Ashton Udall has a good discussion on why the Chinese are likely to copy your products and steal your Intellectual Property over on the Product Global blog (which was inspired by a posting on “Why Does China Copy Designs” on the Design Sojourn blog). The great thing about the post is he breaks it down into two major themes, each of which boil down to the same basic theme: culture, which I have partially discussed in my Is Low Cost Country Sourcing to China really Innovative, my Can China Be Innovative, and my Supply Chain Top Three posts. For those of you considering a new sourcing venture to China, I would highly recommend you check the post out.
Category Archives: China
Ailse Warfare in China?
Another very interesting article in the Economist last month was an article on retailing in China entitled Ready for warfare in the aisles that indicated that not only is China a market of unprecedented opportunity for both domestic and foreign retailers, but it is also a battleground where only the strong will surive.
At the same time that China is trying to become an innovation-based knowledge economy, it is also transitioning to a westernized mass-production and mass-consumption society. According to the article, China’s retail sales are set to expand by 13% to the equivalent of $860 billion this year, making the mainland the world’s seventh-largest retail market. Furthermore, there are now over 1,000 foreign retailers in China compared with just 314 two years ago. This is a stark contrast to traditional retailing in China where the majority of stores are tiny, family run outfits. Even today, China’s top 100 chains account for just a tenth of total retail sales. But it appears that local and foreign investors are eager to change all of that.
However, it appears the local competition is not taking it very well. The article points out that Crippling price discounts can be accompanied by dirty tactics: some stores send fake “customers” to rivals’ new stores to snap up all the promotions before genuine customers can get them. Another trick is to jam the doors of the lockers used by shoppers to store their purchases.
Nonetheless, given that suppliers can pay heavily to place their goods on retailers’ shelves, lease space for in-store displays, help pay for promotions, and give rebates, international chains are still eager to enter the market as these conditions can allow them to be profitable in their first year.
So what does this mean for your supply chain? I’d conjecture that it means two things. One: as the China retail market expands, you might find that you’ll be low cost country sourcing in other parts of Asia for your growing China market while volume-based low-cost country sourcing in China for your North American market and Two: when securing partnerships with local retailers, be sure to factor in all of the incidental costs and fees that will be required to successfully promote your products. Beyond that, I’d say it’s hard to tell … the huge influx of foreign retailers is going to drastically change the market, but I’m betting even the economists are having trouble predicting precisely how, and when, everything is going to happen. But it is going to impact your China supply chain, and is worth keeping tabs on.
Can China be Innovative?
Reading the economist last month, I encountered a number of articles related to China, which is not unusual, but one was entitled Something new: Getting Serious About Innovation (membership required for full article). Considering most of us still equate China with the tail-end of Low Cost Country Sourcing, factories, and knock-offs, the two words seem to be a juxtaposition on first read.
According to the article “innovation” has become a national buzzword, and Chinese leaders have been tossing it into their speeches since the beginning of the year when President Hu Jintao started an ambitious campaign to drive China’s economy further up the value chain.
In launching their “National Medium- and Long-Term Programme for Scientific and Technological Development (2006-20)”, Mr Hu, the prime minister, Wen Jiabao, and other top officials have vowed to spend more on science and technology, and to insist on business reforms. Their goal is to move China beyond its dependence on natural resources and cheap labour, and stake its place among the economies that depend on education and information technology.
The following quote is also very interesting. According to Denis Simon of the State University of New York’s Levin Institute, who advises the Chinese government on science policy, this move comes just in time. “If China doesn’t do this right,” he says, “it risks becoming a good 20th-century industrial economy just when it needs to figure out how to be a 21st-century knowledge-based economy.” This sums up where I see China headed – it takes more than funding, stemming the “internal brain drain”, and a protection of intellectual property rights to build a knowledge-based economy. It takes a culture. The culture that North America was built on and a culture that’s been lacking in China for much of its history.
As the article points out, a huge obstacle is the nature of China’s educational system, which stresses conformity and does little to foster independent thinking. Confucian philosophy reveres the teacher above all. More innovative Western economies, according to Ms Fang, operate under Aristotle’s maxim: “I love my teacher Plato greatly, but I love truth more.” In order to be innovative, China has to foster innovation in the next generation. And that is going to mean fostering independent thinking inside and outside the cirriculum. After all, we are talking about a country with a very long history of imperial and communist rule … which has generated a very conformist culture. And it’s hard to innovate when you conform. I think it will be very interesting to see how this plays out over the next few years. I’m also interested in hearing what The Prophet has to say. In the days ahead, hopefully he’ll chime in.
Is Low Cost Country Sourcing to China Really Innovative?
Since I haven’t been to China, and haven’t been involved in Chinese outsourcing (after all, software technology outsourcing was dominated by India firms during my software career), I’ve been hesitant to post on this topic. However, after readingLow Cost Country Sourcing in a Flattened World by Brad Blonkvist and John Kamauff in Chief Supply Chain Officer magazine, I just couldn’t hold back anymore. It finally pointed out the solid facts behind the anecdotal basis of my fears – China just does not have the physical infrastructure to maintain its current growth rate (despite the fact they are building 4.2B railways).
