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Switching your sourcing to the world’s third largest economy can save you 30%. But getting in there is no easy matter.
China’s development has been one of the great marvels of the modern age. Its output was regarded as a mere statistical anomaly on the international landscape just a generation ago, but has since ascended to become the world’s third largest economy. Chinese exports dramatically expanded after the country’s admittance to the World Trade Organization in 2001, culminating in China’s current status as the number one exporting nation.
In 2009, roughly USD1.2 trillion of Chinese goods reached consumers at every corner of the globe, with sub-Saharan Africa accounting for USD26.27 billion, the Southern African Development Community region accounting for USD12.9 billion and South Africa USD7.37 billion. If businesses wish to remain competitive, it is no longer possible to ignore China’s export potential. For those involved in sourcing, incorporating China into the supply chain presents numerous opportunities.
But before you call the bank to open a letter of credit, you first need to understand how China sourcing can and should be done. Success depends very much on appreciating a few critical drivers and constraints.
Low wages, good infrastructure
The main reason for China’s prominence as a sourcing destination is low costs. Average cost savings of around 30% (depending on product and industry) can be achieved by shifting procurement to China. At the heart of this is labour costs. Average wages in developed nations such as the US are nearly 30 times those of China. Even other developing nations are unable to compete with China on a labour cost basis. The average wage in Brazil is more than six times that of China, and in Mexico, three times. Other factors that contribute to cost savings include lower product input costs and lower finance costs including access to finance and cost of capital.
China’s infrastructure also affords it a distinct advantage over other developing nations. The country ranks 27 on the World Bank’s Logistical Performance Index, higher than Brazil, Russia and India. Numerous new highways and 78,000 km of railway end in six of the world’s 10 busiest ports. Five hundred airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.
Risks and challenges
How then does a procurement manager access China’s significant potential? The answer lies in appreciating that one size does not fit all and the process is time-consuming and requires effort. Distance (time zones), language and culture are significant constraints, and Chinese specifications and standards – especially when it comes to technical industrial pieces and equipment – are not always easily comparable and require clarification.
When these factors have been accounted for, a comprehensive China strategy can be developed. The pivotal element of this is deciding on the conduit between decision-makers at home and Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent; to work with an international company with a presence in China; or to dispatch your own employees to China.
Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected, with the most experienced able to find products for their foreign partners at significantly favourable prices. The major downside to this arrangement is that potential cultural barriers can be a serious hindrance.
A common complaint is Chinese counterparts are often less responsive to emails and may be less direct regarding true circumstances. A straightforward 'no' is rare. Thousands of agents exist, making the best ones more difficult to find. Many of these agents may not also have the appropriate import/export registration.
Other routes
An alternative is to use an international firm with a presence in China. These firms typically employ international staff alongside local Chinese to obtain the best of both worlds. A more acute understanding of the buying company’s procurement requests can be obtained through the use of these agents and it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. But they tend to charge higher fees for their services and are subject to stricter administrative controls, which may cause further delays or unexpected costs in the procurement process.
Lastly, there is the option of directly dispatching employees to China. This may be the most attractive option for those considering large-scale operations abroad. Expatriate staff will already be aware of the product requirements, eliminating communication problems. This option could be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. But this is a less feasible option for companies still in the early stages of their China strategy. It can be difficult for newcomers to find appropriate suppliers and to successfully manage all steps in the production-to-port process.
Objectives and challenges
Having a representative of the company physically present in China greatly eases the business interaction with suppliers. Business in China is very much centred on relationship building. The ability to associate a face with a voice over the phone or the signature line of an email will foster greater personal commitment from the Chinese supplier. This process involves regular visits and is an important cultural aspect in dealing with Chinese suppliers. Concurrent on-site inspections ensure greater quality control.
As with all long-distance international trade activity, there are many risks and it is critical that companies understand them. An on-site presence allows final inspection of the product to take place at the factory rather than when it arrives at your port. This allows immediate adjustments to be made, saving weeks in shipping time and legal complications that may arise with payment terms. Carrying safety stock is another simple technique in preparing oneself for potential supply chain interruptions. It is also useful to arrange supplemental agreements with separate suppliers so as to avoid an over-reliance on any single supplier.
