Category Archives: China

Winning the Talent War in China

The McKinsey Quarterly recently published an interview with Emmanuel Hemmerle, a principal with Heidrick & Struggles, on “Winning the Talent War in China”. It had some great information for those multi-nationals who are looking to expand into China or who are having problems finding the top level talent they need.

It had a number of good points that you should not miss. These include:

  • Top Talent is NOT Cheaper in China
    Packages for top talent — with experience, skill sets and responsibility equal to their counterparts in Europe and the US — are often higher.
  • Strong and Weak Performers Have to be Differentiated
    Failure to do so will seem unfair and may lead to resentment.
  • You Will Need to Invest In China
    In some areas, the market economy is quite new, like luxury goods which really started ten years ago. Senior talent just isn’t available. You have to instead look for rising talent and take them the rest of the way yourself.
  • Talent in China Looks for Careers
    They are very sophisticated and, like their American and European counterparts, are looking at the long term impact of any offer on their career.
  • You Need to Localize
    A majority of the management team of the China operation should be mainland Chinese as this supports localization by showing that you see them as your equals, which they are if you have sought out and hired their top talent. (With a population that is more than four times that of the US, they have four times as many geniuses. Remember that.)
  • You Need to Seek Out the Best
    You should not only know who your top competitors are, but who their top people are and try to recruit them. Even if you don’t get your first choices, it shows your commitment to identifying and hiring the best talent.
  • You Need to Embrace the Culture
    You need to provide them with an environment that is attractive to them. This will include the fostering of a relatively non-hierarchical environment with growth opportunities for each individual, opportunities for each individual to get promoted to the top, and socially responsible activities.

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Nearshoring? Not on this planet. At least not yet.

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.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

 

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

 

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group and Global Supply Training.

It’s the Year of the Tiger … and China is Going to ROAR!

In 2008, according to the World Bank, China had a GDP of approximately 4.326 Trillion. Given that China projected growth of 8% in 2009, that puts them at about 4.672 Trillion for 2009. Continuing this trend, as China is projecting similar growth for 2010, that puts them at a GDP of about 5.046 Trillion this year. Meanwhile, Japan, which clocked in at 4.909 Trillion in 2008, just downgraded its projected growth to 1.3% for 2009, putting it at 4.973 Trillion for the year. As its economic outlook is not looking up, holding steady, this puts Japan at an estimated GDP of 5.023 Trillion for 2010. What does this mean? This will likely be the year that the Tiger ROARS and China becomes the 2nd largest producer of GDP in the world.

So what should you do besides learn Mandarin, if you haven’t already? (You can even start for free at sites like Chinese-Tools.com.) Good Question! While I still adamantly believe that you should not be importing goods from China that you can produce closer to home — as there’s nothing lean about an 8,000 mile supply chain — that doesn’t mean that you shouldn’t be producing in China for the Chinese market. Or that you shouldn’t be tapping the collective knowledge of the almost two million geniuses that live in the country.

But where do you start with the world’s fastest-growing economy? I’m not sure, but a recent article from Knowledge@Wharton on “The Road to China” that interviewed Harbir Singh, Saikat Chaudhuri, and Lawton Burns on their recent trips to China provided some fresh insights that are worth a second thought.

The economy is barreling ahead in high gear in major cities like Shanghai and Beijing which have literally transformed over the last decade. They have a strong infrastructure, a very strong manufacturing-based economy (as they are the manufacturing hub of the world), and are investing a lot of money to set up firms and an ecosystem to foster innovation. They’re trying very hard to move up the global value chain very fast. Plus, a lot of overseas Chinese are now returning to China — junior people as well as senior people.

However, they’re still a big country with a huge population which collectively has many different types of people with varied interests. As a result, where China is concerned, it’s still about managing diversity. It’s about meeting the aspirations of those people and managing the differences, as much as its promoting some uniformity in a standard of living.

In other words, you probably have to start by diving in head first because there’s so much happening, so fast, that it’s hard to really wrap your head around it all unless you’re immersed in it. But check out the article. Although it’s five pages, it is quite interesting.

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‘Made in China’ Now ‘Made in Egypt’

I got a bit of flak for my last global sourcing post on how Some Companies Will Move To China but Others Will Move Closer To Home despite the fact that before the China revolution, Mexican manufacturing was all the rage — and the fact that Mexico still has capability and lots of capacity. While my antagonists may be right in that some verticals will stay in China due to the significant investments that have been made in China in those verticals, not all verticals have made the same level of investment as the high-tech vertical, for example. Also, as per this recent article in Industry Week, even China is adopting near-sourcing!

According to the article, so far, around 950 Chinese companies have set up operations in Egyptian free zones, which represents a total investment of about $300 Million. The breakdown is about 55% (manufacturing) industry, 33% (service), and 12% other (agricultural, tourism, etc.). This is because Egypt is now offering cheap labor (as salaries compete with those in China), investment incentives, and unrestricted exports. Furthermore, given that China is already quite comfortable with Africa (where it invested 7.8B in 2008, up from $0.5B in 2003), this is just the beginning.

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Some Companies Will Move To China, Others Will Move Closer To Home

As noted in this recent Supply Chain Management Review article on “the short tail” (near sourcing trends create winners and losers), analyst Jeff Rubin estimates that the cost of transporting imported goods into the United States is now equivalent to a 9% tariff on imports. Nine Percent! That’s a significant cost considering it’s supposed to be “low cost country sourcing”. In addition, the cost of fuel is now about 40% of carrier operating costs — it used to be about 15%. And the U.S. dollar has significantly decreased in value against the Yuan, Yen, and Euro over the last three years, close to 20%. In fact, the decrease is so significant that, as I noted in a recent post, the “United Nations Conference Is Calling For A New Global Currency”.

When you put it all together, near-sourcing is starting to look pretty good, and a lot of smart companies are going to do it. And they’re going to win big.

Furthermore, so are a number of other companies as well. Who’s going to benefit, besides the companies that near-source to save transportation related costs? The SCMR article points out three types of companies who can win big with the coming shift:

  • Near-Sourcing Transportation & Service Providers
    Truck and rail is poised for growth, and so are 3PL firms that manage near-sourcing transportation.
  • Warehousers and Packagers
    Companies that can offer warehousing and packaging services to near-sourcing companies are also poised for growth.
  • Domestic Raw Materials & Manufacturing
    Near-sourcing means local production, and that means local manufacturing and raw materials.

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