In order to scale up production, you need a certain amount of infrastructure. First of all, you need qualified engineers to staff your factories, plants, or service centers. On a per capita basis, China has only 8.6 students for every 1000 residents, as compared to 56.2 for the US. Furthermore, the studies that claim China graduates considerably more engineers and scientists each year are false. Consider the recent report Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India , by researchers Gary Gereffi, director of the Center on Globalization, Governance, and Competitiveness at Duke University, and Vivek Wadhwa, executive in residence at Duke’s Pratt School of Engineering, as summarized by the National Science Teachers Association (NSTA) on the NSTA WebNews Digest. Even though media reports in 2004 indicated that China produced 600,000 engineers compared to the 70,000 produced by the United States, the study found that more than 290,000 of the Chinese degrees were subbaccalaureate. After all, since the Chinese figures consist of data from different provinces that have no standard definition of engineering and include “the equivalent of motor mechanics and industrial technicians”, its clear that the actual numbers of graduates with US and EU equivalent degrees is much less then advertised. The Washington Post also ran a good article on this topic.
Furthermore, studies by organizations such as the McKinsey Global Institute have indicated that multinationals find that less then 25 percent of the graduates are employable. When you add the considerable language barrier into the picture, this indicates that the number of qualified engineers in China is considerably less then what many firms believe, and despite China’s large population, probably less then the number of qualified engineers in the US. Furthermore, it costs a lot of money to turn those who are qualified into productive workers. In Outsourcing to China, a special report from the Economist, the article points out that foreign companies in China are spending a small fortune “subsidizing China’s education system”. As an example, it points out that Fujitsu‘s Mr Noshiro has put some 40 Chinese workers through intensive training in Japan, at a cost of $30,000 a year each. “They need two years of full-time training just to become a middle-level engineer and four years to get to be a project manager.” Furthermore, even after three years of training “only 10-20% of programmers ever get to a really good level and can become an architect. China has so many colleges and so many graduates, but the degrees are not as good as they sound.”
Secondly, you need raw materials to build and run your plants. China is already importing more then its fair share of raw materials on a global basis. In addition to currently being the world’s largest importer of steel, it is importing 47% of cement, 21% of aluminum, 37% of cotton, and 30% of processed coal on a global basis. How much higher can these numbers go and be sustainable?
Thirdly, you need an infrastructure to get your raw materials in and your finished products out. Dozens of articles have been pointing out the infrastructure shortcomings in terms of paved roads and highways in India for a while now, but outside of a few big cities and central areas, China’s infrastructure is actually much worse. This shouldn’t be surprising as China only has 7 cars per capita compared to the 481 of the US. In addition, China has less then 150 airports compared to the 19,000 in the US.
Fourthly, you need energy to operate your plants – and this is where the numbers get really, really scary. Up to 30% of factories in China are periodically idle for weeks at a time due to power outages. According to the article, Northeast China is expected to exhaust power generation capacity by 2010! But if the rate of outsourcing to China continues to increase, I would predict that this could happen by 2008 – which is only 2 years away! After all, the actual increase in energy usage last year was 15%, not the 5% that was predicted. As it stands, China’s energy needs are expected to double by 2020 at the latest!
Fifthly, you have to protect yourself … but IP protection in China is almost nonexistent. I’ve read and heard too many stories of company X outsourcing product W to company Y who turns around and sells cheap knock-off Z in China which is undifferentiable from your product to the average buyer.
In other words, China, an emerging economy, is about to face a number of very significant problems simultaneously in a very short time frame – problems that the US, an established world superpower, has been battling for years with only limited success (think about the California or NorthEast energy grids, the fact that most major cities now have five and ten year plans just to alleviate current levels of traffic congestion, and the significant amounts of imports the US already requires). And I just can’t envision China coming up with a miracle to prevent the abrupt halt that is in its near future if outsourcing to China continues to increase at an exponential rate.
Now I know China is working on their infrastructure, but they are still concerned with connecting remote provinces by road and rail in efforts to integrate their people into one culture. Furthermore, as illuminated in Train to the Roof of the World, in their efforts to achieve these goals, they are taking considerable risks. For example, in their efforts to connect Tibet, and its capital Lhasa, to the rest of China, they are building a railroad over permafrost that could melt in the near future, especially considering global warming, which is not a myth and happening now. After all, concentrations of greenhouse gases such as methane and carbon dioxide today are the highest seen (40% higher than the highest concentrations measured) in the last 440,000 years, as determined by ice core research, which has removed cores 1.8 miles deep in the Antarctic.
But then again, as I’ve stated above, I’m not an expert, nor have I been to China. So I’m going to invite thought leader Jason Busch of Spend Matters who has been there and is a strong believer that the best is yet to come* in outsourcing to China to use his open mic as soon as he crawls back online* and tell me why I’m wrong and how China is going to solve these problems that have plagued the US and its northern neighbor for years – and do so to a sufficient degree in the next three years before the impending energy crisis begins what could be a quick, and massive, collapse.
* Link(s) no longer available. All posts pre-2012 were eliminated in the site revamp in June 2023.