Once relationships have been established with Chinese suppliers, procurement professionals may be pleasantly surprised by some of the added benefits. Long-time partners in China will frequently share information with international clients, including referrals to other Chinese suppliers in noncompeting industries. Advanced payments often become unnecessary. As stated earlier, Chinese professionals are more responsive to personal affiliations often making it unwise to switch Chinese partners on the basis of marginal price differences. Information sharing, consistent production quality and faster enquiry response times quickly make up for small price discrepancies.
Why choose China?
✓ The potential to obtain significant cost savings because of China’s lower cost base, particularly for labour
✓ You can use the 'China price' to negotiate reduced prices from existing domestic suppliers by gaining greater visibility into the true cost base in low-cost countries
✓ You will avoid the risk of delays or disruptions in material shipments by diversifying your supply base, specifically with critical items
When should China be considered?
Whether to source items from China should not be a one-off decision, but should rather be based upon a series of systematic decisions. Some initial questions to ask are:
✓ Is the category large enough to warrant the effort?
✓ Do Chinese suppliers have experience exporting these items?
✓ Is there reason to believe that Chinese suppliers are significantly cheaper than our current/existing suppliers?
✓ Do we want to diversify our risk from relying on local suppliers?
If 'yes' is the answer to any of the above questions, then consider China, but only with a reliable, on-the-ground partner to support you.
This article was published on Supply Management in August 2010.
Today China is an acknowledged early leader in pursuing green economic development. From having an almost non-existent renewable energy industry in the early 2000s, China is now a leading exporter of renewable energy equipment and machinery. Here we highlight three factors contributing to the explosive growth of China’s renewable energy industry.
Active government support
Renewable energy will be a key focus of the 12th Five Year Plan and of China’s plans to achieve energy independence and reduce pollution. The 11th Five Year Plan already mentioned natural resource depletion as a challenge and up to 40% of China's RMB 4 trillion economic stimulus package is targeted at green projects.
Not surprisingly, China is now the world’s largest investor in renewable energy. In 2009, China invested close to USD 35 billion in clean energy, almost twice that of the US. Today, renewable energy accounts for 4% of China’s total energy capacity and close to 20% if we include hydroelectric power. Still, despite the impressive progress, China still has a long way to go before boosting renewable energy capacity to 10% by 2020 and hence we can expect continual government investment in this sector for the foreseeable future.
International and domestic pressure
Despite China’s impressive developments in clean energy technology, the fact remains that China is now the world’s largest emitter of greenhouse gases. In 2007, China released over 6.5 billion metric tons of carbon dioxide into the atmosphere, about 23% of the world total. China was also blamed by some for the breakdown of talks at the 2009 Copenhagen Climate Conference. More than ever, there is mounting international pressure calling on China to curb its carbon emissions and act like a responsible superpower when it comes to climate change.
Aside from international pressure, there is also growing domestic pressure for China to ‘clean up its act’. Presently, about 80% of China’s energy is supplied through burning coal and the demand for coal keeps rising every year. The result is that air quality for many of China’s cities has turned into a toxic soup of hazardous chemicals and cancer rates have risen dramatically. As the Chinese become accustomed to a better standard of living, more people will begin questioning whether the pursuit of economic growth is worth the cost of environmental degradation.
Partnerships with international companies
As China continues to pour money into developing its renewable energy capabilities, more multinational companies are setting up shop in China, building state-of-the-art facilities and transferring their technologies. Vestas of Denmark has built the world’s biggest wind turbine manufacturing complex in northeastern China, and transferred the technology for the latest electronic controls and generators. Bosch of Germany has spent USD 42 million in expanding its wind turbine manufacturing facilities in Beijing and Changzhou.
This arrangement benefits both sides. Multinational companies are able to take advantage of China’s low labour costs and huge demand for renewable energy, while the Chinese benefit by receiving more foreign investment and foreign technology, which creates more jobs and raises the quality of the Chinese renewable energy industry.
From these factors its a safe bet that renewable energy in China will continue to be a growing industry with the rest of the world taking notice.
There are many similarities between China and India in today's global-economic climate. Both have over one billion citizens, both have experienced resilient growth in output, and both have greatly expanded their roles in international trade. The relatively inexpensive yet well educated workforces of these two countries have made them key prospects for the sourcing of manufactured goods. Yet differences remain in their supplier and logistical capabilities which must be taken into account by the sourcing professional.
