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Dramatic Bottom Line Reduction

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There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings.  Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:

1.  Freight Costs

Freight and logistics should not exceed 10-12% of your total cost of goods.  In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port).  So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.

2. Carrying Cost of Capital

Cash is king in any business.  It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.

3. Warehouse Space

Every square foot of a warehouse used to store products has a fixed cost.  Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue.  Otherwise the savings will be offset by the additional cost of warehouse space.

4. Due Diligence

For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components.  Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress.  Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.

5. Start-up Costs

Your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.

Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas.

Interested in learning more? You can right here.

New Product Development and the Adaptation Curve Part II

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In our 4 part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product.  Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.

What You’ll Need to Start: Ample Capital  

Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer.  Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.?  You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget.  While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.

Inventory Financing / Purchase Order Funding / Factoring

There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise.  Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee.  The caveat is that the invoices must be to reputable clients, i.e. Walmart to be considered.

Advantages

These can be good options that allow you to purchase greater quantities thus commanding volume discounts.  Another benefit is that you don’t have to give up equity to outside investors.  Many times the factories’ terms require money down at the time of placing the purchase order.  IFGs make it possible to abide by these terms.  These companies will want to know:

  1. Your sales and marketing strategy (refer to Part I of the series) and about your team
  2. The quality of the products produced
  3. Your margins
  4. Inventory turns
  5. Your credit worthiness and track record

Disadvantages

Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records.  They may also not take a chance on a new client—one who has no real balance sheet to speak of.  Another downside is that these lenders charge interest rates that can be as high as 40% annually.  Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.

 

Crowdfunding

In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public.  To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.

Advantages

Crowdfunding is catching on and becoming more accepted as a means of raising capital.  Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead.  Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit.  Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted.  On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth.  The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.

Disadvantages

Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.

Seed Capital / Angel Investors

Advantages

The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses.  These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt.  Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan.  Seed investments are less administratively complex with less formal corporate contracts and governance.

Disadvantages

Seed capital usually comes at a cost—Equity. There is risk on both sides.  The investor may never recover their investment or you may give away too much ownership.  Usually the latter results because it is just so tempting for the inventor to commence their dream.

Read Part III of New Product Development

What’s Next for Manufacturing in China?

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What is something you can think of that can’t successfully be outsourced in China?

Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph.

It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?

If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”

Rising Labor Costs in China

 

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In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”

In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.

In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.

A Shift By Coastal Manufacturing Regions

The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says “pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading.”

Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “

The Role Of Appreciation In Chinese Currency To U.S. Job Creation

Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.

Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it’s an issue. But the reality is that jobs from China won’t come to the U.S. They’ll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”

Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”

China as a Market

Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.

In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.

Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?

Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”

The Next 5 Years

China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.

David Alexander is President of BaySource Global www.baysourceglobal.com

US China Relations

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US Ambassador Jon Huntsman’s speech at Tsinghua University reminds us about the positive aspects of US-China relations. An excerpt;

“So this year could be the most important in the history of our bilateral relationship. As an optimist, I believe the test will be how we take our relationship to a new level of cooperation and make real progress in resolving the pressing global issues that we face today.”

Steel Prices to Gain on Low Inventories, Costs, Baoshan Says Steelmakers will raise prices globally as they run down inventories and raw material costs gain, according to Baoshan Iron & Steel Co., China’s largest publicly traded mill.

“There’s momentum for prices to go up,” Yao Lili, an executive with the Shanghai-based company’s raw materials purchasing department, said in an interview in Hong Kong. “Inventories globally are generally quite low.”

Orders for Baoshan Steel, Posco and rivals are picking up as the global economic recovery accelerates, spurring a 55 percent gain in the costs of coal as steelmakers compete for supplies. Steel prices rose 9.1 percent in February int he U.S., and Chinese mills are charging 10 percent more since the start of this year.

“Demand growth from the home appliance makers may be stronger in 2010 than from automakers,” said Yao. “There’s a lot of potential from home appliance makers.”

