Finally it seems something might be done about packaging in China. As someone who has frequently been frustrated by Chinese candy wrappers that often require the use of teeth to be opened, I was heartened to read that the powers that be have proposed that manufacturers and operators in China should cooperate with consumers to reduce excessive packaging. While encouraging product manufacturers to avoid excessive packaging and offer genuine goods at a fair price to consumers, the proposals also exhort packaging enterprises to conserve resources and develop new materials and technologies that are easy to recycle. The worst offenders in China, according to the China Consumers' Association, are health care products, tea, cosmetics and moon cakes.
The new packaging proposals in China are in line with ongoing packaging innovations and improvements resulting from the current focus on developing green supply chains and sustainability. Jean Murphy at SupplyChainBrain has outlined how a recent explosion of corporate sustainability initiatives has led to renewed interest in packaging and achieving sustainability goals, and global retailer Wal-Mart has been a prime catalyst for the trend to reduce packaging in the supply chain, utilizing metrics such as greenhouse gas emissions, product-to-package ratios and space utilization to rate suppliers.
David Busch of Spend Matters has offered some practical insights on how packaging engineering can save money while also helping the environment. He recounts the new designs retailer Costco uses for milk jugs which entail substantial labor, water and fuel savings and also reduce costs for consumers (see also Supply Chain Digest's illustration of the transportation benefits of improved packaging). The doctor at Sourcing Innovation has also proposed package design optimization by which one can attack the packaging category strategically by re-designing packaging materials or by using cheaper substitutions. Optimization of this sort, the doctor feels, will also help you save money and get greener faster.
And for mooncakes there might yet be a solution as well. While describing this distinctly Chinese delicacy as having cockroach-like resisted all attempts at eradication over the years, Imagethief believes a remedy is at hand for the environmental toll of its excessive packaging, as mooncakes are infinitely recyclable and re-giftable. Shanghai, he writes, has brought the mooncake recycling market to a new level: rather than give physical mooncakes, its common to give a coupon that can be redeemed for mooncakes, so that while approximately four billion tons of mooncakes are gifted every mid-autumn, only about ten pounds are actually consumed.
So as China's astronauts land on the northern steppes of Inner Mongolia after a historic spacewalk, I could not help but leave the final word in this posting to CCTV.com with its colorful description of the astronauts' diet while in space:
The number 1 rule for the astronauts' menu is to avoid food that could cause gas. Such foodstuffs may cause stomach ache for the astronauts. And since their spacesuits have a self-circulation system, any gaseous after-effects could affect the air quality for the astronauts.
Yet luckily,
scientists plan to pack on board traditional snacks from all the country's 56 ethnic groups.
So here's to a safe landing, a moonwalk without gas, and a mooncake - without the packaging.
Talk everywhere is of crisis and panic emanating from the US financial centers. Yet in China, a different yet familiar kind of crisis is playing itself out.
Because of strict regulation and an overwhelming domestic focus, as FT.com put it, Chinese financial institutions are not overly exposed to US subprime-related assets or firms, yet China's overall economy, with its reliance on exports and with China's substantial dollar-dominated foreign exchange reserves, will inevitably suffer from a slowing US economy. As Wall Street wallows in a bad dream / nightmare, there are indications that China, while not gripped in panic, may be heading for some storm clouds of its own. While the impact of the Olympics is still unclear, industrial production growth plunged to a six-year low of 12.8% in August; car inventories hit a four-year high in June; air traffic has slowed sharply; and electricity output has dropped. While Chinese exports have remained robust, expanding 22% in the first eight months of 2008, the contraction in Europe and the US could make this period the calm before the storm - before Wall Street's bad dream turns into storm clouds over China's exports-dependent economy. In this context it is possible to discern how China's slightly slowing economy could proceed to slowing more rapidly, reaching what Leo Lewis at The Times referred to as a psychological turning point of single-digit growth.
Although the slowdown in the US and Europe will harm China's exports, in another view, Western consumers might only increase their demand for cheaper, Chinese-made goods. Speakers at this year's Trans-Pacific Maritime Asia conference (h/t 3PLwire) uniformly agreed that, despite the current weak global economy, China will remain the supplier of choice for manufactured products. Jonathan Beard, MD of GHK Hong Kong Ltd., noted that exports through China ports rose 13% in the first half of 2008, and other speakers lauded China's established manufacturing relationships, supply chain infrastructure, port infrastructure and political stability: even in these times China is a safe bet and will remain so.
