Negotiation is often a critical element in closing a sourcing deal, and while the process of negotiation in China is dependent on a complex cultural context, effective negotiation in China can only operate within China's cultural context to seek a positive outcome for both sides.

In the first instance, negotiation is the interface between two parties and their respective objectives, and reaching agreement could depend on the skills, knowledge, and flexibility applied. Yet the crucial element is often in the details of the negotiation approach. Alliance Bernstein CPO Jonna Martinez coined the term Immersion Negotiation (h/t Supply Excellence) to underline the need to be the best prepared negotiator: The more you understand the positions, cultures, pressures, and backgrounds of your opposites, the more you can use that knowledge to attain your objectives. While resonating with the ideas of Sun Tzu and The Art of War, there is no doubt that such a strategy is difficult in China while Western and Chinese cultural notions differ so substantially on issues like the use of contracts, the value attached to personal relationships and the issue of face. Yet in China, the applicable saying is 入乡随俗 (ru xiang sui su)*.

Hence negotiation in China is rarely straightforward, like with the complex importance attached to building trust and the finer nuances of participating in banquets, dinners, visits and even karaoke. These, as David Dayton writes at Silk Road International, are all planned and scripted with clearly defined roles, where foreign buyers are required to play their part in the Chinese script, whether they speak Chinese or not. Of the various ploys and stratagems he experienced in conducting negotiations in China, Dayton deems organization, detail, politeness, a strong will and a healthy dose of patience as the most important. Yet while foreigners in China inevitably have to conduct negotiations under the guise of the foreign buyer, actual negotiating with Chinese suppliers can be a dynamic and unpredictable process in which buyers need to immerse themselves fully in the circumstances and thinking of their Chinese suppliers. There is only one way in China, and while almost anything can be negotiated - it can only be done in the Chinese way.

(* When entering the village, follow the local custom.)

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.

Note: The following is a guest posting by Bradley A. Feuling, CEO, and Yi Kong, Vice President, Supply Chain Operations, Kong and Allan.

Procurement from China is growing. The $1.7 trillion USD or 12.33 trillion RMB produced in 2007 for export provides strong evidence. With increasing manufacturing for foreign and local consumption, new companies are sprouting up. In many regions, we find companies that are untraditional to the historic capabilities of the area. This is just one factor to take into account.

Example: Suzhou
Consider Suzhou in Jiangsu province. Historically, Jiangsu, Zhejiang and Anhui were known for light industry manufacturing such as fabrics and textiles. Automotive manufacturers are now entering what was once silk alley. The difference in local capabilities impacts skill development and material handling processes. Chery automotive in Anhui represents one exception.

Other regions in China
Traditionally, the northeast region focused and still does on heavy industry manufacturing. For automotive, steel, and oil buyers, strong sourcing partners are located here. Currently, the region has experienced slower economic growth, although First Automotive Group provides a developed supplier network.

Shandong province, between Beijing and Jiangsu province, was agriculture based. Many smaller companies have developed in Shangdong, yet the larger supplier bases are linked today to the electronics industry with Haier and Hisense.

Moving south, are Guangdong, Hunan, Yunnan, and Guizhou. Guizhou and Yunnan are known for liquor production, Mao Tai being a famous manufacturer. Guangdong, with its proximity to Hong Kong, became the first area for export-focused manufacturing. Many foundational industries required low-skilled labor such as furniture and textiles.

In Central China, there are Shanxi and Sichuan. Sichuan was a military equipment manufacturing center, also serving the wine and liquor industries. Today, electronics suppliers are developing with the growth of Changhong.

Lastly, we look to Inner Mongolia and in the west, Shaanxi, Gansu and Xinjiang. Inner Mongolia was a livestock -based economy. Today, the province is best known for dairy manufacturing. Western China was and still is the raw material resource base of China: iron ore and crude oil. Currently, the Central Government is influencing the movement of manufacturing to the west. Although investment has been high, a developed society mentality has yet to take hold.