Total vehicle sales in China jumped46 percent last year, fueled by the government’s stimulus spending and tax breaks. Sales may rise more than 10 percent this year, the Ministry of Commerce said Jan 29.

www.baysourceglobal.com

New Product Development and The Adaptation Curve Part I

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In our four part series New Product Development and the Adaptation Curve dedicated to new product developers, innovators and inventors, we explore the Top 8 considerations when developing a new product.  Whether a seasoned marketing professional or first timer, these 8 critical components include aspects related to product design, positioning, manufacturing, and distribution.

Product Development Costs 

Most inventors underestimate the cost for designing a manufacturing ready product.  Tools and molds can easily run into the five to six figure range and can dwarf first year profits.  Most any product requires both two dimensional (2D) and three dimensional (3D) engineering drawings that specify material requirements, accurate measurements and tolerances which are very minute, allowable thresholds or variances in gaps, thickness, or practical limits without significantly affecting function of a component.  These are the physical requirements of a product. There are also electromechanical tolerances which measure allowable ranges of energy output or resistance.

2D & 3D drawings are computer generated or Computer Aided Designs (CAD) are then used for creating the tooling for parts whether metal, plastic or other materials, even cut and sew projects.  The first commercial applications were in the automotive and aerospace industries.  Through the use of some of the most common software such as Solidworks and AutoCAD, two of the more widely used platforms, designers create the physical properties of a product.  Depending on the complexity of the part and the actual quantity of components this cost can range from the low to tens of thousands of dollars.

Distribution Channels

Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor.  Determining how to sell your product comes down to the “4-P’s” or Product, Promotion, Price and Placement.  Entire marketing strategies are built around this.  How you position your product will dictate your brand strategy.  From there it is necessary to determine price, sales tactics and a marketing campaign and budget.

Products are sold through single or multiple channels.  Often and most overlooked by new product developers is the benefit of working through wholesale/distributor channels.  These organizations have years of traction and relationships with retailers and can be the best avenues for introducing your product.  They have sales teams in place and assumedly the category expertise for not only implementing your programs but also helping positioning and building your brand.  Your distributor is your customer and investing the time to work with and support this resource will pay off tenfold.

Think about all the valued functions that are fulfilled by a strong distributor partner.  They have the infrastructure in place that includes:

  • Sales: category expertise and feedback
  • Warehousing; the ability to handle large single shipments
  • Customer service and support— activity based interface with multiple customers
  • Inventory reporting; purchasing and replenishment
  • Shipping and logistics

Read Part II of New Product Development

 

New Product Development and “The Adaptation Curve”

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Nobody has an ugly baby.  The same goes for new product developers.  Whether an independent entrepreneur or seasoned marketing team, once a new product concept is developed and months, even years in some cases are invested, our babies become prettier every day.  The same unconditional love and support that builds as our children mature and develop transfers into the professional mindset of innovators.

Calling All Product Developers

Creating a viable and robust market for a new product takes enormous resource, planning and resolve.  The sheer capital to unveil and furthermore generate brand equity is often the most overlooked aspect of getting a product to market.  Take the Segway for instance.  This emission free, efficient mode of personal transportation has been around for over a decade.  With some quick, simple training even children can master riding this marvel.  Reaching top speeds of 12.5 mph it has a range of up to 24 miles on a single charge.  Still commercial acceptance has been scant.  Why wouldn’t every warehouse and airport have a fleet of them?

Recently two Swedish designers have developed an entirely new concept for biking safety in the form of the Hovding, an airbag which deploys vies-a- vie algorithmic intelligence protecting riders from head trauma in the event of a fall or crash.  This revolutionary “bike helmet” is worn around riders’ necks and actually becomes a stylized accessory.  At $520 prospects for commercial distribution of any scale in the next five years may be slim.  However according to Forbes writer Jeremy Bogaisky this startup has already taken in $13 million in venture capital.  He cites bicycle industry analyst Gary Coffrin who gives a great summation stating “The adaptation curve for such a unique product at this price point is not likely to be rapid.”