Both India and China are capable of world class manufacturing processes. A study performed by the London School of Economics on the supply chains of the two countries’ automotive industries found that two-thirds of their domestic suppliers were able to provide inputs with defect rates of less than 100 parts per million – the typical threshold for suppliers in the US, Europe, and Japan. It was observed that both Chinese and Indian auto manufacturers domestically outsourced component production at similarly high rates, suggesting an adequate availability of competent local suppliers. Whereas the study found higher productivity levels in India, in terms of capital intensity, delivery frequency and stock-turn ratios, China had the edge. In a more recent, broader assessment across multiple industries, Deloitte found that the average number of days an item sits in inventory favored China at 24.2 compared to India’s 32.5.
Beyond the factory floor, connecting products to end users poses different challenges in China and in India. Within India there is a heavy reliance on roads. Their network is the second largest in the world, behind the US, at over three million kilometres. However, only around half of these roads are paved, and their width is generally too narrow to allow the passage of anything beyond smaller, two-axel trucks. Road transit is further slowed by a fragmented Indian trucking industry and by state border checkpoints. China, in contrast, has a far less extensive network of roads. Out of its million-plus kilometre road network, only around 300,000 kilometres are paved. But what China lacks in actual length, it makes up for by having newer, more passable roads. It has five times the number of multiple lane highways than India.
China also has more transport options available to its supply chains in the form of rail, air, and waterways. Over 78,000 kilometres of terrain are connected by rail in China compared with 63,000 in India. Goods can be flown in and out of China by way of 500 airports whereas there are only 334 locations to take to the sky in India. Thanks to geographical endowments, China also has more navigable waterways. Besides some of the world’s most active ports, commerce in China moves on 110,000 kilometres of inland aqueous passageways. This is more advantageous than India’s 16,000 kilometres of waterways, particularly in the movement of bulk commodities.
These transportation differences are partially reflected in the World Bank’s Logistics Performance Rankings. China is rated the highest of all BRIIC (Brazil, Russia, India, Indonesia and China) countries at 27th in the world. Its comparatively higher scores in customs clearance, infrastructure adequacy, logistics, timeliness and tracking ability place it above India, ranked 47th globally. Some of the largest discrepancies between the two countries are shown in survey data collected by the World Bank. Responders reported much higher frequencies of compulsory warehousing/transloading and involuntary payment solicitation in India, while in China greater expenses were incurred in the form of agent fees.
The infrastructure and logistical differences may explain why India is a more common site for the outsourcing of services, particularly IT services, which do not require a physical good to be brought to market. However, India should not be entirely discredited as a sourcing destination for manufactured goods. Both it and China have allocated over 10% of their GDPs toward infrastructure development which will enhance their future logistical abilities in bringing their products to the world’s consumers. The greatest similarity between China and India: neither can be ignored by the sourcing professional.
| Country | Rank | LPI | Cstms | Infra | IntSh | Lgstc | Trckg | Time |
| China | 27 | 3.49 | 3.16 | 3.54 | 3.31 | 3.49 | 3.55 | 3.91 |
| India | 47 | 3.12 | 2.70 | 2.91 | 3.13 | 3.16 | 3.14 | 3.61 |
| Brazil | 41 | 3.20 | 2.37 | 3.10 | 2.91 | 3.30 | 3.42 | 4.14 |
| Indonesia | 75 | 2.76 | 2.43 | 2.54 | 2.82 | 2.47 | 2.77 | 3.46 |
| Russia | 94 | 2.61 | 2.15 | 2.38 | 2.72 | 2.51 | 2.60 | 3.23 |
| China | India | Brazil | Indon. | Russia | |
| Clearance time with physical inspection (days) | 3.38 | 3.45 | 5.47 | 5.12 | 4.62 |
| Clearance time, no physical inspection (days) | 1.70 | 1.92 | 1.67 | 2.14 | 2.57 |
| Percent of imports physically inspected | 8.59 | 13.63 | 10.54 | 11.08 | 44.20 |
| Percent of imports inspected multiple times | 2.46 | 6.20 | 2.04 | 2.56 | 10.05 |
| Export lead time from shipper to port (median) | 2.77 | 2.34 | 2.80 | 2.12 | 3.98 |
| Import lead time from port to cosignee (median) | 2.56 | 5.31 | 3.88 | 5.35 | 2.88 |