Offsetting risks
The risks are numerous to manufacturing products in an area historically not known for specific production. Knowledge and education of product specifics must be understood therefore training costs will be higher. Material management and handling procedures must be analyzed. For example, automotive logistics capabilities in northwest China will be stronger compared to Shanxi, although suppliers may exist. Also, understandings of western sense of service and practices in dealing with foreign companies will reduce certain risks. Regions along the east of China will offer a greater number of sourcing partners who have experience working with foreign buyers.

Bradley A. Feuling is the CEO of Kong and Allan, LLC, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion. Yi Kong is vice president, Supply Chain Operations.

For a fare twenty time more expensive than the ordinary fee, a five-star hotel on wheels will from September this year offer the most luxurious train in the world for the journey between Beijing and Lhasa, complete with a sightseeing car to take in the view on the 'roof of the world.' A few more affluent visitors might well be useful, because according to an evaluation of comprehensive economic competitiveness among China's 31 provincial-level administrative regions in 2006 (released this week by China's Overall Economic Competitiveness Research Center), Tibet finds itself at the bottom of the list, along with other western provinces like Xinjiang, Yunnan and Gansu. Topping the list is highflier Shanghai (with the bad luck that it might find itself inundated by ocean water by 2050 when global temperatures are expected to rise by 2 degrees), where residents have recently been competing very effectively to induce the local government to delay construction of an electromagnetic train line until next year. FT.com reports on mass protests by residents whose flats are situated near the planned track as becoming an important test of the potential for political activism among the new middle class, especially residents of the wealthier cities who have acquired their own property. For all their efforts, the people of Shanghai may soon be able to indulge in Asia's third Disneyland as the city's mayor this week announced plans to build the theme park right in Pudong - the cradle of China's reform-era industrial leap.

The arrival of the full Disney cast in Pudong forms a poignant juxtaposition with Nanjie village in Henan, China's so-called utopian communist village (where workers supposedly go to the factories as equals every morning to the tune of "The East is Red"), and Dazhai village in Shanxi, home of the famous 'Dazhai spirit' of self-reliance and selfless devotion, later renounced during the Cultural Revolution and now a renowned patriotic tourist destination with its own brand name and newly-built Buddhist Temple. No such luch for Nanjie, though. Global Voices Online translates a review by Chinese blogger Xiong Peiyun, declaring the 'Nanjie myth' to the 'broken' and the model village utterly bankrupt. When village director Wang Jinzhing died in 2003, according to Xiong, a full 20 million Yuan was found tucked away in his office.

The obvious gap in access to wealth and instances of corruption have made inequality a serious topic in China. While not supposed to make important decisions, China's National People's Congress (currently in the midst of its annual session) can illustrate the government's two main policy concerns for 2008 which, according to FT.com, consists of taming inflation (which hit a 12-year high of 8.7% in February) and improving the workings of the central government to better facilitate protecting the environment (see Washington Post's article on supposedly green solar energy firms leaving waste behind in China, where the push to get into the solar energy market is having unexpected consequences) and reducing inequality. Thus in order to bypass provincial leaders able to flout the will of the center, plans are afoot to establish a number of 'super-ministries' with increased powers, despite the fierce rivalries anticipated in the streamlining process.

In addressing inequality in China there is clearly (as the President of China Merchant Bank told the People's Daily last week there to be for rural financing in China) "large room for improvement". A World Bank report released this year entitled Migrant Opportunity and the Educational Attainment of Youth in Rural China illustrated the entrenched challenges affecting the social mobility of migrant laborers, an important cog in China's economic transition.

While the opportunity to migrate has raised living standards in many rural areas of China, access to migrant employment appears to create a disincentive for continued increases in educational attainment levels among rural youth... For most individuals in rural areas, the decision not to attend high school is irreversible. When large numbers of families opt out of educational investments in favor of the relatively attractive migrant wage available to middle school graduates, the effectively resign themselves to the long-term prospect of earning considerably less than urban youth, nearly all of whom graduate from high school and who are enrolling in college in greater numbers. The decision not to enroll in further schooling increases the likely gap in the lifetime earning ability of a rural child relative to an urban child, and may therefore contribute to increases in inequality, at least for one generation, within urban areas after migration occurs.