Taking the tech factor down a notch, in my own gym sits a clever form of a door stop called “James the Doorman.”  I would imagine the designers, Black+Bum had their “Eureka” design moment and the wheels started spinning.  Honestly I have never seen such a cool variety of a door stop and  without knowing much about how they developed this unique version of an age old application, I can’t comment on what lengths they went to in commercializing their product.  I do know that the one in my club is the only that I have ever seen.

Every week we hear from inventors and product developers who have put great thought into products which offer unique solutions to every day needs.  Often though there are many missing pieces to their overall strategies.  Below are the Top 8 Hurdles to Successful New Product Launches.  In the coming months, I will be writing a series which individually expands on each of these, why they are often overlooked and how they are important for taking new products to market.

1. Product Development Costs 

Most inventors underestimate the cost for designing a manufacturing ready product.  Tools and molds can easily run into the five to six figure range and can dwarf first year profits.  Developing engineering drawings—those that translate into production and material specifications  require time and money.

2. Distribution Channels

Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor.  It creates additional administrative work for the system, and most inventors don’t have the capital to market their products.  Specialty and on-line retailers generally are better proving grounds for a products’ acceptance but you still have to generate interest and traffic.  Oh, and did you get a UPC code yet?

3. Inventory Capital 

Minimum order requirements (MOQs) by factories usually cause a lump in the throat.  Even if you have the greatest gadget in the world, how do you plan on financing that first big order?

4. Educating the Masses 

How will you announce the arrival of your new product to the world?  Magazines?  PR campaign?  Put an ad in the paper?  Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity.  It’s great to have a video on your web site but again, how will you drive viewers and a following?

5. Price vs. Value 

In the initial phase of your product’s life-cycle there will likely not be the scale (volume) to drive down production cost.  Unless you can convince consumers they should pay a premium retail price, break-even may be longer off than you expect.  Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category. 

6. Regulatory and Testing Requirements 

With your product in the public domain, most retailers will require some sort of regulatory or product safety testing and compliance with groups such as the Consumer Product Safety Commission (CPSC), Underwriters Laboratories (UL) and others.  Depending on what industry you are in, your item may require testing and certification by default.  To you this means additional time, red tape and money.

7. Patent and Intellectual Property Protection 

This is perhaps the most critical and misunderstood area of product development.  In many cases developers could have saved themselves months of work simply by doing some basic research and analysis.  The United States Patent and Trademark Office site has become more navigable and efficient thanks to improvements in their search functions.  There are three ways to begin your inquiry using key words, designs or a combination to see if someone else has registered a similar product.  Even if they have you may be able to make some functional changes to distinguish yours but again, many underestimate the time and capital required to protect the investment of your innovation.

8. Aftermarket Sales and Support

Now that you’ve got a patent pending, finalized your business plan, raised early stage capital, have product on the warehouse shelf and are starting to generate traction don’t forget the basic administrative requirements.  If you hit the lotto and are selling to Wal Mart, using retail link is a requirement.  This entails sending a staff member for training and ultimately using their on line tool daily or weekly.  Is someone manning the phones for product questions and concerns?  How robust is your web site?  Oh, we haven’t even discussed how much this will cost to build.

While these hurdles aren’t surmountable, it is critical to factor in all the critical and time consuming elements of bringing a product to life.  Even this list is not comprehensive enough to account for the unexpected turns in the pathway to new product development.  If it were easy, everyone would be doing it.

Read Part 1: New Product Development and the Adaptation Curve

David Alexander is president of Baysource Global and has a decade of experience with new product development and contract manufacturing.

Playing Football in the Rain

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Growing up in Ohio, I was fortunate enough to play football on a pretty decent high school team. Our season began in the dog days of summer and ran into the first autumn frost. At some point during those four months a good solid downpour during a game was inevitable which meant a contest mired in mud and the need for a revised game plan.

