June 2008 Archives

According to a report by the Renmin University of China and Donghai Securities, the Chinese economy has just peaked.

From the People's Daily, this report envisages China to be on the verge of a systematic slowdown after decades of unsurpassed economic growth. Due to a deteriorating external environment and a tightening of domestic policy, China's economy is forecast to grow at a slower rate of 10.4% in 2008, presumably the first indication of a sustained weakening of economic growth. The current situation also has the (Chinese) editors of the Economic Observer slightly worried, and for them too 2008 is the year in which the ideal track of the Chinese economy has been broken with slower growth, inflation and unemployment, intertwined with surging oil and food prices and a depreciating dollar - contributing to fewer Chinese exports during the first four months of 2008. Yet there are solid grounds for remaining confident, the editors conclude, as recent figures suggest that China's exports of primary, low-cost processing and low-value-added products have decreased, while exports of high-tech products have increased significantly, indicating a steady improvement of China's export structure.

Reflecting on the Chinese economy's ability over the years to overcome a host of obstacles in continuing to register double digit growth, Richard Brubaker at All Roads Lead to China recently pointed to another 'Is the China story over?' type of article, this time from The Motley Fool, whose authors traveled to Xi'an to see the real China and concluded that the China story is clearly far from over. Irrespective of the opulence of cities like Beijing and Shanghai, there is still a long way to go in improving the financial lives of all of China's 1.3 billion people, and with large developments planned a second-tier city like Xi'an (the designated center for westward migration in China) is destined to be a very different city in a few years. Thus the trajectory of the China story is more poignantly reflected in World Bank statistics compiled by Mark J. Perry at Seeking Alpha: Economic reforms from 1978 have helped lift 635 million Chinese people out of poverty, from 839 million in 1981 to 204 million in 2005, with the poverty rate falling from 53% in 1981 to  8% in 2001. (China's story would be incomplete, however, without inevitably assessing the grave ecological costs that rapid economic growth has entailed, as Gaoming Jiang recently did at China Dialogue).

Reflecting thus the broader trajectory of an evolving Chinese economy, the dynamics of low-cost sourcing from China is inexorably changing as well. Analyzing the logistical complexities of utilizing cheaper production in developing nations, Robert J. Bowman at Supply Chain Brain (h/t E-Sourcing Forum) last month emphasized the rising costs of raw materials and labour in China, with the latter being a sign of a growing middle class with new wage demands. Hence, Bowman writes, multinationals in search of cheap labour are moving into less-developed countries, a process which results in further delays and logistical headaches in the supply chain.

As the China story unfolds, however, it is clear that China might eventually completely price itself out of low-cost country sourcing, and when that happens it will form part of a remarkable Chinese story of economic growth and development, often against significant odds, and undoubtedly at great ecological cost, yet ultimately an astounding human achievement.
Small players: they are the weakest link (h/t Supplychainer).

This was the finding of an independent report commissioned by the EU, Evaluating Business and Safety Measures in the Toy Supply Chain, which concluded that China has taken steps to address safety concerns after the recalls of last year, yet small players all round - both among Chinese manufacturers and European importers - tend to be the soft spots in the supply chain. According to the report's independent expert authors, final product testing alone is insufficient to guarantee product safety (which instead has to be embedded in the entire supply chain), and Chinese enforcement authorities should continue to strengthen supervision of the Chinese toy industry, especially focusing on weaker manufacturers. One example of these would presumably be Guangzhou Dongxin Electronics Co., Ltd., which turned out to be the only substandard toy maker in a recent review of the Guangzhou market undertaken by the Guangzhou Municipal Quality Inspection Bureau before International Children's Day. (For children's apparel, however, the review found 30% of clothing to be substandard).

Yet because of these weak links in the supply chain and the substandard products that have menaced consumers, as an indication of how the debate on outsourcing has shifted, serious quality and safety concerns in outsourced products have led consumers and regulators to question whether products using global suppliers are of sufficient quality for end-users. And these intense discussions, as Ben Heineman writes at Forbes.com, have moved outsourcing to the top of the globalization agenda and focused attention on the need for more regulation. And while the role of sourcing countries, such as China, in setting and enforcing standards have likewise been emphasized, for Heineman this should not obscure the fundamental point with regulation, namely
Businesses are responsible for their products and must have sourcing disciplines which ensure their products are free of safety and quality defects...This basic responsibility exists whether the business is sourcing a finished product or components...or whether it sources from one supplier or must rely on second- and third-tier suppliers...
With today's elaborate global supply chains, moreover, the deverticalization of the manufacturing process through off-shoring and outsourcing does not change that ultimate responsibility of companies to take things in their own hands through all stages of the sourcing process,
from solicitation of bids to qualification of suppliers to monitoring, auditing and testing by the ultimate seller of the product before it enters the market. Due diligence...is required to navigate the many shoals of shoddy businesses in the developing world - and to pierce the first-tier supplier, drilling back to the practices of second- and third-tier suppliers.
In global supply chains, therefore, as Bob Ferrari points out at Supply Chain Matters, the only thing that companies cannot outsource is risk.
obama IV.jpgI could not help being somewhat sidetracked this week by unprecedented political events in the U.S. as Barack Obama became the presidential nominee for the Democratic Party. Conducting his campaign with a message of substantial change, Barack Obama has also indicated a desire to engage more constructively with China. China Dialogue recently compared and analyzed the policies of both presidential candidates on climate change, and has republished in full Obama's speech from late May setting out his vision for a new energy future. Bemoaning the U.S.' failure to lead on climate change and its struggling to stay relevant in the debate, Obama noted that already some coal pollution from China's dirty plants is making its way to California, and in an effort to curb China's carbon emissions, he promised that
as we develop new forms of clean energy at home, we will share our technology and innovations with all the rest of the world. If we can build a clean coal plant in America, China should be able to as well. 
Obama's willingness to more readily share technology and innovations with China resonates with the approach adopted by German chemicals manufacturer BASF, which is finalizing plans for an ambitious joint venture in Nanjing with China energy group Sinopec in which the latter is set to receive $900m in investment to boost output by 25% over the next three years. Martin Brudermuller, head of BASF's Asia activities, told FT.com that the Nanjing operation will
aim to gain expertise in combining China's famed low cost
with the development of new design and production skills. If all goes to plan, this will involve importing ideas from BASF's operations around the world and linking these with concepts developed by BASF's 6,000-strong staff in China.
According to Brudermuller, such an approach is required as China's economy starts to mature. Yet BASF's strategy in China is part of a current wider phenomenon as China goes through (as the FT.com article puts it) a more subtle phase:
Known for its rapid progress to become the world's joint-second most productive manufacturing region, China...is becoming a giant test bed for manufacturing ideas, building on its existing strengths in low-cost production by using the efforts of engineers and developers not just in China but from around the world.
The article goes on to cite Jimmy Hexter, a director at the Beijing office of the McKinsey strategy company, who claimed that the greatest commercial rewards will be reaped by companies who are able to optimally utilize networking approaches that link different groups in different countries.

The growing imperative for networking and collaboration in global supply chains has also been emphasized in a new report and supply chain model, Future Supply Chain 2016, published by the Global Commerce Initiative and consulting firm Capgemini. Citing the new report, Sustainable Life Media outlined the best way companies can redesign their supply chains for maximum efficiency:
The coming years will see a new era for industry collaboration, which will become an important factor for future success...Some business areas that are now considered to be core differentiators may well become candidates for collaboration with competitors.
Cooperation in the form of information sharing and collaborative warehousing and distribution, the report found, can offer efficiencies that companies simply cannot achieve on their own.