| Number of export agencies | 4.06 | 3.43 | 3.47 | 2.50 | 5.83 |
| Number of import agencies | 4.20 | 3.71 | 4.21 | 3.67 | 5.17 |
| 40 ft container export charge (USD) | 418.90 | 660.30 | 1,614.05 | 378.93 | 1,310.37 |
| 40 ft container import charge (USD) | 376.37 | 1,266.94 | 1,570.42 | 1,023.84 | 1,144.71 |
I recently attended the ‘Global Purchasing and Supply Chain Forum 2009’, in Besides a discussion on the macro economy, the two main topics from the forum were:
- Supply chain management in the environment of economic recession; and
- Supply chain management contributions to company value
Since the value enhancing role of supply chain management is a common topic discussed at a majority of procurement forums, I was more interested in the first topic. While exchanging ideas about supply management under economic recession with other purchasing managers, I received many useful tips—including those from the speakers. One speaker was Mr. Dai Dingyi, Vice Chairman of CFLP, who introduced the status and trends of purchasing and supply management in
Mr. Johnson Xiao, Global Sourcing Director of TRW Automotive Inc, was another speaker. Mr. Xiao shared his personal experiences in service sourcing. Attendees also learned a lot from Mr. Zhang Jiamin, Director of Li & Fung Group, who gave an insightful speech on how
These speeches were very insightful about the current state of supply chain management in
During the past 3 months, I traveled with a few clients to visit some Chinese suppliers of motors, pumps, valves and other industry supplies. As usual, we recommended the best local Chinese producers – their pricing levels were normally between Chinese-foreign joint ventures and local middle-sized and smaller producers, but their quality was acceptable for our clients.
Although the manufacturing technology for some of the products was not on the international level, the quality of most products exceeded my clients’ expectations. From manufacturing machinery, i.e. widely-used CNCs, to every step of the manufacturing process, casting, machining, welding, surface treatment and packaging - all of these met my clients’ criteria for qualified suppliers. The previous biggest problem affecting my clients' China sourcing strategy, QUALITY, seems now to have been effectively solved. Chinese suppliers' price and delivery, moreover, is usually comparatively better than competitors from other countries.
So what else is the problem then? The biggest problem arose afterwards. Most of the suppliers we visited did not have any agencies in any of my clients' countries, which, incidentally, made it easy to talk to the supplier directly and get lower prices. But for those products frequently requiring maintenance, it is simply not possible to rely only on the suppliers.
Let’s take the procurement of pumps for mining industries as an example. The pumps are usually used in tough (i.e. high pressure and corrosive) conditions. The lifespan of the key parts will be short, sometimes 20 days to 1 month. The buyer can save 1/3 of the total purchase value by sourcing pumps from China. But for maintenance, the buyer will have to keep enough stock for the key parts. If there is not enough stock and the buyer has to order parts from the Chinese supplier, it requires lead time of at least 1 month, plus shipping time. To set up a solid agency overseas is a large investment for many Chinese suppliers, so after-sales service is not an obstacle that can easily be overcome. Yet as long as they are fully aware of the problem, with thorough communication, Chinese suppliers and overseas buyers can come up with solutions, such as
As another example of problematic after-sales service, I can relate the following example. A South African client recently bought an engineering machine from a Chinese producer. The drive, which carried an international well-known brand produced in Germany, turned out to be faulty. The German brand, however, has an agency in South Africa, and so the client was expecting the agency would easily be able to solve the problem. Yet the client was told that it could take 3 months to get a new drive and that this was the normal lead time. The client then came back to the Chinese supplier directly and finally got a new one within 15 days.
From this perspective, the fact that Chinese companies do not have agencies overseas is not reason enough to dismiss their after-sales service completely. Indeed, for international companies who have agencies anywhere else, rigid systems and other factors can sometimes form stumbling blocks of their own. Sourcing managers will still need to invest a lot of time to conduct thorough research before they can decide where to source most profitably.