Now the pessimistic coach might consider this to be a disadvantage to his chances of winning the game. But a more strategic and forward thinking leader would understand both teams faced quarterbacks with wet hands, blockers bogged down in soggy clumps of turf and receivers whose completion numbers were going to be anything but stellar. The conditions of the game while presenting new challenges, would be equitable for each participant. So in the end it would be a level headed strategist who understood and exploited his team’s strengths—advantages even we may not have known we had, who would be celebrating victory after four quarters of play.

In low cost country sourcing, I have heard grumblings for the past five years about jobs lost to China. Indeed, the groundwork laid by Kissinger and Nixon in the 70s to open up free trade with China could have been perceived as an overcast forecast for some players. However, just as we discovered, the right plans and execution meant we could be quite successful rather than assuming failure was looming.

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Global Impact

China is set to become the world’s second largest economy. Those Western companies, who have built the equity of their brands over the past several decades, should recognize the opportunities that exist in China and other parts of Asia for marketing their goods and services. The investments U.S. firms have made in intellectual property, trial and error and innovation are unmatched anywhere in the world. So why haven’t more companies embraced this vast market that exists?

Whether we are talking about cosmetics, heavy equipment, apparel, software, consumer goods, or electronics, there is an insatiable demand for Western products overseas. Even in today’s depressed economic times, the needs for world class technology to complete huge infrastructure projects provide rare market opportunities to international companies.

China’s rebound for the first 3 months of 2009 is considerable. Expectations for economic growth for the next quarter are at 12%, so economists generally expect 7 to 8% overall growth this year.

Why then, is China poised for a rebound when the rest of the global economy is experiencing its worst performance in decades?

According to reports out of China, retail sales have continued to increase strongly with the help of the government which has offered China’s 800 Million farmers VAT exemptions on big ticket purchases, namely electrical appliances. The resulting effect is a replacement of exports through domestic consumption without a loss for the state. Retail sales went up 15% this past March compared to the same time a year ago.

China announced its stimulus investment program last October and took extraordinary measures to make it happen. Just prior to year end, 2008, USD 58 Billion of pending projects were approved within one week. Because the Chinese save most in the world they created the largest bank in the world (in deposits) passing American and Japanese rivals JPMorgan and Mitsubishi-UFJ. China is now home to the top 3 banks, reflecting the confidence of investors in Chinese banks. In the first quarter of 2009 new loans accounted for more than all new loans in 2007.

Exports are picking up too. From a monthly all time high of USD 136 Billion in September 2008, exports fell every month to a low of USD 65 Billion in February (25% less the 2008 figure). But, in March they rebounded to 90 Billion.

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New Market Opportunities

China’s size and growth create enormous opportunity in 2009. As a growing consumer market, the number of millionaires has grown to 825,000, many younger than 40. According to an April 30 Wall Street Journal article, the $585 billion stimulus program has “quickly funneled money into everything from bridges to consumers’ pockets.” There are countless municipal projects which now need to be completed including high speed trains, power plants, telecommunication systems, hospitals and water treatment plants–all which will be built in second and third tier cities. Business processes outsourcing (BPO), and high-technologies have been singled out as fast investments on the coast. Hi-tech will continue to rebound driving demand for components – all which will be made in China. Imports have started to recover since the beginning of the year.

Heavy equipment sales have increased as is evidenced by the attendance of almost 200,000 visitors to the China International Machine Tools fair in April. Caterpillar Inc. CEO James Owens, according the WSJ article, says “the company’s excavator sales in China have returned to record levels in recent months.” He goes on to say that “China continues to start work much more quickly than the U.S.”

Lower Manufacturing Costs

According to a recent report by Supply Chain Digest, “between lower wage pressures and the fact that most Chinese factories operating at low levels of utilization, Western buyers are gaining more pricing clout than they have had in years. The Chinese government, for example, says the value of China’s exports fell 25.7 percent year-over-year in February, accelerating from a tough 17.5 percent decline in January.”

Estimates of Hong-Kong based manufacturers in China indicate that business activity is stabilizing 20-30% lower than before the crisis. Forced to reduce prices in an over-supplied environment, Chinese producers have no other choice but to become the most competitive, even against other Asian producers.

