Rising costs require change in China sourcing strategy, study says

Rising costs require change in China sourcing strategy, study says China is losing its edge as a pure low-cost manufacturing center, but multinational companies can still benefit by sourcing there if they broaden their strategy to sell to the growing Chinese domestic market, according to a study released this month by the American Chamber of Commerce in Shanghai and management consulting firm Booz Allen Hamilton.
   More than half of the 66 foreign-owned or joint venture companies surveyed in Shanghai believe that other low-cost countries are becoming viable manufacturing alternatives, and nearly 20 percent said they have concrete plans to relocate or expand China operations to other countries, primarily Vietnam and India. Among the reasons behind the decline in competitiveness are the rising value of the renminbi, wage inflation, difficulty retaining staff and fewer tax benefits. Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively in recent years.
   The survey indicated that companies that integrate China into their sales strategy achieve far higher profits than those simply producing or buying products for export to save on labor and other costs.
   Companies that pursue a dual strategy report that profits on average are two-thirds greater than those that focused only on domestic sales or exports (29.6 percent vs. 17.8 percent), the study said.
   So far, however, only a quarter of companies are able to combine a strong in-country marketing effort with their manufacturing and outsourcing operation.
   The study said that while a stronger Chinese currency and rising wages are placing pressure on manufacturing margins that maximizing use of in-country resources and expertise to expand into the China market can spread out the cost and help maintain profits. Manufacturing challenges in China are compounded by immature standards in the areas of logistics infrastructure, trade laws, access to technology, management capabilities and intellectual property rights.
   The study didn’t consider other factors that also add risk to overseas sourcing, such as customs fees and regulation, and transportation.
   'The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,' said Booz Allen Vice President Ronald Haddock. 'China's changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy. At the same time, China is increasingly a major source of product and business model innovation. We're seeing globalization at work and China's role has changed.'
   Many companies have not fully applied best practices in China such as enterprise resource planning software, material requirement planning, and analytical inventory calculation tools and processes. Only 4 percent employed best practices for supply chain management, the study said.
   Despite the rising costs of manufacturing in China, 83 percent of companies said they would maintain their operations in the country. China’s huge domestic market was cited by 78 percent of respondents for staying put, while 39 percent said they were unwilling to establish a new supply chain. ' Eric Kulisch