Category Archives: China

China’s New Labour Militancy

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In my last post I wrote about the loosening of the controls on the value of the yuan. Since then, the yuan has weakened about 1%. That’s one of two developments affecting China sourcing.

The other, which I think will have more immediate effect, is new labor militancy among the employees of export related industries. They are realizing they are in a very strong bargaining position, because they are working for first tier suppliers of consumer products, such as computers, telephones and cars. The Apples, Dells, HPs and Hondas of the world aren’t going to stay customers of companies who take (with or without government involvement) repressive measures against labor militants.

This is unlike the situation in Mexico, where the federales broke a miner’s strike a few weeks ago. Miners are about as far back up the supply chain as you can get, so it’s unlikely the mine’s customers are going to feel consumer pressures. The mine is in Cananea, and is more or less an historic site because there was another famous government-assisted strike breaking there about 100 years ago. In that 1906 incident, the US Army got involved, 60 miles inside Mexico.

In China, the suppliers are generally conceding to labor’s demands. Will that lead to a massive departure from China? Not in itself, particularly in the electronics industry. As a rule of thumb, electronics assembly costs are 80% material, 15% overhead and only 5% labor. A small increase in labor costs at the assembly level is unlikely to be a deal-killer. That’s helpful, because resourcing all that electronic assembly work out of China is going to take years. Foxconn alone has 800,000 employees in China. Resource that!

Thanks, Dick.

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Are Chinese Christians Buying Themselves a New Vacation Home on the Aegean Sea?

While many people may still think that the majority of Chinese are Buddhist or Taoist, a large number of Chinese actually follow the “minority” religions of Islam or Christianity — and the number of people who follow the minority religions are significant as estimates put the number of followers of Islam at 20 Million to 30 Million and the number of followers of Christianity at 40 Million to 55 Million, or 3% to 4% of the population.

This is a very significant number, as it’s roughly four times the number of orthodox Christians in Greece (which account for roughly 97% of the population) — a country that China is in the process of buying piece by piece. According to this recent article in the Washington Post on how Greece is tapping China’s deep pockets to help rebuild it’s economy. Greece, which had to turn to the European Union and the IMF in April for a 140 Billion payout to stay afloat, is taking on the powerful unions in an effort to ensure that the Chinese can introduce dramatic changes as they invest in major projects, such as the 700 Million transformation of the Mediterranean port of Piraeus that will create a modern gateway that links Chinese factories with consumers across Europe and North Africa.

Greece is courting China for a bevy of other projects, including a sprawling new distribution centre in the industrial wastelands west of Athens, a monorail line, five-star hotels and a new maritime theme park — everything you’d want in a vacation home — or a wedding location! (The island of Santorini has started selling itself as the perfect location for “Big Fat Mandarin Weddings”.) And China is buying.

This will obviously improve port productivity and give those who are shipping into Europe more options, but is there a downside from the Chinese turning Greece into their vacation home?

China (Kinda) Loosens Controls on the Yuan

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

China announced last week that they will no longer peg the yuan to the US dollar. Instead, they are going to control the currency against a market basket of the currencies of countries they trade with. This is what Singapore did a decade or two ago.

This is at best a stop gap measure. It complicates the task of the Chinese government in setting exchange rates. Just because it’s more complex, it increases the credibility of those who call the Chinese currency controls “manipulation”.

China really should just let the currency float. Apparently internal pressures from their business community are stopping them from doing that.

So what does this mean for people sourcing in China? It’s probable that the Chinese currency will get stronger against US dollar. But even that isn’t certain. They tied the value of the yuan partially to the value of the euro. If the euro were due to collapse due to fiscal problems in its “club med” (Spain, Italy, Greece) countries, the yuan could actually weaken against the dollar.

So, what happens to your costs if the yuan were to appreciate, say 10%? Would the price for your Chinese product go up 10%? Probably not. The answer depends on two things. First, what fraction of the manufacturing cost of the product is Chinese? You do know the answer to that question, don’t you? You should.

In assembled products, it’s rarely 100%, because a lot of the components are imported.

Second, how competitive is the market for the product you are buying? If there’s a lot of competition, sellers can’t always pass on cost increases to buyers.

I also expect change will be slow. It’s more likely that the recent labor militancy will have a larger and more immediate effect, particularly on the price of higher-technology products. More on that in my next post.

Thanks, Dick. (Global Supply Training)

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Should Your Supply Chain Be Frugal?

After reading “first break all the rules” in the special report on innovation in emerging markets in the April 17th edition of The Economist, I have to wonder if the charms of frugal innovation will be the salvation for supply chain leaders who have hit a brick wall in supply chain optimization.