For the 324 Chinese companies listed on China's two stock exchanges who have filed their annual reports for 2007, however, profits have nearly doubled compared with that of 2006. And as an indication of future prospects for Chinese industrial growth and profit, a survey of 2,000 U.S. consumers conducted in 2007 by market research firm GfK Roper found that Chinese products are regarded as being inferior only to American goods, and in terms of prestige products from China are held in higher regard than those of Canada, South Korea and any other developing country.

As yesteryear's model villages Nanjie and Dazhai make way for the dream world of Disneyland in Pudong, its obvious that many in China will happily go relish the arrival of Mickey and Goofy - and many others will never make it there.

Yet with people like Liu Xiufang around, an 80-year-old woman from a village in Fujian province who (the Shanghai Daily recounts) lives on 10 Yuan a day and has donated more than four million yuan to charity and public welfare over the past 20 years, it is interesting to think whether China's growing affluent class can learn something from her, as she probably did from Dazhai.

 

       

The start of the year of the rat was a rather miserable experience for some in China this year, especially for a few of the 210 million migrant workers who were deprived of their only holiday when the transportation system clogged up under heavy snowfall (I watched it all from sunny South Africa).

The real culprit for it all was hot air.  Like the U.S.-based Pew Center explained to China Dialogue this week (after first pointing out that science cannot in fact determine whether any single weather event is directly connected to global warming), when warmer conditions evaporate water from the ocean, moist air is formed and when this meets cold air over land the moisture freezes and falls. Asked why this process happened to such an extreme degree in China this year, Pew Center explained (after first pointing out that they are in fact not a meteorological society) that

the unusual severe snow storm in China certainly fits a broader trend of increasing severe weather events that is well documented and it could well be a consequence of global warming...The most important lesson China can take from this event is that climate change has real and potentially severe costs.

China's energy security, moreover, is intimately linked to climate security. China still relies on coal for about 80% of its electricity generation, and as most of the coal is mined in the northern and western provinces and then transported to China's booming coastal provinces, the recent storms have illustrated how easy road and rail networks can be disrupted.

Ministry of Railways spokesman Wang Yongping also had some hot air to deal with recently. Involved in a controversial exchange with the Guangzhou CPPCC deputy secretary on February 20th, Mr Wang has had his head called for and the Ministry of Railways exhorted to adopt an attitude of submission, earnestly studying the problems exposed by the recent disaster, as one columnist put it. As David Bandurski outlined at the China Media Project, exchanges like these have formed part of the Chinese media anticipating a green light on 'reflection,' or fansi 反思 (emanating from favourable whispers of Wen Jia Bao's report for the upcoming session of the National People's Congress), and hence their providing bolder coverage of the storms and what they reveal about government and society in China.

Thus for example the Economic Observer this week highlighted the plight of Chenzhou in Hunan, which was isolated for ten days during the Spring Festival after three successive snowstorms and freezing rain decimated its power grid, shut down public transportation and limited water supplies. And it was bad, as local resident Li Ronghua explained,

There are floods and droughts here every year, so we are used to natural disasters. But this time many of us panicked. The city was so close to coldness and death.

Relief work in Chenzhou has just begun, the city's secretary general said - 70% of the city still has no power - and would last until May. Chinese banks have kindly lent more than RMB102 billion to help rebuild areas damaged by the storms, aimed at restoring farms, transportation, power and other infrastructure. China's 'big four' top state-owned banks accounted for RMB59 billion of the disaster loans, and no doubt China Minsheng Banking Corp, China's first private bank that saw its net profits jump 68% in 2007, would also have been asked for a contribution.

Shanghai has luckily shown the way forward in dealing with global warming. While an explosion at a sewage plant in eastern Beijing this week caused the death of four people and poisoned 20 on-site workers, advertisements on Shanghai's new subway stations now have themes related to global warming, and the city's Waste Management Department recently announced they have found new ways of classifying waste, utilizing a four-category classification pattern referring to four different bins for glass, harmful waste, recycled waste and other waste. Clearly, what Beijing's new subway lines need are the right kind of message.     

