Barry: November 2007 Archives

The New York TImes today reports China's explanation for blocking the visit to Hong Kong last week of a U.S. carrier battle group and other American warships. The lack of hospitality was actually in retaliation against the upgrading of Taiwan's Patriot anti-missile batteries, proposed by the Bush administration. Even two minesweepers were turned away from Hong Kong's protected harbour when seeking shelter from a storm. Although China later rescinded its decision, the Pentagon launched a formal complaint as senior U.S. naval commanders said they were 'perplexed and troubled.'

Yet two commentaries today on China's global supply chain dynamics give a different perspective of the expanding levels of engagement. Author and Boston Consulting Group senior partner Hal Sirkin writes in the Washington Times that the era of the global supply chain has arrived, and companies need to deal with it and adapt accordingly. While the U.S. and Chinese militaries might not be the best of friends, relations are much better between the Consumer Product Safety Commission (CPSC) in the U.S. and its Chinese counterpart, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), who have concluded an agreement supposed to resolve safety issues. The real responsibility for ensuring safety, however, Sirkin writes, lies in 'corporate boardrooms and with corporate managers' and their ability to monitor global supply chains. Low-cost demands extra vigilence, and companies should monitor their suppliers instead of simply blaming 'the Chinese.'

Bradley Feuling today in Industry Week adds an interesting assessment of the status of the China supply chain. Whereas cost was originally the primary driver for companies entering China, quality has since become increasingly important, and this has emphasised machinery investment and internationally recognised certifications. But today, according to Feuling, companies must pay more particular attention to the China supply chain itself. As opposed to squabbling as independent operators for supply chain knowledge, execution and talent, Chinese manufacturers can take advantage of new competitive advantages as China's expansion continues. In fact,  

By further developing a supply chain and procedural mindset, we may witness a true great leap forward rapidly approaching.

With all the high-profile product recalls and quality scares associated with Chinese products this year, events in the news can give some sense of the response elicited from Chinese government and business circles. Xinhua today reports customs authorities in Guangdong Province, a major base for toy-making industries in China, saying demand for exported toys has rebounded from the recall dramas of earlier this year. Partly spurred by the start of the Christmas retail season, Guangdong toy exports in October still registered no less than a 27.6% year-on-year increase. Yet in reaction to the outcry over toy safety the province launched a month-long safety inspection in September, and the provincial Quarantine and Inspection Bureau subsequently withdrew production licenses from 423 toy makers.  

In terms of food safety, a Chinese government spokesman has recently outlined the measures recently taken in legislation, administration and media supervision. In the aftermath of international food quality scandals Chinese officials have called for international consultation on food security, and today saw news of the issuing of a joint declaration in Beijing by 600 World Health Organization (WHO) and international delegates from 45 countries to boost information exchange on food contamination and disease outbreaks. 

It seems likely in fact Chinese manufacturing is taking the quality concerns of 2007 in its stride. The editor of Cargonews Asia this week expressed his amazement at signs that manufacturers in China have actually increased their profitability despite a number of challenges such as inflationary pressures and increased costs of raw materials:

The rising costs forced mainland manufacturers to seek out the inefficiencies in their systems that were previously of little consequence... Labour costs have always been low enough that some factories employed hundreds of thousands of workers with no regard for the payroll. Those days are over. Better transport and storage of raw materials, improved technical efficiency in the production process, better warehousing and road access have all enabled factories to cut down on waste and ramp up productivity.   

Faster, Better, More

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In the latest of the sustained upgrading of China's transport infrastructure, the People's Daily on Saturday reported the commencement of construction of two new railway lines to link Fujian on the southeastern coast with inland areas. One of the lines is to start in Xiamen, a port city facing Taiwain, and will continue for over 500km along the coast to Shenzhen. Upon completion in 2011, travel time between the two cities will require less than three hours (compared to the current eleven hours). The second project will be a 600km railway linking Nanchang in Jiangxi with Fujian province.

With plans 'on track' to drastically reduce travel times, the China Sourcing Report today reported that over 80 million digital still cameras will be produced in China and Taiwan this year, up 27% year-on-year. Greater China accounted for more than 73% of global shipments of this product in 2006, and is forecasted to take an even greater share in 2007. Chinese manufacturers are aware of the highly competitive nature of the global digital still camera market, and hence are increasingly targeting mid- to higher-end markets with advanced products and competitive pricing, ultimately leaving a more robust manufacturing base. In addition, more than 65% of Greater China's manufacturers are preparing for an increase in output in the next 12 months by expanding production capacity.

And with Chinese Vice-Premier Wu Yi assuring American companies in a keynote address in Beijing on Friday that China's door will remain open 'forever' and the country receptive to foreign investment, current trends are not likely to change direction soon. More than 70% of all U.S. firms investing in China made a profit in 2006, Wu said, and she assured her audience that China's position to value foreign capital will not be changed.

All just more sings that the future of sourcing in and from China will likely be faster, better and more....

Online China sourcing platform Alibaba has launched an online advertising exchange called Alimama, located at Designed to help small- and medium-sized web publishers monetize the estimated 80% of web site traffic which goes unmonetized in China, the ad exchange facilitates the trading of online inventory between web publishers and advertisers. Advertisers will via Alimama be also able to purchase advertising on Yahoo China, and since launching in beta on August 10 Alimama has signed up more than 150,000 small- and medium-sized web publishers and 135,000 personal blogs, covering more than 1 billion page views per day.