Although the manufacturing technology for some of the products was not on the international level, the quality of most products exceeded my clients’ expectations. From manufacturing machinery, i.e. widely-used CNCs, to every step of the manufacturing process, casting, machining, welding, surface treatment and packaging - all of these met my clients’ criteria for qualified suppliers. The previous biggest problem affecting my clients' China sourcing strategy, QUALITY, seems now to have been effectively solved. Chinese suppliers' price and delivery, moreover, is usually comparatively better than competitors from other countries.
So what else is the problem then? The biggest problem arose afterwards. Most of the suppliers we visited did not have any agencies in any of my clients' countries, which, incidentally, made it easy to talk to the supplier directly and get lower prices. But for those products frequently requiring maintenance, it is simply not possible to rely only on the suppliers.
Let’s take the procurement of pumps for mining industries as an example. The pumps are usually used in tough (i.e. high pressure and corrosive) conditions. The lifespan of the key parts will be short, sometimes 20 days to 1 month. The buyer can save 1/3 of the total purchase value by sourcing pumps from China. But for maintenance, the buyer will have to keep enough stock for the key parts. If there is not enough stock and the buyer has to order parts from the Chinese supplier, it requires lead time of at least 1 month, plus shipping time. To set up a solid agency overseas is a large investment for many Chinese suppliers, so after-sales service is not an obstacle that can easily be overcome. Yet as long as they are fully aware of the problem, with thorough communication, Chinese suppliers and overseas buyers can come up with solutions, such as
- Sourcing some general-use parts (i.e. seal parts) locally with the assistance of other Chinese suppliers
- Negotiating with Chinese suppliers to have a ‘green channel’ to shorten lead times
- Setting up a stock level system with supply chain management knowledge
As another example of problematic after-sales service, I can relate the following example. A South African client recently bought an engineering machine from a Chinese producer. The drive, which carried an international well-known brand produced in Germany, turned out to be faulty. The German brand, however, has an agency in South Africa, and so the client was expecting the agency would easily be able to solve the problem. Yet the client was told that it could take 3 months to get a new drive and that this was the normal lead time. The client then came back to the Chinese supplier directly and finally got a new one within 15 days.
From this perspective, the fact that Chinese companies do not have agencies overseas is not reason enough to dismiss their after-sales service completely. Indeed, for international companies who have agencies anywhere else, rigid systems and other factors can sometimes form stumbling blocks of their own. Sourcing managers will still need to invest a lot of time to conduct thorough research before they can decide where to source most profitably.
The recently released Supply Chain Intelligence Report (SCIR) is an international, independent study on supply chain management and logistics practices in emerging economies, conducted in South Africa. The aim of the research is to provide insight into many forces that are driving change in supply chain management and to demonstrate how the most successful companies are dealing with these new and evolving challenges. Conducted annually, the SCIR facilitates progress and development in supply chain and logistics practices through the sharing of information and knowledge, without compromising confidential or strategic information.
The basic premise of the report is that planning and forecasting are undoubtedly the only big challenges to efficient supply chain management – as further illustrated by several international studies in recent years. Yet as we all clearly realize, the world is changing, and it is changing at a far faster rate than before – one of the primary drivers of this rapid change is information, the freely available and accessible information that the average person has access to.
What the SCIR 2009 proposes is that the only really effective way of addressing the planning and forecasting challenge is to improve visibility (both for demand and supply) in a supply chain, while simultaneously increasing the supply chain’s reactivity. If this is achieved, one will be able to plan and forecast and thus have an effective and efficient supply chain.
Visibility is the capability of easily observing, of being able to provide a clear view in respect of both supply & demand and is primarily determined by two drivers: technology and collaboration. By increasing forward and backward visibility along the supply chain, companies will have a greater lead time to adjust their production schedules and orders. Through the efficient use of technology, one is able to have greater access to information (in real time) and thus greater visibility.
Reactivity on the other hand is the ability to readily respond to a change, in this case a change in demand, with supply chain reactivity being best improved through the appropriate use of in-sourcing, outsourcing and virtual resourcing, as well as through integrative practice techniques. The report elaborates on the fact that the essential components of reactivity are ‘flexibility with respect to the ability to deploy supply chain assets, and the ability to assemble a virtual best of breed supply chain team that can redesign, implement and operate what will need to be almost an organic supply chain - one that changes, learns and evolves continuously.’