“Deflation [in China pricing] is here to stay,” believes William Fung, managing director at Li & Fung. “Buyers have more of an upper hand again.”

That’s because export volumes to the weak economies of the US, Europe and Japan show no signs of recovering soon. However, there are signs that China’s manufacturing sector is recovering on its own, without much help from export customers, as the country’s economic stimulus plan and focus on bolstering the internal economy start to pay off.

By February, the producer price index went down 4.5% year on year, to its November 2007 level. The trend accelerated in March with a 6% drop. The consumer prices naturally followed, resulting in an actual deflation (-1.6% in February and -1.2% in March).

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The World’s Second Largest Economy Emerges

According to Daniel Meckstroth, economist at the Manufacturers Alliance in Arlington, VA, “the hope is that China would become an engine of growth to drive the local economy.” China’s proactive response to the crisis has enabled it to be the first to bounce back. This flexibility will not only result in China becoming the world’s second largest economy, but will also let it take its rightful place atop the value chain. Therefore it will have to invest to improve and maintain its cost competitiveness, as both a viable market and as a manufacturing leader. Should the U.S., Europe and other trading partners be able to weather the current storm, China will play a major role in world economic recovery.

A Winning Season

Those U.S. companies who spend their time, energy and resources embracing this new China market rather than disparaging others who offshore low value added labor, will actually enjoy playing on the muddy playing field that our global economy has become. In the end, the sun will still rise in the East and set on the West. The soggy ground will firm up and those who respond to all elements of the season accordingly will record a win.

David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com

China News

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Each day we read and hear more and more about the co-mingling of China and the U.S. as these two interdependent nations refine their geopolitical position with each other and the rest of the world.  China is a vast nation teeming with industrious minded entreprenuers who are seeking their fortune much in the same way as U.S. pioneers in the early 1900s.  Our countries are indissolubly linked from an economic standpoint and nothing on the horizon seems to contradict this long term description of our relationship.  China, while still “factory to the world,” will forge ahead in Western style to build consumer brands, capitalize on the meteoric rise of a middle class market, and play a vital role in world financial markets.  It is a story that will be amazing to see unfold and in no way does the ending have to be a negative one as both nations continue to innovate and lever their strengths and resources. 

If you or your colleagues and associates have the need for a competent and experienced partner to manage your company’s China business, we want to be just that.  We have a China staff of over 30 who have working knowledge of hundreds of industries and disciplines.  Our specialties are complex manufacturing assignments, supply chain management, fulfillment and distribution in China, greenfielding, and highly competent project management.  We are integrity driven, quality focused and have an ardent desire to see our clients succeed in every undertaking. 

Thank you for allowing us to continue to reach out to you with newsletters and emails.  Should your business plans include any aspect of dealing with China, please don’t hesitate to contact us for a free, no-obligation consultation.  

China to continue RMB exchange rate reform Chinese President Hu Jintao reiterated on May 24th that China will continue to steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress. Hu made the remarks at the opening ceremony of the second round of China-US Strategic and Economic Dialogue in Beijing. 

Hu said China will continue to pursue a win-win strategy of opening up. The country would expand market access in keeping with established international economic and trading rules, support the improvement of international trading and financial systems, and askance trade and investment liberalization and facilitation. 

On China’s effort to accelerate the transformation of its economic development pattern, he said, “We will make great effort to expand domestic demand and increase household consumption, vigorously promote sounds and balanced growth of external trade, and reject protectionism in all manifestations.” 

China’s trade back into surplus After a US$7.2bn deficit in March, China’s trade retuned to surplus in April but shrank 87% from a year earlier due to faster growth in imports. The trade surplus stood at US$1.68bn in April, according to the General Administration of Customs. Exports rose 30.5% you to US$119.92bn in April, while imports surged 49.7% to US$118.24bn.