China's future path is a stark choice between four options, or trajectories as they call them, as laid out by The Foundation for Law, Justice and Society (FLJS) at the University of Oxford in a report (link from Asiabizblog.com) considering whether China's transition is 'stalled'. These four, under the strangely familiar banner of One Country, Four Perspectives, are so descriptive they require little further explanation:

• Liberal evolution
  
• Authoritarian resilience
  
• Imminent collapse, and
  
• Authoritarian stagnation
  

The report bulges with talk of calculating ruling elites, a political monopoly overriding the culmination of full market reform and ominous indications of the development of a predatory state and systemic risks. Ultimately, what's going on in China right now is called (deceptively harmonious-sounding)

...Partial Reform Equilibrium.

And basically, the choice from here onwards ranges between

• Evolving, like China's two-tiered household registration system which is set to be reformed to allow freer migration between cities and the countryside;
  
• Persisting, like the stinky smell from 10 branches of the Liaohe River, for which reason 200 small paper-making plants will be shut down in Liaoning this year; 
• Collapsing, like the roof of a slag pit in Liaoning; or
  
• Stagnating, like China's manufacturing competitiveness in some industries, at least according to more than half of the 66 foreign-invested firms surveyed by the Shanghai Chamber of Commerce.

Let's not throw out China's new lively intellectual class, however, whose influence (writes Mark Leonard in the March edition of Prospect magazine) is actualy amplified by China's repressive political system that can use intellectual debate as a surrogate for politics. In the long term China's one-party state may well collapse, yet although China is not as yet a fully open intellectual society,

it is so big, so pragmatic and so desperate to succeed that its leaders are constantly experimenting with new ways of doing things. They used special economic zones to test out a market philosophy. Now they are testing a thousand other ideas - from deliberative democracy to regional alliances. From this laboratory of social experiments, a new world-view is emerging that may in time crystallise into a recognisable Chinese model...

(For another encouraging political outlook for China in 2008, see Economic Observer's views on why this year will be a key point in Chinese history).

All of this cuts no ice for FLJS at Oxford University though. Which of the four 'trajectories' does their report consider, on balance, the more likely outcome in China? You guessed it:

Option number four!, with a gradual dissipation of vigour and momentum projected to set in. Ouch!  

As Beijing celebrated the start of its 'Olympic Year' with a large outdoor music performance on Monday night, we might well look at some of the trends that could impact China sourcing in 2008.

Homeworldbusiness speaks of "shifts in the China sourcing paradigm" as a 'macro' issue of 2007, and one which is expected to escalate in 2008. As a gloomy forecast of the outlook for the U.S. housewares industry in 2008, changes in the Chinese economy in the coming year like 

Inflated prices on Chinese-made housewares induced by rising raw material and fuel costs are a reality that the biggest retailers can no longer deny. Get ready for mounting increases in 2008 stoked by a weaker dollar to the Yuan RMB, reduced export tax rebates to Chinese factories, stiff pollution penalties and tightened product safety standards as the Chinese government adopts and enforces regulatory controls.

The benefits of stricter product safety standards, however, should be more evident in 2008, even though housewares retailers and suppliers will have to "rigorously self-police" to ensure the quality and safety of all their products. And as an additional challenge to Chinese sourcing in 2008, the Olympics may lead to labour shortages as workers are temporarily relocated to Beijing, resulting in restricted production during the usually critical June/July manufacturing period.

For Supply&Demand-Chain Executive the advent of the Olympics could in 2008 coincide with media attention focusing on China as the world's next potential 'bubble,' leading many manufacturers to shift sourcing strategies away from Asia. The falling dollar, limited free trade agreements, high energy costs and rising production costs will all contribute to companies reevaluating extended supply chains in Asia, and in addition

shareholders and board members could question their company's reliance on China and the Asia region should any further negative headlines arise regarding quality issues or if China receives bad press on the handling of protestors and dissidents prior the the Olympics. 