According to the article, the future lies in “reverse” or “constraint-based” innovation, which is being relabelled as “frugal” innovation. In frugal innovation, product companies take the needs of the poor consumer as a starting point and work backwards. Instead of adding ever more bells and whistles, the products are stripped down to their bare essentials. This goes beyond simply cutting costs to the bone as frugal products need to be tough, easy to use, and have a low environmental impact. In short, frugal does not mean second rate.

Frugal innovation involves rethinking the entire production process and business model. Companies need to compress costs to reach more customers and accept thinner profit margins to increase volume. Under the frugal innovation mindset, three ways of reducing costs are proving quite successful:

  1. Increase Contracted-Out WorkBharthi Airtel, a 30B Indian mobile company with some of the lowest fees in the business, contracts out everything but its core business of selling phone calls. Ericsson handles network operations, IBM handles business support, and an independent company manages transmission towers.
  2. Use Existing Technology in Imaginative New WaysTCS wants to use mobile phones to connect TVs to the internet through a set-top box because PCs are rare in India while TVs are ubiquitous.
  3. Apply Mass-Production Techniques in New and Unexpected AreasDevi Shetty, India’s most celebrated heart-surgeon, is attempting to make the industry more efficient through application of Henry Ford’s management principles to create a combination of economics of scale and specialization that can radically reduce the cost of heart surgery. His flagship Narayana Hrudayalaya Hospital in Bangalore has 1,000 beds (compared to an average of 160 in American Heart Hospitals), a team of 40+ cardiologists who perform about 600 operations a week, and generous backup facilities that allow the surgeons to concentrate on their speciality and not administrivia. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America and has success rates that rival the best American hospitals.

And all three ways are appropriate to your supply chain. For example, an efficient operation focusses on its core strengths and contracts out support operations a partner can do better, faster and cheaper; a forward thinking operation will realize that RFID is sometimes more useful when applied within your four walls to automate tracking of all of your assets (as asset tracking and inventory is one of the most time-wasting administrative practices your people will need to engage in); and will automate repeated RFX and Auction events on a massive scale to reduce the amount of tactical data collection efforts that their buyers will need to engage in (which will allow them to focus on strategic efforts).

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Is AMR Too Hard on China?

Now it’s well known that, unlike a fellow blogger, I’m not all that high on China (having questioned how innovative LCCS sourcing to China really is back in month one) because I believe that we could be a lot more sustainable, green, and logical and near-source much of what we’re needlessly outsourcing halfway around the globe, but sometimes I think AMR is even lower on China than I am, to the point of being unjustly hard. (Because, as Dick Locke will point out, sometimes they are the best choice. Not always, but sometimes.)

Basically, I found this recent article from AMR on “six reasons to worry about China in your supply chain” a little unfair. While all of the reasons were valid, most of them weren’t exclusive to China. In fact, only two of them were specific to China and most of the rest were pretty generic and applicable across the globe. While the rare earth chokehold — evidenced by the fact that they control 93% of the world wide production of terbium, dysprosium, and other highly specialized high-tech minerals, and the exchange rate by fiat — evidenced by the fact that the Yuan’s exchange rate is still pegged to the dollar, are specific to China, the following concerns are much more global:

  • Capricious Trade RulingsChina isn’t the only communist country that can impose prohibitive export taxes without warning that, in one case, quadrupled the price of yellow phosphorous overnight. Before Chavez started seizing oil companies, he was creating “extraction” taxes of at least 33%. And let’s not forget that protectionist democracies can hike taxes without warning too. For example, last year Obama imposed a huge, three-year tariff on tires imported from China that raised prices for consumers by 35%.
  • Indigenous InnovationSure China has a policy that favours companies using domestically developed IP, but there’s nothing to stop India, which is also focussing strongly on (frugal) innovation from adopting a similar policy. And even if they don’t, with 1.2 Billion people and a burgeoning middle class that will soon be larger than the population of North America, it probably won’t be long before they’re out-innovating us.
  • Rampant IP PiracySure China might consistently top the watch lists, but Russia and Mexico are consistently high as well, and the recent US watch list also includes Spain near the top of the list!
  • Poisons, Pollution, and ContaminationSure the cities in China are bad, but so are the cities in India. And the water in much of India is terribly polluted — over a million children die each year from disease and infection from the polluted water, and it’s a major reason that 50% to 60% of women living in the slums suffer from chronic malnutrition, recurrent gastro-enteritis, and helminthic infections.

Now, I’m definitely not saying these aren’t valid concerns where China is involved, just that these concerns aren’t restricted to China and that if you’re gonna beat on China, you should be fair about it.

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