Yet if China sourcing seems set in theory to emerge unscathed from the current financial crisis, what of the reputation for quality and safety concerns associated with products made in China? The Made in China brand has once more been enveloped in crisis with the ongoing milk powder scandal. The fallout has generated vigorous online debate in which some Chinese netizens even called for a boycott of all products made in China, and China Youth Daily columnist Liu Yibin (h/t China Media Project) suggested that the best medicine for enterprises lacking conscience would be to simply allow them to die. Yet for those who do quality control for a living in China, its less of a crisis than merely business as usual. At the Silk Road blog, David Dayton writes:
As the milk powder scandal shows, out in the trenches, over the past year, nothing’s really changed...We still have the same issues with factories not meeting agreed upon standards, not understanding those standards in the first place, substituting cheaper domestic products in place of more expensive imported ones, using uncontrolled sub-suppliers, working rejected product back into approved stock, and of course purposeful and natural quality fade issues.
And Dayton is not hopeful of seeing any changes soon. He's not holding his breath, at least not until the next crisis.
The Guangdong Bureau of Quality and Technical Supervision has released a special audit of DVD player manufacturers in the province in which only 39.2% of small and medium-sized manufacturers were found to pass quality spot checks. Yet large-scale manufacturers in Guangdong which, as the Bureau put it, produce relatively reliable quality products, scored a full 100% pass rate. In a similar fashion, smaller foreign companies also struggle with quality issues in China. The presence needed on the ground and the overall effort required for QC and due diligence makes for a formidable challenge. Reuters recently reported on a small number of German firms who, in response to quality concerns, are swimming against the tide and leaving China. One of these is toymaker Steiff, which originally outsourced around a fifth of its production in 2003 yet have had to reject a cumbersome number of toys made in China, some of which Managing Director Martin Frechen described as looking like they have been run over by a car. The stark quality divide between large and smaller companies seems to be a corollary of a fundamental trend with quality in China: Size is integral to every aspect of the process - the bigger the better.
Steiff MD Frechen attributed the problems with quality to the high staff turnover in Chinese factories which meant staff received insufficient training, yet he also thought Steiff's typical orders of around 500 lots were too small to reap cost advantages in factories accustomed to mass production. For all its high-profile product quality problems associated with China last year, Mattel - the world's largest toy maker - has stood by its Chinese partners and improved quality checks, yet quality control is difficult to implement for smaller companies without a substantial presence in China. The problem for small companies in China with an emphasis on quality, as Volker Treier, chief economist of the German Chambers of Industry and Commerce, mentioned in the Reuters article, is when they have to jump into cold water and see if they can swim without the resources for proper research.
So how can small companies keep themselves from drowning in cold water with quality concerns in China? Ultimately they will have to trust someone to do their QC for them. The Quality Wars blog (h/t China Law Blog) has weighed in on the choices available for foreign manufacturers between doing their own QC with an employee in China or hiring an outside QC service provider. While a local employee will generally be cheaper and may have access to local knowledge and networks, they may also be exposed to being bribed by the factory to pass unacceptable goods. Outsourcing QC to a third company, however, will put QC in the hands of a dedicated company that specializes in checking products and factories in Asia.
Ultimately, in China, the best option is QC=BIG.
Mexico is currently being considered as an alternative sourcing option
to China, especially by some US-based supply chains eager to bring
production closer to home. Yet they are not the only ones hoping to
find new opportunities in Mexico, so are manufacturers from....China.
At the Supply Chain Digest, Dr David Simchi-Levi of MIT has proclaimed that the dramatic rise in fuel prices and transportation costs of recent times constitutes a tipping point where logistics costs have started to negate the unit cost advantages of China and other Asian countries. As a result, Simchi-Levi has noted a number of companies that have either put Asian offshoring on hold or have brought production back to domestic or nearshore sources, the so-called in-sourcing (or near-shoring) phenomenon that is raising Mexico's profile for US sourcing and supply chains.
And logistics costs are not the only concerns with China. As this article from IHT outlines, inflation, rising labor costs, shortages of workers and energy, a strengthening currency, and dwindling tax breaks for foreign investors all have multinationals encouraging their suppliers to diversify out of China. With the so-called China plus one strategy, companies are expanding their bases elsewhere in Asia (particularly Vietnam) so as not to be overly dependent on factories in one country. Yet few companies are actually closing factories in China, and for those with large operations in China, China plus one is only a strategy intended to mitigate risk and control costs.