Prospects for 2008 have a few few commentators fearing signs of 'bubble(s).' The Washington Post on Sunday outlined China's current dot-com boom where start-ups have proliferated in the past decade in 'new Silicon Valley' districts thanks to an aggressive government campaign to attract private investment. Since the beginning of a frenzy of investment in 2005, many domestic Chinese companies that have gone public have traded at exceedingly high valuations, and some fund managers are worried that China is creating a tech bubble similar to the one that burst in the United States at the start of the decade.

Yet the party seems far from over in China, and Moneymorning.com views China as being on the edge of an economic transformation known as 'global decoupling' in which the growing prosperity and influence of China is contributing to the U.S. slowly being excised from its role as global economic trendsetter, all indications that 2008 will see a continuation of trends prevalent in 2007.  

Note: This posting is an abridged version of an article by Julian Hewitt which originally appeared on The Beijing Axis website. The full verison of the article can be accessed here.

Two and a half decades of economic reform have placed China firmly on the path of rapid industrialization. China’s recent ascension to the World Trade Organisation has further hastened its opening up to the rest of the world.

At the same time, South Africa has also enjoyed a fruitful period of economic and political progress after many years of international isolation. However, it was only since the establishment of formal diplomatic ties in 1998 that these two regional leaders have begun to realize a significant growth in trade.

In 2006 China exported USD6.6 billion worth of goods (dominated by electronic equipment and textiles) to South Africa while it imported USD2.0 billion worth of goods (dominated by raw materials) from South Africa, according to South African Revenue Service figures. Official statistics from the Chinese Statistical Bureau paint a rosier picture, however, with Chinese exports to South Africa standing at USD5.8 billion and imports from Africa’s largest economy at USD4.1 billion.

China’s rapidly growing middle class is opening up new exporting markets for South African suppliers, and from a South African perspective, rising Chinese living standards are translating directly into more wines, fruit juices and fruit on local supermarket shelves. In addition, China is also becoming a focal point of international gold, diamonds and platinum sales, and on an industrial level South Africa is a large supplier of raw materials that help fuel China’s factory-floor economic model.

China presents big importing prospects for South African suppliers and retailers, yet sourcing of products from Chinese suppliers and maximizing China’s strength as a producer of the lowest cost goods is an avenue South African firms have not yet fully tapped into. Of course, trading with China is not without its pitfalls, even for companies with previous Chinese experience. Language and cultural barriers and often opaque importing and exporting processes serve to complicate business interactions and frustrate expectations between buyers and sellers. China is also a very regionally fragmented market, and this often requires specialized local knowledge of how to tap into potential Chinese business opportunities.

However, it is not without just cause the China commands daily media attention. The benefits of incorporating a China objective into your business’ importing or exporting plan far outweigh challenges on the way. China represents a competitive advantage and it not taken up, could easily be to your competitors advantage.

The Central Economic Work Conference closed in Beijing on Wednesday with headlines proclaiming that the 'ten-year prudent' monetary policy will be replaced by the 'tight one' in 2008. The current 'prudent' policy itself replaced the 'proactive' policy in 2005. Amid familiar fears of 'overheating,' China's economy has been running at 11.5% year-on-year growth in the first nine months of 2007, and the annual consumer price index was estimated to stand at about 4.5%, overrunning the warning threshold by more than 1%. The conference identified five major problems in the national economy, starting with 'overheating' and inflation concerns, to a weak agricultural sector and difficulties with energy conservation and emission reduction, and ending with welfare issues.

So with the economy frequently showing signs of overheating, how long can China's phenomenal growth rates continue? Moreover, while low labour costs have undoubtedly been China's trump card in capturing world markets, how long can this advantage persist with labour costs likewise creeping upwards?

One study (see reference 1 below) conducted this year examining the impact of market access and internal migration on average provincial manufacturing wages in 29 Chinese provinces between 1997 and 2004 found that provincial wages increased by about 15% per year (or 130% over the 7 year period), corresponding to 'common shocks possibly like total factor productivity growth and national rise in prices.' Internal migration, the study found, has slowed down wage growth by only 2% per year.

