This post seeks to provide you with a possible context in which to view and better understand our trip to China.
I recently touched based with one of our graduates working for a US firm that manufactures its product in China and exports the product back to the US and Europe. His firm is finding that establishing and managing the supply chain in an emerging market like China can be a challenge. I asked him, â€œWhat are you now seeing happening on the ground in China? And its pros and cons?â€ and he noted the below:
>Dear Professor Carr,
Good to hear from you. I hope the school year is going well and the students are preparing themselves for the incredible experience that is China. I am still loving the hustle and bustle of China. There is so just much more energy here compared to the US, and opportunities are in abundance.
There are some major changes on the ground here that I have seen in recent months.
One change is the shortage of raw materials, not just in our [XX] industry but in the [YY] industry as well. These are the two industries I have direct contact with but I suspect this change is across the board.
[One of my Orfalea College classmates also in China] has also been telling me how there was a massive shortage of parts for the OEM electronics business and only the big companies who have the buying power were getting what they needed. The smaller firms had to sit and wait for parts. (His company at the time was having one of their bigger customers place the parts orders that other smaller companies needed.) In my industry costs have gone up due to demand, and finding specific lesser-used materials has become difficult. Unless you are a big company and can meet the high order requirements of most factories to run a specific material, you can sometimes be out of luck.
Also, when the downturn in the economy started a year or two back, raw material vendors cut back production in all industries, as they were scared that they would be sitting on piles of stock. But it turns out global production didn’t dip a much as expected thereby causing shortages all over.
Also, the banking crisis and the troubles that small to medium size companies were having in accessing capital, caused many of those factories to go out of business. And China’s growing domestic consumption helped add to this shortage. It is unbelievable how fast this place is growing and changing.
Some companies are moving their manufacturing from the coastal cities to the more central provinces of China. One example I am sure you are aware of is Fox Conn, one of the world largest OEM electronic manufacturers. It has started moving its Shenzhen offices more inland to save on labor costs and to take advantage of some of the tax breaks the local governments are offering there to attract business. Many other companies are doing the same, or at the least opening second facilities in more remote areas of China, and moving what they can to those areas.
Both at the national and local level (Shenzhen and other already developed cities) the minimum wage has been raised. I have seen the minimum wage increase three times in the two years I have been here, between the national and local increases. This, along with the shortages of raw materials, has caused prices to significantly increase in manufacturing.
The Yuan (RMB) is also going up in value against the US dollar. This, of course, gives us less bang for our buck. This in and of itself is very interesting, as a change in currency value either way will have huge effect on the economy here and abroad. The Chinese don’t want to move the value of the RMB much. However, inflation in China is a huge issue and fear, and keeping the RMB pegged doesn’t help deal with that. But moving it can force many foreign companies to start looking elsewhere for cheaper manufacturing. So this is a catch-22 situation we all face.
Further, I believe, along with other Chinese I know and work with, that China’s real estate is over priced and in danger of a crash. The central government is doing all it can to try and prevent this at the national level, but local governments continue to ignore Beijing’s mandate on this and fund huge development projects, hoping to cash in on what have been super lucrative opportunities so far. This issue continues to have a down stream impact on firms like mine, and our supply chains.
Chinese companies are also now giving preference to domestic consumption and charging many export-based companies premium prices for their goods. As touched on above the buying power of the middle and even lower class is rapidly growing. The Chinese government wants to make sure that this growth continues and will give priority to domestic growth over the other issues it faces (and there are many).
In this changing environment, some firms will pull some of their manufacturing back to the States or Europe. Others will stay and move a second facility inland. Others will focus less on export and now that they have their China legs under them turn their attention to manufacturing in China and selling mainly to the Chinese domestic market — if you are manufacturing in China you MUST look at China as a market to sell to as well. But challenges will come with focusing on the domestic market as well. Any foreign product that is designed and used as an export product by foreign companies, if sold to the local market, will still be taxed as an import product. This gives Chinese companies the advantage as they can under price the competition. For example, Sony TVs are more expensive to buy in China than in the US, even though they are made there. That goes for computers, clothes, accessories, and everything else.
Having said all of the above, I still think any established brand that is not focusing on selling IN China or getting into the game here is really missing out and needs to find a way to get their foot in the door. However, if they don’t partner with a Chinese partner when they do so this will be extremely difficult and the more their brand grows in popularity the more it will be counterfeited and sold on the black markets. But that is just a cost of doing business in China. I feel that in time this situation will improve as China continues to develop and modernize.
The above, of course, doesn’t even take into consideration the vast cultural differences that still exist between Western and Chinese ways of thinking and doing business. The reality is that in doing business in China you are still a foreigner and the locals will always have an advantage over you. Everyday I am in China I am reminded that I am a foreigner, which presents difficulties in some areas but also some opportunities in others.
In summary, there is a lot going on here and in the ever-complex world of China. The opportunities are just huge here and the buying power is too great to ignore this market. I am thrilled to hear you continue to bring students to China. The place continues to blow me away.
I hope to make it back to SLO in the future so we can talk some more and catch up.
Question: Your thoughts to this alumni’s view, experience and touch base?
And to build off this post and alumni feedback re: this shift now taking place in China as China continues to develop and ‘modernize’, see these two interesting related posts and perspectives from Dan Harris over at the always good China Law Blog, China Manufacturing: ‘We’re Bringing It Back Home’ and Where To Locate Your Business In China. This Download Will Tell You.
May 5, 2011 addendum: Today’s Wall Street Journal had two excellent article that echo and build on this blog post and alumni observation, Will Costs Abroad Drive Firms Home? and Candle Maker Feels Burned: Compamy, With Plants in Asia, Struggles to Open in U.S.