If US supply chains are not about to retreat en masse back to Mexico, expanding Chinese auto manufacturers are preparing to advance into Mexico to get a foothold in America. Following the Chinese company First Auto Works, who announced plans to build an assembly plant in Mexico with Grupo Salinas, private Chinese auto manufacturer Geely Automobile this week also announced plans to move ahead with construction of an assembly plant in Mexico to supply both the North and South American markets. Geely and a local partner will invest up to $270 million to build a factory in Leon, capital of Guanjuato state in central Mexico. With the plant eventually set to have an annual capacity of 300,000 units, Geely wants Mexico to be a stepping-stone for achieving its ambitions of conquering the US market.
And Geely might pave the way for a host of Chinese manufacturers to head into Mexico. With China now being Mexico's second largest trading partner, during his visit to China in July Mexican President Felipe Calderon invited Chinese business leaders to invest in Mexico:
So if some US supply chains are forced to head back closer to home in Mexico, manufacturers in China are prepared for a big push westwards, to Mexico and beyond.We do want global investment, and if there are (Chinese) companies that are thinking about investing in other (Latin American) nations, but those nations are not hospitable to investment, they should know that they are welcome in Mexico and we protect their rights.
Image: www.iho-ohi.org
In what the Financial Times describes as a great leap, next year (and four years earlier than expected) China is set to become the world's largest producer of manufactured goods with 17% of manufacturing value-added output, while the rapidly weakening US economy will have to settle for second place with 16%. Underlining the surge of China's manufacturing-led economy (China contributed only 3% of global manufacturing in 1990), The Financial Times is in no doubt about the historical significance of the development:
Yet in an inverted parallel between ancient China and the modern, confident Middle Kingdom, contemporary China's ability to build and export various machines is indeed setting it apart from the rest of the world. Apart from its imminent status as the world's leading manufacturer, China is now the world's leading exporter of machinery and electrical equipment (i), and it exports more high technology than Germany and Japan (ii). Most (56%) of its high tech exports, moreover, go to the US, Japan and Germany (ii), and its high tech exports to the US has grown by 197% from 1990 to 2004 (ii).
If 2009 is then to be the year when China officially returns to a position of
dominance in the world, it remains a fascinating sight to behold China's ongoing great leap into the unknown - by no means a perfect journey, but history moving before our eyes.
(i) Source: UN Statistical Database HS 2002.
(ii) Source: OECD, STAN Bilateral Trade Database, 2006 edition.
Image: www.china.org.cn
One defining element that typified the divergence between China and the West during the latter's rise to ascendancy during the Industrial Revolution was the utterly novel ability to build a machine, and a steam engine in particular - the quintessential invention of the Industrial Revolution. Here I can only acknowledge my sage old history professor at the London School of Economics, Prof Kent Deng who, with his paper Why the Chinese Failed to Develop A Steam Engine, delved into the multiple reasons why pre-modern China was never able to progress from building production processes relying on human or natural forces to inventing a man-made engine utilizing the conversion of one form of energy to another, as is the case with the steam engine.The expected change will end more than a 100 years of US dominance. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world's biggest manufacturer after its Industrial Revolution.
Yet in an inverted parallel between ancient China and the modern, confident Middle Kingdom, contemporary China's ability to build and export various machines is indeed setting it apart from the rest of the world. Apart from its imminent status as the world's leading manufacturer, China is now the world's leading exporter of machinery and electrical equipment (i), and it exports more high technology than Germany and Japan (ii). Most (56%) of its high tech exports, moreover, go to the US, Japan and Germany (ii), and its high tech exports to the US has grown by 197% from 1990 to 2004 (ii).
If 2009 is then to be the year when China officially returns to a position of
dominance in the world, it remains a fascinating sight to behold China's ongoing great leap into the unknown - by no means a perfect journey, but history moving before our eyes. (i) Source: UN Statistical Database HS 2002.
(ii) Source: OECD, STAN Bilateral Trade Database, 2006 edition.
Image: www.china.org.cn
China's manufacturing has primarily been export-driven. This has been due to a large historical price gap. Other gaps, however, have resulted in huge costs, long delays, and a lack of knowledge for manufacturers, buyers and end customer expectations. These are information transfer gaps.
