Sourcing in China: From Cost-cutting to Strategic Asset
Through more than fifteen years of developing suppliers and managing sourcing, assembly operations and production on behalf of Western companies and their subsidiaries in China, SinoScan Group has been witness to tremendous change in the tactical and operational needs of customers and the strategic circumstances shaping those needs.
Since the beginning of Chinese economic reform, Western companies have looked to China for cost-efficient sourcing. Of course, in many cases, ensuring that labour cost reductions made it all the way down to the bottom line proved a formidable challenge. In a country still in the process of building its infrastructure, legal system, and management culture, the costs of controlling suppliers, their quality performance, and lead times while dealing with language barriers and cultural idiosyncrasies often more than offset the gains of being in China in the first place. Even so, for the companies that succeeded in their efforts, China has become an indispensable source of cost-efficient production input.
In recent years, however, considerations concerning a presence in China have become increasingly market-driven rather than cost-driven. These days, stagnant home markets, industry cluster relocations, and relatively higher growth rates in the Chinese economy are now presenting Western companies with challenges of an altogether different nature: As Chinese rivals expand their capabilities and consolidate market share in the Chinese and other emerging markets, the time might soon be at hand where in a growing number of industries the scale of their operations enables them to pose a credible threat to Western companies in high-end market segments – in China and beyond.
For a long time, received wisdom for many Western companies operating in the Chinese market has been to focus on the high-end segments. However, many analysts now believe that for a number of industries, long-term success in China, in other emerging economies and in the increasingly integrated global markets will require a presence in the mid-end segments.
parts in Assortment
Total Quality Compliance
As a case in point, a study from 2010 of Chinese acquisitions of German companies in the equipment and machinery industry found that some of the acquired companies had found themselves confined to an increasingly exclusive market-segment and decided that being acquired by a Chinese entity – quite apart from the financial resources afforded by a takeover – provided the best way back into a wider range of market segments in the world’s fastest growing economy – and to their survival.
For the numerous companies opting for avenues of expansion into the Chinese mid-end segments other than that of Chinese ownership, an important question is how to retain the company’s basic value proposition while enhancing both price competitiveness and sensitivity to Chinese particularities. Modes of distribution, accuracy of market data, and the informed deciphering of such data obviously form a crucial part of this question.
A part of the equation that is perhaps less often brought fully into play is the possible relocation or expansion of up-stream activities into China. The reasons for this omission are legion. The potential costs, the time required to reach a stage where actual, reliable production can take place, the tales of intellectual property lost to unscrupulous employees, suppliers, or competitors, or the potentially devastating consequences of a supplier base where stories of sweatshops still occasionally surface to the detriment of corporate reputation.
As hinted at in the above, however, the opportunities lost or the price to be paid for not seeking to leverage an integrative view of down-stream and up-stream activities in management and boardroom discussions of how to stay ahead in the Chinese market can be significant.
SINOSCAN STAFF - CLICK TO GO TO OVERVIEW
Gradual Upstream Adaptation
One fact that tends to be overlooked is that whereas the discussion of whether to have a manufacturing presence in China or not is dual in nature, the process of establishing such a presence and the associated costs and acquisition of risk are gradual.
At a recent meeting with a customer who has been sourcing from China for its European operations, the issue of how to expand the range of customer segments served in China was brought up. It turned out that this company had a number of product designs that were through their life cycle and no longer in production in Europe, designs that might with some modifications serve as an attractive offering for a group of mid-end customers. Furthermore, since the majority of parts did not require re-engineering, it was possible fairly quickly to initiate work on gathering quotations and commencing sample production. Other customers formerly sourcing solely for European manufacturing today are having a number of their products sourced and assembled by SinoScan in China and shipped directly to end-users.
At present, it will be possible for many companies to initiate a great deal of work relevant to manufacturing in China for the Chinese market through Western operators specialized in managing supply and production in China. Such operators, accustomed to the demands of a Western supply chain, afford companies a cost-efficient way of exploring how manufacturing in China can be used to leverage China market strategy without taking on the capacity costs and risk of establishing their own manufacturing facilities until the waters have been sufficiently tested. Importantly, for IP-sensitive products, part supply can be spread out over a number of suppliers and assembled at a secure facility.
A Window of Opportunity
As outlined above, many Western companies operating in China today, focused on protecting IP, sticking to home market value propositions and making their way into the much vaunted high-end segments of China, might find their positions to be unsustainable, even in the medium-term.
However, the components of their value propositions – be it innovative design, reliability, or a sharp focus on the end-user – coupled with the ability to produce competitively for the Chinese mid-end market, might prove to be crucial components in a bid for long-term prosperity in China. How long the window of opportunity for leveraging these components will remain open is, of course, an altogether different question.