As public images go, 2007 has not been a good year for products sourced from China. Media attention was seemingly constantly awash with a recurring chain of events starting with news of (Chinese-made) product recalls and reservations about product safety and quality to outcries regarding dangerous Chinese products (so poignantly expressed in the idea of Chinese-made toys poisoning Western children), to bickering in the media and protestations of innocence from the Chinese side, and culminating in a quality and safety backlash of measures to address the problems discovered.

Safety and quality issues are bound to appear in China, and in this regard 2007 has been unprecedented. It seems a logical deduction, yet is a myopic view of the larger changes and forces at work affecting China sourcing.

The U.S.-based retail environments association NASFM (name recently changed to Association for Retail Environments, A.R.E., according to website) published in its official publication the findings from its 2007 study tour to China, organised by the International Shopfitting Organisation (ISO). In May this year 14 of NASFM's representatives inspected 'a variety of Shanghai-area manufacturing facilities,' visited the CRC Expo trade fair and attended presentations by 'Maersk, the world's largest shipping company.' On the lookout for sourcing and business opportunities, the participants found changes within China since 2004 'even more dramatic than the changes in North America.'

Practically every plant we visited was either undergoing expansion or preparing to move to larger facilities, or had recently moved or expanded. Also evident was heavy investment in equipment, together with improvements in productivity, quality, and design. 

Yet the participants also heard from 'many sources' that Chinese facility owners and managers now face 'new' challenges of labour shortages, rising labour costs, and high employee turnover. With high turnover issues appearing more severe in urban and coastal areas, several companies were found to be looking at moving their manufacturing facilities westwards to reduce costs and to find a more stable workforce.

At the same time, while the 'blame game' was in full swing this year amid accusations of low quality standards in China and protectionism in the U.S., multinational corporations and their incessant drive to lower prices have in 2007 contributed to a particular dynamic among Chinese manufacturers. In the words of China-based Fiducia Management Consultants in a recent newsletter,

One fact is that many Chinese manufacturers cut corners: by using lower-quality materials, by running cheaper production processes and by violating pollution laws... (The) driving force behind this are, in fact, multinational corporations who have been aggressively pushing down prices... With shrinking margins, suppliers struggle to make ends meet; a fact likely to result in this so-called "quality fade."'

Yet notwithstanding the events of 2007, a competitive analysis of U.S./China manufacturing industries conducted by Grant Thornton in 2005 found that 'a surprisingly large' 73% of Chinese plants indicated that 'high quality' is also a focus of their market focus, while only 28% of them indicated 'low cost' as a market focus. Moreover, more than half the Chinese plants reported having an 'innovation' focus, compared to just 26% of U.S. plants. China's emphasis on innovation as well as 'service and support,' the study concluded,

shows that a real shift has occurred among the country's manufacturers - in short, China's manufacturers are recognising the need for a full complement of manufacturing skills to compete when low cost isn't the only advantage.

And as an Ernest & Young Spotlight on China study pointed out last year (available here), while in the past China strategy for foreign companies was only about sourcing, with the Chinese determination to move up the value chain and evolve from the world's manufacturing centre to a world class innovation centre, today the options have multiplied to participating in China's market growth from the inside or even importing to it. The 'differences and difficulties' in concluding satisfactory deals in China are slowly diminishing, and while foreign firms are getting more adept at navigating the challenges, WTO commitments and the need to develop lasting relationships with outsiders are gradually bringing more sectors in China in line with business practices recognised in other parts of the world.

While 2007 thus witnessed unprecedented fears about the quality and safety of products sourced from China, the clear underlying trend evident this year for manufacturers in China is one of an increased focus on quality and innovation. So with the uproar about Chinese-made product safety issues and recalls in 2007 still lingering (a C100 survey on American and Chinese attitudes toward each other released last week found that favorability in the U.S. about China has fallen since 2005, partly reflecting 'media attention on the Chinese product safety issue'), the underlying patterns at work in China in 2007 actually paint a vastly different picture as China slowly comes to grips with the demands of manufacturing quality products.