Category Archives: China

Was China Ever Worth It?

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A recent article in the Supply Chain Management Review covered a recent AMR survey across 133 manufacturers and retailers with over 5 Billion in revenue each and asked them about their sourcing plans from China. The survey found that manufacturers, who believe China contributes the most risk in 12 of 15 categories, are now 2-3 times more likely to decrease sourcing in China.

Nothing against China, but it’s about time. I’ve been against needless global sourcing since day one. Most of the time it just adds time, cost, risk, and, because of the dismal state of pollution control in the ocean shipping industry (which accounts for 4% of all emissions that contribute to climate change globally), pollution. And it wastes limited petroleum reserves. (The stuff takes millions of years to form under the earth’s surface, thus, at any point in time, the total amount available, even if we don’t know how much there is, is limited.) We can get the same quality of VCR or DVD player from Mexico, quicker, with reduced costs in a number of categories, with less risk, and less pollution.

Now, I’m not against global sourcing … some raw materials just aren’t available in sufficient quantities on all continents, each continent has a different growing season (and greenhouses aren’t as cheap or green as you think they are), and sometimes there are only a few places that can produce a new product. In these cases, you should definitely be global sourcing. But you shouldn’t be global sourcing just because it’s the lowest cost today … you should be global sourcing because it’s the best option, and value, over the long term.

Are We Moving Away From China?

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Editor’s Note: This is Dick Locke’s third post as a regular contributor on Sourcing Innovation. (His previous guest posts are still archived.) Dick, who has delivered seminars to over 100 companies across the globe, is a seasoned expert on International Sourcing and Procurement who wrote the book.

I just read through AMR Research’s “Supply Chain Risk, 2008-2009: As Bad as It Gets“. It rightly points out that it’s been a scary year. It does do a very thorough job of criticizing China. I know that AMR is just reporting what their clients report to them so I can’t fault AMR for what they say.

Among the things they say

China is the world capital of supply chain risk.

And, because of such concerns,

The move away from China sourcing starts with higher value-added work, boding ill for the Dragon’s ambitions to outdo Japan’s ascent from a cheap labor to high-tech economy.

If such a move has taken place, it’s not apparent yet in the computer industry.

Here are statistics from the US International Trade Commission: HTS 8471 is computers and peripherals. Data is January through April.

 

Country 2008 YTD 2009 YTD Percent Change
Thousands of dollars YTD2008 – YTD2009
China $9,101,153 $8,407,280 -7.60%
Mexico $1,734,089 $1,863,850 7.50%
Malaysia $3,166,961 $1,150,911 -63.70%
Thailand $1,138,875 $818,513 -28.10%
Singapore $953,493 $543,373 -43.00%
Japan $537,601 $383,673 -28.60%
Canada $280,130 $232,428 -17.00%
Taiwan $276,369 $207,521 -24.90%
Ireland $221,564 $171,436 -22.60%
Hungary $244,124 $147,130 -39.70%
Philippines $234,714 $130,273 -44.50%
Germany $125,194 $104,954 -16.20%
United Kingdom $103,245 $94,534 -8.40%
Korea $152,459 $88,018 -42.30%
Israel $47,296 $52,556 11.10%
Subtotal: $18,317,267 $14,396,450 -21.40%
All Other: $290,471 $211,065 -27.30%
Total: $18,607,738 $14,607,515 -21.50%

 

Sources: Data on this site have been compiled from tariff and trade data from the U.S. Department of Commerce and the U.S. International Trade Commission.

Comparing the first four months of 2009 to the same four months of 2008, computer imports into the United States dropped 21.5% in value. Imports from China only dropped 7.6%. China is increasing its share of imports.

I don’t think this is a sign that computer manufacturing is returning to the U.S. However, one sign that nearshoring may be taking hold is that Mexico is one of only two countries whose absolute value of imports increased. It jumped from number three country to number two.

These USITC reports are especially useful when sourcing. Look for both high value countries and rapidly growing countries. Your best sources will probably be in those countries.

Dick Locke, Global Procurement Group and Global Supply Training.

Junket Junking with James Jin

While I was visiting MFG headquarters in Atlanta yesterday, I had the pleasure of sitting down for a few minutes with James Jin, who runs MFG’s Shanghai office (which covers all of Asia at the moment). James, who hosted last year’s webinar on Surviving China’s Rapidly Changing Sourcing Tides is a rare character who not only deeply understands both the North American business world and the Chinese business world, but who also sees what’s needed to bridge them into a more seamless global marketplace, which is something he does on a daily basis through MFG. It was a pleasure to discuss both what he thought were the most critical areas of focus for MFG, and other companies doing business in China, as well as what his biggest challenges were, because it not only highlighted the differences in doing business with China, but also the similarities – which I don’t think enough people spend enough time on.

From James’ perspective, the three most critical aspects that MFG (and other businesses entering or doing business in the Chinese marketplace) needs to focus on are:

  • Any international business can’t afford to miss the China market
    Low cost country sourcing might be going away, or changing in nature, but China is here to stay as not only a huge supply base, but an economic development opportunity.
  • There is a huge buy-side demand, growing larger by the day.
    Not only does China have one of the largest emerging middle-classes in the developing world, but they already have one of the largest middle-classes in the world. (Think about it, they have over 1.3 Billion people!) China is not just a large supply-side opportunity, but they are a large sell-side opportunity for any company that can offer the right products at the right prices.
  • The key to success is to think globally, but act locally.
    Doing business in China requires a balance and an understanding of local culture and geography.

