Eastern perspectives on topics ranging from everything from business culture and protocol; political climate; culture, and basic life in China. There was a great response which is compiled below. Overwhelmingly there was sentiment that there is no substitute for the experience of living and working in China. However, for those without this limited or practical experience here is the top 30 that members from three Linked In Groups--China Trade Group, Business in China, and Procurement Professionals said: (listed by title and author)
Mr. China, Tim Clissold top 4
Managing the Dragon, Jack Perkowski top 4
The China Price, Alexandra Harney top 4
China Inc, Ted Fishman top 4
One Billion Customers, James McGregor
China StreetSmarts, John Chan
The Art of the Deal in China, Laurence J. Brahm
The Art of War, Sun Tzu
Chinese Business Negotiating Style, Tony Fang
Inside Chinese Business, Dr. Ming-Jer Chen
Chinese Business Etiquette, Scott D. Seligman
The Chinese, Jasper Becker
Business Leadership in China, Frank T. Gallo
The Coming Collapse of China, Gordon chang
Luxury China, Michael Chevalier
Elite China, Pierre Xiao Lu
Where East Eats West, Sam Goodman, Michelle Ree
Poorly Made in China, Paul Midler
Factory Girls, Leslie T. Chang
All the Tea in China, Kit Chow, Ione Kramer
China Shakes the World, James Kynge
China: Fragile Superpower, Susan L. Shirk
The Tiananmen Papers, Liang Zhang, Andrew Nathan
Gifts Favors and Banquets, Mayfair Mei-hui Yang
Capitalism with Chinese Characteristics, Yasheng Huang
The Great Wall, William Lindesay
What does China Think?, Mark Leonard
The Search for Modern China, Jonathan D. Spence
Chinese Religiosities, Mayfair Mei-hui Yang
When Asia Was the World, Stewart Gordon
China News
Each day we read and hear more and more about the co-mingling of China and the U.S. as these two interdependent nations refine their geopolitical position with each other and the rest of the world. China is a vast nation teeming with industrious minded entreprenuers who are seeking their fortune much in the same way as U.S. pioneers in the early 1900s. Our countries are indissolubly linked from an economic standpoint and nothing on the horizon seems to contradict this long term description of our relationship. China, while still "factory to the world," will forge ahead in Western style to build consumer brands, capitalize on the meteoric rise of a middle class market, and play a vital role in world financial markets. It is a story that will be amazing to see unfold and in no way does the ending have to be a negative one as both nations continue to innovate and lever their strengths and resources.
If you or your colleagues and associates have the need for a competent and experienced partner to manage your company's China business, we want to be just that. We have a China staff of over 30 who have working knowledge of hundreds of industries and disciplines. Our specialties are complex manufacturing assignments, supply chain management, fulfillment and distribution in China, greenfielding, and highly competent project management. We are integrity driven, quality focused and have an ardent desire to see our clients succeed in every undertaking.
Thank you for allowing us to continue to reach out to you with newsletters and emails. Should your business plans include any aspect of dealing with China, please don't hesitate to contact us for a free, no-obligation consultation.
China to continue RMB exchange rate reform Chinese President Hu Jintao reiterated on May 24th that China will continue to steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress. Hu made the remarks at the opening ceremony of the second round of China-US Strategic and Economic Dialogue in Beijing.
Hu said China will continue to pursue a win-win strategy of opening up. The country would expand market access in keeping with established international economic and trading rules, support the improvement of international trading and financial systems, and askance trade and investment liberalization and facilitation.
On China's effort to accelerate the transformation of its economic development pattern, he said, "We will make great effort to expand domestic demand and increase household consumption, vigorously promote sounds and balanced growth of external trade, and reject protectionism in all manifestations."
China's trade back into surplus After a US$7.2bn deficit in March, China's trade retuned to surplus in April but shrank 87% from a year earlier due to faster growth in imports. The trade surplus stood at US$1.68bn in April, according to the General Administration of Customs. Exports rose 30.5% you to US$119.92bn in April, while imports surged 49.7% to US$118.24bn.
