October 2008 Archives
Part I: Impact and Evolution.
There is a crucial difference between a meltdown and a slowdown. Like the difference between 25% and 8%.
Yet the rise in China's exports has also been characterized by an important shift in its export structure. Where twenty years ago China was primarily an exporter of textiles, textile articles and apparel, today China is the world's largest exporter of electronics and machinery-related products, which make up 43% of China's total exports. China is rapidly moving up the technology ladder and is therefore becoming more competitive in exports of high-value capital goods - industries where traditionally Western countries such as Japan, Germany and the US have held the competitive advantage. But to what extent is China really able to compete with these countries today?
To better analyze this competitive landscape, we can make us of the industry classification of the OECD in its STAN Bilateral Trade Database, edition 2006, to compare Chinese and US high technology exports during the past few years.
According to the chart above, if we assume that the US' share of high-technology exports will continue the trend it has followed in the past 5 years, China's high-technology exports have already surpassed those of the US. So what does this mean? Is China the new high-technology power? Are there grounds for concern about China's threat to the competitiveness of Western industries?
I believe if these questions were posed to Laozi, the father of the yin yang concept, his answer would not be yes or no, and neither black or white, but rather a combination of both.
Yin: A sourcing opportunity rather than a threat
According to OECD sources,
China's export performance, therefore, is directly linked to its specialization in assembly operations and the high value-added inputs imported from Western economies. This has facilitated a rapid diversification of its manufactured exports, from low-end manufactures to high-technology products.some 55% of China's total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese.
Yang: A sourcing opportunity but a future threat
Although Chinese high-tech ability is still subsidized by foreign technology transfers and government support, Chinese companies are developing competitive advantages in several areas of high-value industrial and equipment manufacturing. Good examples are Huawei (a telecommunications equipment maker based in Shenzhen), whose equipment and services were considered good enough to beat Siemens in a German tender; Zhenhua Port Machinery, which had a full two-thirds of global port crane orders in 2006; and Tian Di Science & Technology, the national leader in the design and manufacturing of coal mining equipment.
To effectively make use of China's cost advantages as a high-technology assembly center, foreign companies will have to carefully consider to what extent and with which strategic framework technology transfers are implemented and imported inputs are assembled in China. At the same time, and considering China's evolving high-technology exports, trying to avoid China as a high-technology sourcing destination will likely result in an unfeasible cost structure and a loss of competitiveness. Successfully dealing with China's sourcing challenges and particularities will finally determine whether China is a threat or an opportunity.
Demand from both the domestic and overseas markets began to shrink markedly from August this year, and with the current financial crisis there is no evidence to suggest that this trend will be reversed anytime soon.
Stockers have been reducing new orders to steel mills, while at the same time cutting prices by large percentages of up to 30%, until now. Some small steel mills have been forced to close, and big mills have reduced production. The related products include plates, coils, wires, welded tubes and other lower value-added products.
Prices for hollow bars, however, have dropped by 17% so far, on average less than the 12-30% drop of other steel products. Hollow bars are a kind of seamless tube, widely used in machinery industries and in the petrochemical industry, as well as for boilers and power generation services. In the hollow bars market there are fewer competitors, and it is a comparatively higher value-added product. The overwhleming majority of hollow bars are sold directly from the mills to the end-users in China and to overseas buyers.
Dates: 24-27 October 2008
Venue: Shenzhen Convention and Exhibition Center
Organizer: Reed Huabo Exhibitions (Shenzhen) Co. Ltd.
Tel: +86 755 3333 1166
The International Toys & Gifts Fair is held twice annually (Spring & Autumn) and is identified as a fast and effective platform for both domestic and foreign gifts, premiums and consumer products manufacturers and suppliers to build their brand awareness and promote their products. Exhibitors include Arts & Crafts, Premiums & Giftware, Ceramics, Household, Home Decorations, Electronic Appliances, Bags and Cases, Leather Products, Home Textiles, Fashion Jewelry & Accessories, Clock & Watches, Packaging & Paper Products, Beauty & Healthcare Products, and Sports & Leisure Products.
For more information, see official website.
The current global financial crisis is reshaping the world's economies at various levels and it seems that no country in the world will be immune from the ripple effects. The lack of liquidity in global financial markets, combined with the drop in purchasing power is leading to a decrease in profits that are forcing many companies to re-evaluate and completely restructure their procurement strategies. In essence, the only way to keep profit margins at a healthy level - while at the same time remaining competitive in global markets - will be cutting costs and/or increasing revenues. It is within this space that new opportunities lie to source from or manufacture in China.
The potential benefits of sourcing from China are now more than ever becoming powerful, even necessary drivers for some companies to overcome the present difficulties. If approached correctly and strategically, China can be a solution that will not only help stabilize the present turbulence, but also establish a foundation for a more sustainable and profitable outcome by engaging the main components of the profit equation.