Harley Sales Up Harley Davidson Inc has reported that sales in China doubled last year, according to Rodney Copes, VP of international sales. Since it entered China in 2005, Harley has developed four dealers nationwide – one in Shanghai – and plans to open four new dealerships this year in Wenzhou, Xiamen, Dalian and Chengdu. 

Foreign Investment Reflecting the determination of China’s central government to attract additional foreign investment-and to direct that capital towards industries and regions that serve the government’s broader social and economic goals-the State Council issued Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions) on April 6, 2010. The Foreign Capital Utilization Opinions set priorities that encourage foreign investment in research and development centers, high-end manufacturing, high and new technology, alternative energy, and other environmentally friendly industries while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China. 

Shanghai Pudong – new policy on JVs On 13th April 2010, The Shanghai Pudong People’s Government issued the Tentative Measures On Setting Up A Sino-foreign Equity Joint Venture (“EJV”) and Cooperative Joint Venture (“CJV”) In Pudong (“Tentative Measures”). The Tentative Measures have been introduced to allow domestic natural persons to establish EJVs and CJVs in the Pudong New Area. The Tentative Measures came into effect on 1 May 2010 for a trial period of 2 years. 

The Chinese laws on joint ventures, which were initially issued in 1979 and 1988 respectively, do not allow domestic natural persons to set up EJVs or CJVs with foreign companies or individuals. Such restrictions do not conform to the principle of “national treatment” and so have been seen as being an obstacle to domestic individuals hoping to cooperate with foreign entities and/or individuals. As the Chinese people are becoming more prosperous, pressure has increased to abolish the existing restriction. 

The usual way to circumvent the restrictions is for a Chinese natural person to set up a limited liability company (normally a one-person company), and to use the new company as a vehicle to partner foreign parties. However this route is very inconvenient and the issue of the “invisible investor” has led to many disputes between contracting parties. 

Foreign investors have encountered difficulties when trying to partner with a Chinese citizen they trust. There has been rapid growth int he need for cooperation between individuals from SMEs and foreign individuals in high-tech and creative industries. As the officials from Pudong said, “We have changed because such change is required.” 

Highest Level of Confidence  Chinese consumer confidence rose int he first quarter of the year to the highest level since 2007 as people became more optimistic over their future, a survey by Nielson Co and the National Bureau of Statistics. The Consumer Confidence Index in China climbed to a three-year high, bolstered by better employment prospects. However, people’s willingness to spend fell slightly due to soaring asset prices.

World Expo Opens  Shanghai kicked off the 2010 World Expo with an extravagant opening ceremony and fireworks show. The two-hour performance at the new US$270m Expo Culture Centre ended with a spectacular outdoor multimedia show punctuated by a parade of hundreds of national flags carried by boats along the city’s Huangpu River. The city has spent US$45bn, more than Beijing spent not he 2008 Olympics, to put on what it says will be the biggest Expo ever.

 

David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com

A Community of Opportunity

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Last fall I visited a state of the art precision die cast factory in Southern China. By my estimate they do a turnover of ~USD$400MM. This facility had two very sophisticated machines that were designed and manufactured by the Japanese and could essentially be used for highly technical military products although they were simply utilizing these for their advanced automation in making automotive (carburetor) parts. After a long lunch, the owner took us to their R&D building where they had something they wanted us to see. It was…a turkey fryer. That’s right. They had devised a turkey fryer that uses 80% less oil than deep frying. Already they had complete prototypes for cooking French fries.

You may be wondering where this story is headed. I had to admit I was a bit taken back by this “top secret” invention they whetted our curiosity over during our meal. But in their thorough marketing analysis, they had deduced there was no similar Western device yet on the market. It just so happened to be November and thus the American Thanksgiving holiday was just around the corner. This factory had a business plan in place, knew their total market universe in the U.S. of those who deep fried turkeys vs. oven, and even recognized this was a stronger activity in the South. In fact, they had determined that their distribution channel likely needed to begin with HSN or QVC and migrate into traditional retail.