The report further goes on to expound the hypothesis that planning and forecasting are inseparable parts of what drives competitive advantage. In fact, planning and forecasting really drive efficiency – defined as cost reduction and precise execution – which is also matched by effectiveness – defined as doing the right thing at the right time. Effectiveness in itself is supported/driven by market sensitivity; which is an ability to acutely read and/or understand the market and be able to detect and anticipate events before they actually occur. Once all these are in place, understood and properly managed/executed, then a company has created a competitive advantage and can be defined as a ‘winning company.’
You can get a free copy of the main research report if you participate in the survey, which will take you about 10 minutes to complete, on the official SCIR 2009 website.
- Packaging
- Characteristics of the goods
- Shipping methods (by sea or air, by bulk or by container)
- Shipping period
- Policy in force at the destination, such as regulations on imported wood
- Storage needs
- After Sales and Warranty
- Quotation Deadlines and Validity Period
- Non-disclosure Agreement (NDA)
- Contact Details
In this series we have talked about a lot of elements which together make a good enquiry. These elements can reduce risk, increase sellers' and therefore buyers' efficiency, and of course help in getting the quotation you want.
We welcome any feedback should there be further questions or suggestions.
Since the advent of economic reform in China, Chinese exports as well as China's share of world exports have grown at a fast pace to surpass that of many developed economies. As a result, by the end of 2006 China had become the world's third-largest exporter after the US and Germany. In April 2008 the WTO announced that China had overtaken the US to become the world's second-biggest exporter, second only to Germany.
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,
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.
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.
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.
Economic logic dictates that if one does not manufacture where the production costs are the lowest, one may lose global competitiveness and therefore market share. Yet this is not only a question of low labour costs. Far from making a decision based upon a single criterion, entrepreneurs analyze a wider picture within which many other factors may influence the success of sourcing operations in a certain country. Such factors include set-up costs, labor supplies, export subsidies, import and export duties, tax incentives, proximity, country risk, political stability, the investment environment, abilities and qualifications of human resources, access to technology, infrastructure, logistics and consumption markets.
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:
As shown in the graph above, China's profile is the thinnest and hence China remains the most competitive. China's country risk and political stability index is higher than that of Germany or the US, but with much lower labor costs it reaches a very similar level of exports. In addition, there is little difference between China's country risk, political stability index and labor costs compared to those of Brazil and Thailand, yet its level of exports notably exceeds that of these developing economies.
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.
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.
As shown in the graph above, China's profile is the thinnest and hence China remains the most competitive. China's country risk and political stability index is higher than that of Germany or the US, but with much lower labor costs it reaches a very similar level of exports. In addition, there is little difference between China's country risk, political stability index and labor costs compared to those of Brazil and Thailand, yet its level of exports notably exceeds that of these developing economies. 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.
Finally it seems something might be done about packaging in China. As someone who has frequently been frustrated by Chinese candy wrappers that often require the use of teeth to be opened, I was heartened to read that the powers that be have proposed that manufacturers and operators in China should cooperate with consumers to reduce excessive packaging. While encouraging product manufacturers to avoid excessive packaging and offer genuine goods at a fair price to consumers, the proposals also exhort packaging enterprises to conserve resources and develop new materials and technologies that are easy to recycle. The worst offenders in China, according to the China Consumers' Association, are health care products, tea, cosmetics and moon cakes.
The new packaging proposals in China are in line with ongoing packaging innovations and improvements resulting from the current focus on developing green supply chains and sustainability. Jean Murphy at SupplyChainBrain has outlined how a recent explosion of corporate sustainability initiatives has led to renewed interest in packaging and achieving sustainability goals, and global retailer Wal-Mart has been a prime catalyst for the trend to reduce packaging in the supply chain, utilizing metrics such as greenhouse gas emissions, product-to-package ratios and space utilization to rate suppliers.
David Busch of Spend Matters has offered some practical insights on how packaging engineering can save money while also helping the environment. He recounts the new designs retailer Costco uses for milk jugs which entail substantial labor, water and fuel savings and also reduce costs for consumers (see also Supply Chain Digest's illustration of the transportation benefits of improved packaging). The doctor at Sourcing Innovation has also proposed package design optimization by which one can attack the packaging category strategically by re-designing packaging materials or by using cheaper substitutions. Optimization of this sort, the doctor feels, will also help you save money and get greener faster.