Some of the potential benefits of sourcing from China are:
- Direct cost savings - Companies can obtain direct cost savings due to China's lower cost base, specifically in the areas of utility costs, raw materials and labor. This has enabled Chinese companies to produce high-value products while retaining competitive pricing.
- Access to a large potential market - Impressive economic growth throughout the years has given rise to a new Chinese middle class with increasing purchasing power. This factor, combined with the Chinese saving culture and low dependency on credit, has minimized the effect of the global financial crisis in China. Companies can take advantage of this and see China not only as a cost saving solution but also as a new source of revenue.
- Competitive strategy - Many companies will accept that China is a viable solution in the current financial crisis, so quickly engaging the best Chinese suppliers before the competition reaches them will be instrumental to successful procurement strategies.
All of these benefits have been mentioned before, but for many companies the global financial crisis has transformed the benefits of sourcing from China into essential requirements for remaining competitive or even solvent in the global market.
I am currently involved in some projects to assist foreign clients in sourcing machines and equipment from China, and I can share some of my experiences of the processes of delivery, installation and commissioning.
With the growth of China's equipment exports, the world is becoming more aware of China's relatively advanced technology and strong capacity to manufacture equipment, apart from China's traditional price advantage. However, when foreign buyers look closely at made-in-China equipment, they find that the problems lie in the details. Poor quality paint, bad welding and cuttings all reveal China's weakness in managing the details when compared to foreign brands. Even for packaging design, good foreign suppliers always fully consider users' convenience, while Chinese suppliers sometimes completely ignore the end-users' needs.
Chinese suppliers seem to care more about delivery times and schedules, which is why they can usually deliver on time. However, Chinese suppliers should learn to pay more attention to other factors. In my experiece, when installing and commissioning equipment in foreign factories, the process could often be suspended for safety reasons. Yet Chinese suppliers, if stopped from working, will complain about foreigners' over-cautiousness and 'low' efficiency.
Chinese suppliers are manufacturing equipment as sub-contractors under various world-class brands, i.e. Siemens, Demag, Danielle, etc. This is evidence of the growth of Chinese manufacturing capacity. Yet what Chinese suppliers still lack are 'soft skills' that would significantly improve professionalism and project management.
Venue: China Import and Export Fair Complex (Pazhou)
Organizer: China Foreign Trade Center
Tel: +86 (0)20 2608 8888
- Phase 1: October 15-19 2008, 09:30-18:00 Daily
- Phase 2: October 24-28 2008, 09:30-18:00 Daily
- Phase 3: November 2-6 2008, 09:30-18:00 Daily
Since 1957, the China Import and Export Fair, also known as the Canton Fair, has been held twice annually, in spring and autumn. It is China's largest trade fair, with the greatest variety of products and the largest attendance and business turnover.
- Electronics & Household Electrical Appliances
- Lighting Equipment
- Vehicles & Spare Parts
- Hardware & Tools
- Building Materials
- Chemical Products
- Consumer Goods
- Home Decorations
- Textiles & Garments
- Office Supplies, Cases & Bags, Recreation Products
- Medical Devices and Health Products
- Food & Native Produce
For more information, see Canton Fair official website.
*为方便与中国的朋友交流, China Sourcing Blog 特开设《外贸经验》栏目作为与中国朋友分享交流外贸经验的平台。这是本栏目的第一篇帖子，欢迎大家与我们分享观点和经验！
Labor costs are the lowest in countries such as the Philippines and Vietnam, for instance, yet the lack of existing infrastructure or an industrial base are likely going to increase the cost of business operations. On the other side of the spectrum, developed countries such as the US or Germany excel in modern transportation networks, but labor costs are extremely expensive and will predominate in an unfeasible cost structure.
In order to identify the best destination for a particular sourcing operation, one should firstly determine the critical performance indicators that may differ from country to country, and secondly compare those indicators between the selected potential sourcing countries. Following this logic one could build an 'Export Competitiveness Model' which could determine the likelihood of a successful managerial decision.
An enterprise would typically consider four critical performance indicators in its decision-making process:
- Exports: The more a country exports the more competitive its production in global markets will be. A country with a high level of export implies a developed industrial base and related transportation infrastructure.
- Labor costs: The lower the labor costs, the lower the production cost structure and therefore the larger the profit margin.
- Country risk: The lower the country risk, the more sound and stable the legal environment will be to support business operations.
- Political stability: The more politically stable a country is, the more sustainable its operations will be in the future.
Ultimately we can find many reasons to choose China as the most suitable sourcing destination. Yet the full answer depends not on one or two factors but on a combination of different factors that together create a favorable environment for sourcing operations.
The International Sourcing Fair was held at the Shanghai Mart from 23 to 25 October 2008. I was there early on the 24th.