To improve supplier management, these information gaps must be sealed. Companies are doing this through end-to-end supply chain monitoring. A method for linking the manufacturer with end expectations will reduce operational risks. Likewise, conveying manufacturer production and lead time expectations to the customer can reduce costs.
Examples in Product Dying
Information and material flows in product dying are complex. Color pallets are created by designers. The pallets are then translated to dying machines. Once confirmed, dying colors must be maintained within a variance to minimize coloration discrepancies. If just one process occurs incorrectly, work-in-process inventory can turn to waste.
The challenge is translating the color pallet to the manufacturer. This takes technical knowledge of machinery calibration and material characteristics, engineer to engineer. Unfortunately, errors are caused by knowledge transfer from marketing staff to engineer. For example, a foreign buyer switches suppliers in China. The color pallet is referenced as displayed on the buyer's website or a sample is provided. Is the new manufacturer expected to recreate the color only by sight?
The Problem Permeates Sourcing
Many companies face this reality daily. With far removed buyers more closely associated with higher value added marketing and branding, technical knowledge needed to address engineering challenges is often left to the manufacturer's discretion. Here is another example.
In the apparel industry, raw material is defined by the end-customer in terms of feel, fit, and perceived value. The buyer's responsibility is to translate these qualitative characteristics into tangible products. There is a divergence in the production process, however. The buyer relays marketing language such as 100% cotton, feels cheap, and wrong shape. The manufacturer relays material specifics in technical language: vertical and horizontal thread count, weight per square meter, and stitch width per mm.
To address this issue, technical knowledge must be conveyed directly to the manufacturer. Passing through intermediaries may create potential miscommunications. On-the-ground teams who understand the product, material and process specifics are essential. To minimize the risk of error, bring the customer to the manufacturer.
With rising costs, it is clear China is entering a new phase. The new era will focus more attention on customer-driven metrics instead of direct cost and quality. Being closely integrated in supply chain flows will be essential for supplier managers to unlock once hidden productivity and efficiency gains. As global supply chains become longer, sustainable advantages will be solidified through increased collaboration in supply chain operations.
Bradley A. Feuling is the CEO of Kong and Allan, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion.
To improve supplier management, these information gaps must be sealed. Companies are doing this through end-to-end supply chain monitoring. A method for linking the manufacturer with end expectations will reduce operational risks. Likewise, conveying manufacturer production and lead time expectations to the customer can reduce costs.
Examples in Product Dying
Information and material flows in product dying are complex. Color pallets are created by designers. The pallets are then translated to dying machines. Once confirmed, dying colors must be maintained within a variance to minimize coloration discrepancies. If just one process occurs incorrectly, work-in-process inventory can turn to waste.
The challenge is translating the color pallet to the manufacturer. This takes technical knowledge of machinery calibration and material characteristics, engineer to engineer. Unfortunately, errors are caused by knowledge transfer from marketing staff to engineer. For example, a foreign buyer switches suppliers in China. The color pallet is referenced as displayed on the buyer's website or a sample is provided. Is the new manufacturer expected to recreate the color only by sight?
The Problem Permeates Sourcing
Many companies face this reality daily. With far removed buyers more closely associated with higher value added marketing and branding, technical knowledge needed to address engineering challenges is often left to the manufacturer's discretion. Here is another example.
In the apparel industry, raw material is defined by the end-customer in terms of feel, fit, and perceived value. The buyer's responsibility is to translate these qualitative characteristics into tangible products. There is a divergence in the production process, however. The buyer relays marketing language such as 100% cotton, feels cheap, and wrong shape. The manufacturer relays material specifics in technical language: vertical and horizontal thread count, weight per square meter, and stitch width per mm.
To address this issue, technical knowledge must be conveyed directly to the manufacturer. Passing through intermediaries may create potential miscommunications. On-the-ground teams who understand the product, material and process specifics are essential. To minimize the risk of error, bring the customer to the manufacturer.
With rising costs, it is clear China is entering a new phase. The new era will focus more attention on customer-driven metrics instead of direct cost and quality. Being closely integrated in supply chain flows will be essential for supplier managers to unlock once hidden productivity and efficiency gains. As global supply chains become longer, sustainable advantages will be solidified through increased collaboration in supply chain operations.
Bradley A. Feuling is the CEO of Kong and Allan, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion.
