The $6 Haircut

There’s a great commercial running now for Office Depot featuring an independent barber, Dan who walks out of his shop one day to see “Nitro Cutz” has opened across the street offering $6 haircuts.  http://www.youtube.com/watch?v=9UiIVImKsRk&feature=email

Unflappable, Dan, walks into an Office Depot to prepare his counter strategy which we later learn is simply to put up a sign that reads, “We Fix $6 Haircuts.”  Brilliant.  

Office Depot

In 2005 when we began to offer our clients our sourcing and project management services in China, we assumed our only competition would be others who jumped on this bandwagon.  Were we wrong.  Our greatest barrier to acquiring new clients became the honorable but misguided efforts of those managers who had been led to believe that a web search and a few returned emails from China meant they were well on their way to implementing their companies’ low cost sourcing initiatives. $6 haircut indeed. 

In the past decade technology has enabled much more efficient  information transfer between continents.  FTP sites and inexpensive phone rates via Skype, Vonage and other VOiP carriers have improved the cost and speed of sharing data.  Social Media, blogs and email have given us the perception that barriers to communication have fallen.   Airfares to and from China are reasonably priced and with over 1 billion people in a country the size of the U.S. there are plenty of agents ready and willing to take on your manufacturing project.  All of these new advantages,  highly valuable as they are, present no assurrance that your new found business associate in Asia has the know-how, experience and resources to deliver you a quality product and service. 

Now, even some of the top private equity firms in the U.S. have followed the models of Fortune 1000 companies opening offices in China to centralize sourcing and purchasing.  I write about the “Five Things You Should Know Before Launching in China” http://bit.ly/c5eeBg which lists key considerations prior to investing in this front-loaded, fixed cost model.  

Faced with the downturn in our economy, manufacturers and distributors are re-thinking which initiatives make the most sense for offshore manufacturing outsourcing.  This is a good practice and new criteria have been distilled into this decision making process.  What is clear now however, is that many are finding the “$6 haircut” actually costs triple that or more when you leave this vital decision in the hands of those without the know how or qualified personnel in place.   What are the true costs of poor quality, defects, and missed product launch deadlines?  How many personnel on your  payroll have to get involved to solve the various challenges that result in poor execution?  Need to airfreight and rush that order in?  You just doubled, tripled or worse your shipping cost of goods. 

When taking a project to China, it is imperative that you confirm you are working with engineers who understand Western quality standards, tolerances and material specifications.   Be sure you have a dedicated team of advisors who have an interest in your success, respond to your project timelines, and share your same sense of urgency.   Are your China contacts truly invested in your business and do they have only your best interests in mind? 

Many of our new clients are now those who assumed the $6 quotation they received would net them a $12 profit.  There are multitudes of willing entrepreneurs in China willing to take your $6 time after time.  Buyer beware the $6 haircut.  There is great peace of mind knowing you can walk out with both ears, without a mowhak and ready to face the day with confidence.

 

David Alexander is President of BaySource Global www.baysourceglobal.com a leading sourcing and project management firm with offices in Shenzhen and Shanghai.

Will China Remain a Strategic Manufacturing Destination?

We continue to hear about the dynamics affecting China’s place as factory to the world. Increased labor costs, currency fluctuations, and shipping cost increases have affected decisions about whether or not offshoring strategy makes sense. Certainly there are products that simply aren’t feasible for contract manufacturing scenarios. Here are the top five reasons China is still an ultimate destination for products that are highly labor intense or are in the startup phase.

Labor vs Other Countries

Labor costs may be up to 30% lower in other countries like Viet Nam and India. However this is offset by superior supply chain advantages such as roadways and utilities. Skill levels are also higher thanks to Western training and a little osmosis over the past 15 years. This means China’s productivity continues to rise other countries in Asia are less efficient overall.

Flexibility

Because China’s manufacturing base tends to be cellular, meaning a production or assembly line can be producing one thing today and another tomorrow, China workers are frequently adaptable to ever changing tasks. Much of this can be attributed to the highly seasonal nature of Western retail needs such as Christmas lights or plush toys. China also presents many options for qualified suppliers whose initial minimum order quantities are less than traditional manufacturers. Often a China manufacturer will begin with molds having less cavitation than is generally required until volumes reach a critical mass. This all translates into less startup cost, quicker return on investment and greatly reduced risk.

Availability of Materials and Manufacturing

Because China now makes a fifth of the world’s manufactured goods, there is a ready source of supply for various components, parts and necessary materials. China is also home to thousands of industrial parks thanks to investment by not only the Chinese government but also foreign direct investment by Western firms. Shanghai and Guangzhou are known manufacturing hubs and have some of the heaviest investment and infrastructure along with some of the largest workforces in the country. Special Economic Zones created by the PRC have attractive tax incentives for FDI and are given more independence on international trade and economic activities.

China Innovation and Investment

Because as we mentioned China’s skill levels have vastly improved, China is now focusing more on innovation and creative manufacturing practices. Also, with labor increases have come increased capital investment in the form of automation—something that used to be last resort if a task or function could be completed manually. So what does this all mean?

Ideal Product Development

China continues to be an ideal partner for new product developers and innovators. While labor costs have increased over the past five years, China’s productivity has increased tenfold. China offers the flexibility required to take on a variety of new projects and with lower minimum order quantities. There is a steady supply chain for materials and different manufacturing services and China continues to invest in technology, facilities and innovation. While China may not be suitable for some manufacturing due to increasing freight costs and currency fluctuations, every project must be carefully weighed and evaluated on its own merit.

The Top Books on China

Recently I posed the question asking what the best books available on China were. My intention was to highlight both Western and Eastern perspectives on topics ranging from everything from business culture and protocol; political climate; culture, and basic life in China. There was a great response which is compiled below. Overwhelmingly there was sentiment that there is no substitute for the experience of living and working in China. However, for those without this limited or practical experience here is the top 30 that members from three Linked In Groups–China Trade Group, Business in China, and Procurement Professionals said: (listed by title and author)

Mr. China, Tim Clissold top 4
Managing the Dragon, Jack Perkowski top 4
The China Price, Alexandra Harney top 4
China Inc, Ted Fishman top 4
One Billion Customers, James McGregor
China StreetSmarts, John Chan
The Art of the Deal in China, Laurence J. Brahm
The Art of War, Sun Tzu
Chinese Business Negotiating Style, Tony Fang
Inside Chinese Business, Dr. Ming-Jer Chen
Chinese Business Etiquette, Scott D. Seligman
The Chinese, Jasper Becker
Business Leadership in China, Frank T. Gallo
The Coming Collapse of China, Gordon chang
Luxury China, Michael Chevalier
Elite China, Pierre Xiao Lu
Where East Eats West, Sam Goodman, Michelle Ree
Poorly Made in China, Paul Midler
Factory Girls, Leslie T. Chang
All the Tea in China, Kit Chow, Ione Kramer
China Shakes the World, James Kynge
China: Fragile Superpower, Susan L. Shirk
The Tiananmen Papers, Liang Zhang, Andrew Nathan
Gifts Favors and Banquets, Mayfair Mei-hui Yang
Capitalism with Chinese Characteristics, Yasheng Huang
The Great Wall, William Lindesay
What does China Think?, Mark Leonard
The Search for Modern China, Jonathan D. Spence
Chinese Religiosities, Mayfair Mei-hui Yang
When Asia Was the World, Stewart Gordon