Harley Sales Up Harley Davidson Inc has reported that sales in China doubled last year, according to Rodney Copes, VP of international sales. Since it entered China in 2005, Harley has developed four dealers nationwide - one in Shanghai - and plans to open four new dealerships this year in Wenzhou, Xiamen, Dalian and Chengdu.
Foreign Investment Reflecting the determination of China's central government to attract additional foreign investment-and to direct that capital towards industries and regions that serve the government's broader social and economic goals-the State Council issued Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions) on April 6, 2010. The Foreign Capital Utilization Opinions set priorities that encourage foreign investment in research and development centers, high-end manufacturing, high and new technology, alternative energy, and other environmentally friendly industries while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China.
Shanghai Pudong - new policy on JVs On 13th April 2010, The Shanghai Pudong People's Government issued the Tentative Measures On Setting Up A Sino-foreign Equity Joint Venture ("EJV") and Cooperative Joint Venture ("CJV") In Pudong ("Tentative Measures"). The Tentative Measures have been introduced to allow domestic natural persons to establish EJVs and CJVs in the Pudong New Area. The Tentative Measures came into effect on 1 May 2010 for a trial period of 2 years.
The Chinese laws on joint ventures, which were initially issued in 1979 and 1988 respectively, do not allow domestic natural persons to set up EJVs or CJVs with foreign companies or individuals. Such restrictions do not conform to the principle of "national treatment" and so have been seen as being an obstacle to domestic individuals hoping to cooperate with foreign entities and/or individuals. As the Chinese people are becoming more prosperous, pressure has increased to abolish the existing restriction.
The usual way to circumvent the restrictions is for a Chinese natural person to set up a limited liability company (normally a one-person company), and to use the new company as a vehicle to partner foreign parties. However this route is very inconvenient and the issue of the "invisible investor" has led to many disputes between contracting parties.
Foreign investors have encountered difficulties when trying to partner with a Chinese citizen they trust. There has been rapid growth int he need for cooperation between individuals from SMEs and foreign individuals in high-tech and creative industries. As the officials from Pudong said, "We have changed because such change is required."
Highest Level of Confidence Chinese consumer confidence rose int he first quarter of the year to the highest level since 2007 as people became more optimistic over their future, a survey by Nielson Co and the National Bureau of Statistics. The Consumer Confidence Index in China climbed to a three-year high, bolstered by better employment prospects. However, people's willingness to spend fell slightly due to soaring asset prices.
World Expo Opens Shanghai kicked off the 2010 World Expo with an extravagant opening ceremony and fireworks show. The two-hour performance at the new US$270m Expo Culture Centre ended with a spectacular outdoor multimedia show punctuated by a parade of hundreds of national flags carried by boats along the city's Huangpu River. The city has spent US$45bn, more than Beijing spent not he 2008 Olympics, to put on what it says will be the biggest Expo ever.
David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com
US China Relations
US Ambassador Jon Huntsman’s speech at Tsinghua University (http://beijing.usembassychina.org.cn/031810amb.html) reminds us about the positive aspects of US-China relations. An excerpt;
“So this year could be the most important in the history of our bilateral relationship. As an optimist, I believe the test will be how we take our relationship to a new level of cooperation and make real progress in resolving the pressing global issues that we face today.”
Steel Prices to Gain on Low Inventories, Costs, Baoshan Says Steelmakers will raise prices globally as they run down inventories and raw material costs gain, according to Baoshan Iron & Steel Co., China’s largest publicly traded mill.
“There’s momentum for prices to go up,” Yao Lili, an executive with the Shanghai-based company’s raw materials purchasing department, said in an interview in Hong Kong. “Inventories globally are generally quite low.”
Orders for Baoshan Steel, Posco and rivals are picking up as the global economic recovery accelerates, spurring a 55 percent gain in the costs of coal as steelmakers compete for supplies. Steel prices rose 9.1 percent in February int he U.S., and Chinese mills are charging 10 percent more since the start of this year.
“Demand growth from the home appliance makers may be stronger in 2010 than from automakers,” said Yao. “There’s a lot of potential from home appliance makers.”
Total vehicle sales in China jumped46 percent last year, fueled by the government’s stimulus spending and tax breaks. Sales may rise more than 10 percent this year, the Ministry of Commerce said Jan 29.
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
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
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