The question is really how China can keep increasing the competitiveness of its products and maintain its export growth, and factors such as low wages, a favourable exchange rate and the flow of foreign direct investment have all played their part in fuelling China's growth. Yet according to a study (2) assessing the causes for China's competitiveness, China's pool of cheap and increasingly mobile labour means competitiveness based on low wages will persist for 'quite some time,'  and Chinese producers are becoming much more proficient in enforcing world requirements for quality and product design, partly facilitated by the inflow of foreign direct investment and entrepreneurship. In effect, the study suggested, with China's enormous rural population and increasing number of 'floating' urban workers, 'it will be many years before the supply of low-cost unskilled labour runs out.'   

(1) De Sousa, J; Poncet, S, How are wages set in Beijing?, CEPII, No. 2007 - 13.   

(2) Adams, FG; Gangnes, B; Shachmurove, Y; Why is China so competitive? Measuring and Explaining China's Competitiveness, 2006.

 

 CHINA

SOURCING

BLOGS

ROUNDUP

  

Michael Pettis at China Financial Markets (site blocked on the mainland) on Wednesday made some significance of the first decline ('after many days of strength') of the RMB to the dollar.

Is this simply a random event or are the Chinese financial authorities warning European officials to stop pushing on the RMB front? If it is the latter, its likely to be a wasted warning.

According to Pettis, Europe's trade deficit is likely to rise even further over the next few months, and with anti-Chinese feelings already high in Southern Europe and a 'chill' in the air between China and Germany after Merkel's meeting with the Dalai Lama, at this rate its hard to see how China will avoid a nasty trade dispute with Europe. Yet though it makes sense for domestic reasons for the Chinese government to adjust the RMB more quickly, this is unlikely to happen without serious foreign pressure.

I think they are making a huge mistake, however. China's out-of-control monetary policy is already very likely to lead to domestic grief, and if we keep this pace of reserve accumulation up for another year, I think the chances of an ugly adjustment become extremely high.

Richard Brubaker at All roads lead to China on Saturday commented on the New York Times reporting on China agreeing to remove a dozen subsidies on WTO-disputed products. Quoting the analysis of Susan Schwab claiming the step as a victory for U.S. 'manufacturers, producers and their workers,' according to Brubaker the impact is likely to be insignificant as   

they are not clear on what is an American product, a Chinese product, and what is an American product made in China...and without this distinction, I do not think they would be able to correctly solve the imbalances that are present in the system.

American made cars and telecommunications equipment made for instance by Buick, GM, Cisco and others are doing well in China, yet none of these items are made in America and sold to China; manufacturers have found its more cost-effective to produce and sell in the same market.

Through this process, American manufacturers have in essence become their own competitors, and while I am not saying this is right or wrong, I am saying that the way the argument is being framed, the discussions conducted, and the solutions created to address these problems is wrong.

Discussing the same news report, Stan Abrams at China Hearsay today put the U.S. manufacturers' 'victory' in the following light:

 Illegal subsidies provoke quiet complaints in different bilateral venues. After that, you issue formal complaints and let the media get in on the action. Still no progress, you ratchet up some rhetoric. No movement? You then threaten to take the case to the WTO. Eventually you file a case and hope to settle at some point. This is ultimately what happened here. That's sort of what every U.S. administration would have done; its called cycling through your options. Even calling it a policy or strategy is rather embarrassing. I'm not sure how else you would do it.

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.

In July 2007 The Boston Consulting Group put out a report grandly titled Sourcing from China - Lessons from the Leaders. Only 15 pages long, however, it's an easy read that summarizes in simple terms a list of ten best practices, without raising any of these to the essential pedestal so often seen in literature discussing sourcing in China. The list includes, amongst others:

• Defining a clear sourcing strategy with specific targets and plans;
• Aligning the China sourcing organisation with global procurement;
• Enabling collaboration across regional and functional boundaries; and (my favourite)
• Providing internal education to increase awareness and understanding...

The last point is discussed rather late in the document, which is a pity since, according to several surveys on the issue, the greatest difficulty in sourcing from China is not currency fluctuation, broken contracts or quality, but opposition from inside the organisation...