With the Games now in full swing, Olympic tourists would be unaware of the concentrated efforts on the streets of Beijing that preceded their visit to the Chinese capital. Foreigners residing in Beijing before the Games would know, however, that cheap DVDs are no longer freely available on the street corners, while Beijing's Silk Street has been put through what Chinese Vice Premier Wang Qishan described as rectification. If there are visible outcomes of the Chinese government's claims of taking Intellectual Property Rights (IPR) seriously, these are part of it.Crackdowns in China are no small feat: China's scrap with the counterfeit industry has historically been of epic proportions. The tide of Western companies setting up production in China has provided numerous opportunities to copy designs and production techniques, and China's rising middle class (according to Supply Chain Digest) has been eager to snap up realistic looking knock-offs at low-ball prices. 80% of all items confiscated in 2007 by U.S. Customs authorities as counterfeit items, moreover, were produced in China, pointing to an advanced global distribution network for fake goods.
The latest crackdown in China was preceded by warnings in June of harsher punishments about to be meted out to piracy offenders. Copyright Management Bureau Director Xu Chao admitted to a grave piracy situation in China, yet as part of China's new Intellectual Property Rights Strategy, Xu promised better administrative protection of copyrights and harsher judicial penalties. Yet while a sign of changes on the ground, crackdowns in China still occur in a general context of lax enforcement of IPR, a description preferred by the Economist's Intelligence Unit, based on their analysis of China's still fragmented regulatory environment with various toothless agencies and biased courts.
Nevertheless, yesterday's edition of the China Daily newspaper reports of a crackdown planned for the local cultural market in the city of Anshan, Liaoning province. During the crackdown,
Yet if the amount of pirated goods exceeds 500 items, the article concludes with the terse yet ominous proclamation: the law-breaking unit or individual will bear criminal liability.law enforcement officials will inflict a stiff punishment on offenders. If the amount of pirated [goods] sold in one time do not exceed 100 items, all illegal goods and income will be confiscated, and the law breaker will be punished a minimum of 10,000 yuan (sic).
So despite China's infamous status as the counterfeit capital of the world, with the current crackdown in force, copyright offenders in China have been put on notice: surpass the magic number of 500 and you will face the full might of the law. Yet like with all crackdowns, the real test will be to see what happens after the crackdown, or more to the point, after the Olympics.
Image: China Daily.
The impact of volatile oil prices and rising transportation costs is still sending shock waves across global supply chains, illustrating the potentially tenuous foundations of low-cost country sourcing and raising new claims that China sourcing is about to be eclipsed.
As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.
Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.
Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.
As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.
Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.
Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.
Does the Peri minicar (left), built by China's GreatWall Motor, look remarkably similar to the Fiat Panda (right)?
A Turin court was in no doubt last month when it barred the Peri from being sold in the E.U., after an appeal by Fiat. Yet unsurprisingly, Great Wall Motor was able to shrug off the Italian court's decision, because a few days later a Chinese court dismissed the claim filed by Fiat in China alleging the GWPeri model was an infringement of its patent.
The Peri/Panda case is by no means the first claim of imitation against Chinese auto makers. In 2006 The Times described at length how the likes of General Motors, Rolls-Royce, BMW, DaimlerChrysler, Honda, Audi, Nissan, Toyota and Mercedes-Benz have all had to fend off a so-called attack of the clones from Chinese manufacturers like Chery, Shuanghuan, Hongqi, Geely and JiangLing. Some analysts have even concluded that Western manufacturers have to accept copying as part of the price of doing business in China, like Honda concluded when it lost half of its motorcycle manufacturing market share in China to cheaper Chinese immitations. Staying in China, Honda decided, required entering into partnership with some of the very companies copying its bikes.
Yet with the steady growth of the Chinese car market, China is no longer producing just lower-value clones. Chinese brands have grown to the point that 57% of all vehicles sold in China in 2006 were from local manufacturers, and in March 2006 Chery Automobile became the first Chinese auto maker to top the domestic car sales list. To actually break in to markets overseas, however, and to overcome their disadvantages in product and business model innovation and manufacturing quality, Chinese car makers have to make a quantum leap across the automotive value chain, enhance quality standards while developing unique models. While positioning itself for exports, Chery has been co-operating with global design and engineering experts and is now boosting exports to markets such as Egypt, Italy and Russia.
For many years regarded as low-end, unreliable brands, Chinese auto manufacturing is experiencing a gradual coming of age with the global emergence of Chery, and with the growth of the market in China and government encouragement of R&D, China will gradually lose its knack for manufacturing cheap clones.