And for mooncakes there might yet be a solution as well. While describing this distinctly Chinese delicacy as having cockroach-like resisted all attempts at eradication over the years, Imagethief believes a remedy is at hand for the environmental toll of its excessive packaging, as mooncakes are infinitely recyclable and re-giftable. Shanghai, he writes, has brought the mooncake recycling market to a new level: rather than give physical mooncakes, its common to give a coupon that can be redeemed for mooncakes, so that while approximately four billion tons of mooncakes are gifted every mid-autumn, only about ten pounds are actually consumed.
So as China's astronauts land on the northern steppes of Inner Mongolia after a historic spacewalk, I could not help but leave the final word in this posting to CCTV.com with its colorful description of the astronauts' diet while in space:
The number 1 rule for the astronauts' menu is to avoid food that could cause gas. Such foodstuffs may cause stomach ache for the astronauts. And since their spacesuits have a self-circulation system, any gaseous after-effects could affect the air quality for the astronauts.
Yet luckily,
scientists plan to pack on board traditional snacks from all the country's 56 ethnic groups.
So here's to a safe landing, a moonwalk without gas, and a mooncake - without the packaging.
Mexico is currently being considered as an alternative sourcing option
to China, especially by some US-based supply chains eager to bring
production closer to home. Yet they are not the only ones hoping to
find new opportunities in Mexico, so are manufacturers from....China.
At the Supply Chain Digest, Dr David Simchi-Levi of MIT has proclaimed that the dramatic rise in fuel prices and transportation costs of recent times constitutes a tipping point where logistics costs have started to negate the unit cost advantages of China and other Asian countries. As a result, Simchi-Levi has noted a number of companies that have either put Asian offshoring on hold or have brought production back to domestic or nearshore sources, the so-called in-sourcing (or near-shoring) phenomenon that is raising Mexico's profile for US sourcing and supply chains.
And logistics costs are not the only concerns with China. As this article from IHT outlines, inflation, rising labor costs, shortages of workers and energy, a strengthening currency, and dwindling tax breaks for foreign investors all have multinationals encouraging their suppliers to diversify out of China. With the so-called China plus one strategy, companies are expanding their bases elsewhere in Asia (particularly Vietnam) so as not to be overly dependent on factories in one country. Yet few companies are actually closing factories in China, and for those with large operations in China, China plus one is only a strategy intended to mitigate risk and control costs.
If US supply chains are not about to retreat en masse back to Mexico, expanding Chinese auto manufacturers are preparing to advance into Mexico to get a foothold in America. Following the Chinese company First Auto Works, who announced plans to build an assembly plant in Mexico with Grupo Salinas, private Chinese auto manufacturer Geely Automobile this week also announced plans to move ahead with construction of an assembly plant in Mexico to supply both the North and South American markets. Geely and a local partner will invest up to $270 million to build a factory in Leon, capital of Guanjuato state in central Mexico. With the plant eventually set to have an annual capacity of 300,000 units, Geely wants Mexico to be a stepping-stone for achieving its ambitions of conquering the US market.
And Geely might pave the way for a host of Chinese manufacturers to head into Mexico. With China now being Mexico's second largest trading partner, during his visit to China in July Mexican President Felipe Calderon invited Chinese business leaders to invest in Mexico:
So if some US supply chains are forced to head back closer to home in Mexico, manufacturers in China are prepared for a big push westwards, to Mexico and beyond.We do want global investment, and if there are (Chinese) companies that are thinking about investing in other (Latin American) nations, but those nations are not hospitable to investment, they should know that they are welcome in Mexico and we protect their rights.
Image: www.iho-ohi.org
China's manufacturing has primarily been export-driven. This has been due to a large historical price gap. Other gaps, however, have resulted in huge costs, long delays, and a lack of knowledge for manufacturers, buyers and end customer expectations. These are information transfer gaps.
To improve supplier management, these information gaps must be sealed. Companies are doing this through end-to-end supply chain monitoring. A method for linking the manufacturer with end expectations will reduce operational risks. Likewise, conveying manufacturer production and lead time expectations to the customer can reduce costs.