However, James’ answer to my inquiry on the three biggest challenges to doing business in China was even more revealing on what it takes to do business successfully in China than the three most important areas on which you need to focus. In short, the three biggest challenges are:

  • People
  • People
  • People

Despite the cultural and language differences, the reality is that doing business in China is just like doing business with most developed countries. They’re very mature about their approach to business (they understand that business ebbs and flows in a repeated cycle, and that just because they’re getting a lot of business today, that doesn’t mean they’ll be getting a lot tomorrow and that they’re going to have to work to get and keep new business), they have new plants with industry leading technology (in fact, some suppliers have the most modern plants in the world for what they produce due to recent investments to keep up with Western demand), the leaders understand that it’s all about the people (as almost everything but the human equation can be automated these days), but, even with 1.3+ Billion people, it’s a constant struggle to find the right people with the right education and the right skills for the job. Especially when they have to play in a global marketplace.

As for what’s going on with the rest of MFG, you’ll be hearing a lot more from them next quarter, and I’ll have more to discuss at a future time as well, but for now, I need to hit the road again and wonder just what Willie was thinking. (Obviously, he didn’t drive his own tour bus!!!)

Can China Be Innovative? IBM Says “YES”

Can China be Innovative? I asked this question here on this blog about a year and a half ago after doing a fair bit of reading and research on the subject – which led me to the conclusion reached by Denis Simon of New York’s Levin Institute, that China risks becoming a good 20th-century industrial economy just when it needs to figure out how to be a 21st-century knowledge-based economy if it doesn’t move in the right direction.

The reason for this is that it takes more than a new science policy (as mentioned in the Economist article Something New: Getting Serious About Innovation, registration and subscription required), additional funding, a stemming of the “brain drain”, and a protection of intellectual property rights to build a knowledge-based economy – it takes a culture, and more specifically, a culture that fosters innovation, not conformity.

But it seems like IBM, who moved it’s global procurement headquarters to Shenzhen, China back in the fall of 2006, thinks that China is far enough down the road to open its first supply chain innovation center in Beijing. Dedicated to helping companies worldwide integrate and transform their global supply chain capabilities, the center will leverage the company’s expertise in supply chain research, business consulting services, software capabilities, and it’s own Integrated Supply Chain experience (which brought the company from the brink of bankruptcy in 1993 to a company that saved 6.2B in 2006) to create new solutions for companies around the world.

According to the press release, the Beijing Supply Chain Innovation Center will collaborate with companies to develop innovative solutions that include:

  • Virtual Command Center
    a SOA (Service Oriented Architecture) supply chain visibility solution that integrates and synchronizes supply, demand, and logistics information
  • Carbon Tradeoff Modeler
    that helps companies include carbon output foot-printing in their supply chain optimization efforts
  • Supply Chain Optimization
    tools and modelers that enable companies to design and operate agile and adaptable supply chain processes and networks

… and is available to be leveraged by any IBM client world-wide — immediately.

It’s a very interesting development. It means that the pockets of innovation are becoming larger and that China might be capable of accelerating down the innovation highway faster than one would expect. However, given that China, like India, contains a great disparity between its urban centers, which are rapidly giving rise to a new middle class, and rural areas, which are only beginning to taste the “new” China, it also means that China might be exacerbating some problems as it solves others. I don’t think we’re far enough down the road to make any calls yet, and this leaves me with my initial thoughts: it will be very interesting to see how this plays out over the next few years.

China Matters Less

It looks like my predictions that the China craze may soon be coming to an end, first expressed in mid-2006 when I asked if low cost country sourcing to China was really innovative, are coming true. Consider this recent Slate article that points out how we’re now in the last days of cheap chinese and how we are about to start paying more (and, in some cases, a lot more) for clothes, electronics, toys and just about everything else.

Thanks to irrepressible inflation, soaring prices for raw materials, oil costs over 100 a barrel, and China’s Generation Y, the era of cheap Chinese goods is coming to an end. Some Chinese factories are now asking their American customers for price increases of as much as 20% to 30% – and getting it.

No longer is China desperate for foreign investment. No longer is there excess capacities in every industry. No longer are there millions of unemployed Chinese extremely desperate for city employment (as now there are millions of employed Chinese desperate for better wages). No longer is the Chinese renminbi extremely undervalued. And, most importantly, no longer are government officials turning a blind eye to every labor and environmental violation being committed in the country.

Unions are on the move. In January, Beijing introduced a new labor law that significantly strengthened the influence of the union in management decisions and the All-China Federation of Trade Unions, the country’s state-backed labor organization, has launched an aggressive recruiting campaign.

China’s Generation Y (born after the one-child policy came into effect) are increasingly aware of their rights to a legal wage, health insurance, and a certain number of days off every month – and they want them. As the article points out “already, southern China’s Guangdong province, known as ‘the workshop of the world’, is short 2 million workers, the equivalent of 14 percent of America’s entire manufacturing workforce”.

Does this mean that importers who currently rely on China are going to move away? Not likely. There are no other countries waiting in the wings to be the new China, just like China was waiting in the wings to be the new Mexico years back. Vietnam? It only has 85 Million people and only a fraction of its population is suitable for factory work – plus it’s inflation is faster than the rest of Asia. India? It can’t get its act together, it’s transportation system is a mess, it’s not set up for volume, and with an educated populace in many of its cities that speaks reasonable English, it’s going after the higher paying jobs in the information economy. Kenya? Madagascar? A ways off, at the least.

In other words, China is here to stay – but many of the “advantages” it had, especially where costs are concerned, are now gone. Get used to it … and in addition to paying a lot more at the pump, get used to paying a lot more in the stores as well.