Originating from a factory producing golf carts in rural Jinhua (hours away from the nearest big city, Hangzhou), Alibaba in November listed shares on the Hong Kong stock exchange in the largest Internet initial public offering since Google, raising $1.5 billion from investors. The rise of Alibaba reflects some of the rapid economic shifts taking place in China as the country is poised to overtake the U.S. in the number of internet users, itself in part testament to the rising prominence of China's rapidly evolving middle class.

As an example of its call for firms to look beyond the city limits of Shanghai, Beijing and Guangzhou and to explore the opportunities of cities like Wuhan, Chengdu, Xi’an and Xiamen, All roads lead to China today commended U.S. hedge fund Chilton Investment for its plans to establish an office in Western China, as reported in China Daily.

all I can say is that its about time…Many PE/VC funds have shied away from believing that the best deals are here. The problem is that for firms in Shanghai, there is a tour that everyone makes and with so much attention, so much ‘love,’ that expected valuations are off the chart… Hopefully we are entering a time where opportunities in the West are given more consideration.  

The China Briefing Blog on Thursday reported on the confusion and uncertainty caused in the real estate sector by new guidelines for FDI. A new catalogue for foreign investment aimed to limit investment in industries not perceived by Beijing as problem areas seemed effectively to have terminated foreign investment in the real estate industry. Where the 2004 catalogue classified foreign investment in new residential developments as ‘encouraged,’ it is now absent, while foreign investment in property brokerages and agencies are now listed in the ‘restricted’ category. One sector where foreign investors will enjoy significant encouragement in the new catalogue, however, is high-tech industry.    

Michael Pettis in China Financial Markets yesterday commented on the recent flurry of Chinese acquisition plans abroad. While several Chinese companies listed on the Shanghai and Shenzhen markets can use their expensive share prices to make foreign acquisitions, the problem is that their currency, like the RMB itself, has limited value abroad. In addition, they are hamstrung by the restrictions on foreign ownership which mean they cannot exchange their shares for foreign holdings, and they also cannot raise enough cash directly, making it very difficult to buy foreign-listed shares.   

China Supply Chain 2007

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The November/December edition of Chaina magazine leads with an appraisal of The who, what and why of the China supply chain in 2007

As the 2007 edition of the magazine’s annual look at the companies, people, technologies, ideas and regions in China supply chain and logistics that you need to know about, Lenovo is singled out as a leading Chinese multinational of 2007. The feature also relates the emergence of Vietnam in opening up for business and even possibly rivaling China, and covers leading issues during 2007 such as greener and more ethical supply chains, and the activities of leading multinationals such as IBM and Intel as well as those of relative newcomers in China like Tesco.

China’s State Intellectual Property Office (SIPO) launched its first ever “Patent Week” on friday, reports Xinhua. As part of the drive, trade fairs, exhibitions and lectures will take place in Beijing and 20 other provinces and municipalities including Tianjin, Shanghai and Jilin. In 2006 SIPO accepted 573,000 patent applications, a 20.3 per cent year-on-year increase, of which 210,000 were patent applications for new inventions.

Counterfeiting and IP have become hot issues in U.S.-China relations recently, especially with the perception that the Chinese government is not active enough in stemming the tide of counterfeit products emanating from China. Yet as The Economist recounts, there are visible signs of progress, and there are signs of retreat and cynicism. In essence the situation varies from industry to industry.

According to Chinese government statistics the number of criminal cases relating to intellectual property rights fell by 35 per cent in 2006, and the regulations regarding investigations and prosecutions are cumbersome and painfully bureaucratic. Yet as Chinese products become more sophisticated the costs of having no property rights become increasingly apparent. The availability of innumerable cheap foreign products is undoubtedly holding back the development of domestic industry, and Chinese firms increasingly have brands and technology they want to protect. Patents filed by Chinese companies overseas rose by 58 per cent in 2006, making China rank third only behind the U.S and Japan in terms of patent applications. Yet government officials eager to have China create advanced products have come to realise that no-one will create anything without stronger levels of protection.

This year has seen Chinese products regularly hitting the headlines for the wrong reasons, raising serious concerns about quality control and the qualitative value of Chinese exports. In the latest round of recalls, of toys unsurprisingly , Xinhua News agency reported last week that the Chinese government’s quality control administration was suspending exports of toys covered with a toxic chemical or so-called date-rape drug as nine children in the U.S. were taken ill after ingesting toy beads coated with a toxic chemical. Attempting to buttress China’s tarnised exporting reputation, the government has increased inspections and punishments and launched a public campaign to boost quality control in China. Now Chinese toy makers, The Economic Observer reported recently, are going on the offensive to restore trust in the ‘Made in China’ brand. In a law suit expected to be filed by toy industry players from Guandong under an umbrella body, China’s toy manufactuers are taking on American toy giant Mattel after the company announced a recall of 21 million China-made toys during August. Yet although fifteen percent of the recalled toys were found to contain excessive qualities of lead, Mattel admitted subsequently that the majority of products were flawed as a result of the way Mattel designed them. Yet for the Guandong toy companies picking a fight with Mattel, part of the province’s overbearing share (70%) of the total Chinese toy production, the consequences of Mattel’s recalls are far-reaching: following the incident with Mattel, Guandong toy exports contracted by 5.776 million dollars in September compared to the previous month.

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