Additional sources:
China. An Automotive Industry on the Verge (Accenture)
Shaping the Future of China's Auto Industry (McKinsey)
Foreign Technology in China's Automobile Industry (China Environment Series)
Images:
http://blogs.automobilemag.com (Panda)
http://www.cnnauto.com (Peri)
Negotiation is often a critical element in closing a sourcing deal, and while the process of negotiation in China is dependent on a complex cultural context, effective negotiation in China can only operate within China's cultural context to seek a positive outcome for both sides. In the first instance, negotiation is the interface between two parties and their respective objectives, and reaching agreement could depend on the skills, knowledge, and flexibility applied. Yet the crucial element is often in the details of the negotiation approach. Alliance Bernstein CPO Jonna Martinez coined the term Immersion Negotiation (h/t Supply Excellence) to underline the need to be the best prepared negotiator: The more you understand the positions, cultures, pressures, and backgrounds of your opposites, the more you can use that knowledge to attain your objectives. While resonating with the ideas of Sun Tzu and The Art of War, there is no doubt that such a strategy is difficult in China while Western and Chinese cultural notions differ so substantially on issues like the use of contracts, the value attached to personal relationships and the issue of face. Yet in China, the applicable saying is 入乡随俗 (ru xiang sui su)*.
Hence negotiation in China is rarely straightforward, like with the complex importance attached to building trust and the finer nuances of participating in banquets, dinners, visits and even karaoke. These, as David Dayton writes at Silk Road International, are all planned and scripted with clearly defined roles, where foreign buyers are required to play their part in the Chinese script, whether they speak Chinese or not. Of the various ploys and stratagems he experienced in conducting negotiations in China, Dayton deems organization, detail, politeness, a strong will and a healthy dose of patience as the most important. Yet while foreigners in China inevitably have to conduct negotiations under the guise of the foreign buyer, actual negotiating with Chinese suppliers can be a dynamic and unpredictable process in which buyers need to immerse themselves fully in the circumstances and thinking of their Chinese suppliers. There is only one way in China, and while almost anything can be negotiated - it can only be done in the Chinese way.
(* When entering the village, follow the local custom.)
Changes in labor organization and regulation in China are providing a unique perspective on China's systematic move up the production ladder and its embrace of higher-skilled industries.In a landmark agreement, employees of a Wal-Mart outlet in Shenyang, capital of Liaoning Province in northeastern China, last week signed a collective labor contract with the retailing giant. Under the agreement, employees' salaries will be raised by an annual rate of 8 percent in 2008 and 2009, and standards for minimum pay, paid vacation, social security and overtime pay were agreed to. The International Labor Rights Fund (ILRF) Blog has hailed the contract as a stepping stone for Walmart's ongoing labor organizing efforts in China (as well as for its influence on the All China Federation of Trade Unions), the successes and challenges of which China Labor News Translations have been documenting at length.
The ILRF Blog has pointed to draft labor regulations proclaimed in Shenzhen in June as evidence of the persisting trend towards collective bargaining and legislation in China; and this trend, in turn, as an indication of China's growing conviction that it must move up the production ladder, focusing on higher-skilled industries - or be stuck forever competing with its poorest neighbors for the cheapest manufacturing orders.
The IHLO (Hong Kong Liaison Office for the international trade union movement) in June investigated the impact of the Labor Contract Law in the preceding six months of implementation, and concluded that the real impact of the new law has not been its negligible overall impact on labor costs, but rather the way it makes it harder for companies to avoid paying benefits to their employees or to circumvent implementing existing labor legislation. And this encapsulates government policies aimed at transforming China's traditional reliance on low-cost labour and labour-intensive industries to the development of higher-value industries. This process requires companies to invest in employee training, and makes it harder to routinely flout labor regulations. With such incremental developments, the organizational and regulatory outlook for labor in China provides ongoing insight into more long term transformations in the Chinese economy.
(Image: Wal-Martwatch)
Chen Weiliang, President of Foxconn International, Taiwan's biggest company and the largest contract manufacturer of electronics worldwide, last week announced that the company will be moving its factories from Shenzhen to northern Chinese provinces such as Hebei and Shanxi, where the average salary is more than 60% lower than in Shenzhen. In addition, Chen said Foxconn will be opening new factories in low-cost markets like Hungary and India to reduce the pressure caused by cost increases.
Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.
China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design.
While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.
Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.
Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.
China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design.
While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.
Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.
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