Examples in Product Dying
Information and material flows in product dying are complex. Color pallets are created by designers. The pallets are then translated to dying machines. Once confirmed, dying colors must be maintained within a variance to minimize coloration discrepancies. If just one process occurs incorrectly, work-in-process inventory can turn to waste.
The challenge is translating the color pallet to the manufacturer. This takes technical knowledge of machinery calibration and material characteristics, engineer to engineer. Unfortunately, errors are caused by knowledge transfer from marketing staff to engineer. For example, a foreign buyer switches suppliers in China. The color pallet is referenced as displayed on the buyer's website or a sample is provided. Is the new manufacturer expected to recreate the color only by sight?
The Problem Permeates Sourcing
Many companies face this reality daily. With far removed buyers more closely associated with higher value added marketing and branding, technical knowledge needed to address engineering challenges is often left to the manufacturer's discretion. Here is another example.
In the apparel industry, raw material is defined by the end-customer in terms of feel, fit, and perceived value. The buyer's responsibility is to translate these qualitative characteristics into tangible products. There is a divergence in the production process, however. The buyer relays marketing language such as 100% cotton, feels cheap, and wrong shape. The manufacturer relays material specifics in technical language: vertical and horizontal thread count, weight per square meter, and stitch width per mm.
To address this issue, technical knowledge must be conveyed directly to the manufacturer. Passing through intermediaries may create potential miscommunications. On-the-ground teams who understand the product, material and process specifics are essential. To minimize the risk of error, bring the customer to the manufacturer.
With rising costs, it is clear China is entering a new phase. The new era will focus more attention on customer-driven metrics instead of direct cost and quality. Being closely integrated in supply chain flows will be essential for supplier managers to unlock once hidden productivity and efficiency gains. As global supply chains become longer, sustainable advantages will be solidified through increased collaboration in supply chain operations.
Bradley A. Feuling is the CEO of Kong and Allan, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion.
To improve supplier management, these information gaps must be sealed. Companies are doing this through end-to-end supply chain monitoring. A method for linking the manufacturer with end expectations will reduce operational risks. Likewise, conveying manufacturer production and lead time expectations to the customer can reduce costs.
Examples in Product Dying
Information and material flows in product dying are complex. Color pallets are created by designers. The pallets are then translated to dying machines. Once confirmed, dying colors must be maintained within a variance to minimize coloration discrepancies. If just one process occurs incorrectly, work-in-process inventory can turn to waste.
The challenge is translating the color pallet to the manufacturer. This takes technical knowledge of machinery calibration and material characteristics, engineer to engineer. Unfortunately, errors are caused by knowledge transfer from marketing staff to engineer. For example, a foreign buyer switches suppliers in China. The color pallet is referenced as displayed on the buyer's website or a sample is provided. Is the new manufacturer expected to recreate the color only by sight?
The Problem Permeates Sourcing
Many companies face this reality daily. With far removed buyers more closely associated with higher value added marketing and branding, technical knowledge needed to address engineering challenges is often left to the manufacturer's discretion. Here is another example.
In the apparel industry, raw material is defined by the end-customer in terms of feel, fit, and perceived value. The buyer's responsibility is to translate these qualitative characteristics into tangible products. There is a divergence in the production process, however. The buyer relays marketing language such as 100% cotton, feels cheap, and wrong shape. The manufacturer relays material specifics in technical language: vertical and horizontal thread count, weight per square meter, and stitch width per mm.
To address this issue, technical knowledge must be conveyed directly to the manufacturer. Passing through intermediaries may create potential miscommunications. On-the-ground teams who understand the product, material and process specifics are essential. To minimize the risk of error, bring the customer to the manufacturer.
With rising costs, it is clear China is entering a new phase. The new era will focus more attention on customer-driven metrics instead of direct cost and quality. Being closely integrated in supply chain flows will be essential for supplier managers to unlock once hidden productivity and efficiency gains. As global supply chains become longer, sustainable advantages will be solidified through increased collaboration in supply chain operations.
Bradley A. Feuling is the CEO of Kong and Allan, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion.
The impact of volatile oil prices and rising transportation costs is still sending shock waves across global supply chains, illustrating the potentially tenuous foundations of low-cost country sourcing and raising new claims that China sourcing is about to be eclipsed.
As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.
Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.
Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.
As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.
Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.
Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.
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.)
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