What they didn’t have is a contact in the U.S. to assist with the launch nor did they know anyone who could introduce them into this market. They explained they were missing a key intermediary who could introduce this new product to a leading cookware company, someone familiar with infomercials, or a firm that could handle direct sales and distribution. If so, they believed annualized sales could reach USD$50-100MM. Have you seen this product on the market yet?

Sure there are low value added jobs that have gone offshore. And by the way, we haven’t stopped manufacturing in Central and South America and Eastern Europe. But there is an interdependency between China and the U.S. that can’t be ignored. There is also a huge market in China for our goods and services. Take the story of Dais Analytic whose desalination and wastewater technology will add up to 1,000 jobs in Tampa, FL over the next five years. Just this week, Warren Buffet’s Berkshire unit purchased Burlington Northern Santa Fe which is a huge bet on increased trade with China. And as a growing consumer market, the number of millionaires in China is 825,000 and growing, many under 40 years of age.

If you take this story out of the realm of turkey fryers, the Chinese are innovating every day but will rely on marketing expertise here to be successful. Likewise, there are Western companies who require cutting edge innovation and new product development to maintain and gain market share. Possibly this could lead to Eastern entities establishing beachheads in the U.S. The typical hurdle rates that private equity and investment banking firms require to do deals may be cast aside by Chinese courtiers who seek a foothold in the U.S. to incorporate their intellectual property, low cost labor structure and “can-do” spirit with U.S. brands.

It is truly a global landscape yet we seem to be protectionist by default. If we start embracing opportunities as a global “community” vs. simply a global business landscape, we have the chance to merge our creativity and assets to serve one another.

David Alexander is President of BaySource Global, specializing in project management, supply chain and cross border opportunities with China. www.baysourceglobal.com

PriorityPass.com!

Who Is Responsible For Monitoring Quality When Utilizing Low Cost Country Sources?

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China is notoriously blamed for quality issues in products sold in the West. But who really is responsible for ensuring quality can be found in products shipped abroad from China? In a former July post to 10 LinkedIn Groups associated with manufacturing, engineering, supply chain and quality control this was the question posed. Readers eagerly provided a total 104 responses of which 49 gave specific answers.

The results could be summarized and compiled into 8 consistent categories. They were:

1. The Manufacturer – 11 respondents
2. Purchasing- the buyer- in house sourcing – 8 respondents
3. A reliable third party QC firm – 8 respondents
4. Cross functional teams (purchasing, engineering, & production) – 7 respondents
5. The company importing the goods – 7 respondents
6. In house QC – 4 respondents
7. The seller/customer – 3 respondents
8. Entire supply chain – 1 respondent

11 Sage Morsels of Advice:

• Do not start LCC sourcing if you are not able to build the appropriate team. Consider outsourcing it to insure the quality of your supply chain.

• Specifications must be clear as to the quality standards expected and the acceptance test regime and what happens to the rejects – you do not want them to appear in the local street market if it is a branded item!

• Be present at intervals throughout the production process. The factory you visit may not be the one producing the goods.

• Establish a personal rapport with your supplier. It is good business and makes communication a lot easier.

• Arrange for acceptance testing – either by your own staff or by an outside agency in the country of origin. Nothing is shipped without inspection.

• Develop a supplier approval process.

• Allot resources for site visits.

• Get references for third party teams.

• Determine their ability to complete the contract. Determine if supplier is financially stable. Assure that they have systems and certifications, such as ISO-9001, in place.

• Ensure that they are motivated to provide quality and on-time delivery.

• Be clear why you are using a low cost country and take all costs into account – it may not be so low cost in the end.

So in summary, everyone has a stake in quality even though it is easiest to point the finger at the manufacturer (China). If we capture all the great advice from industry experts, heed the wisdom and incorporate all these due processes, everyone will come out a winner.

LinkedIn Groups:

GVRT Council of Supply Chain Managers
Global Sourcing
Innovative New Product and Service Innovators
ISM Purchasing and Supply Chain Managers
Offshoring & Outsourcing Forum
Procurement and Supply Chain Leaders
Procurement Professionals
Retail Global Sourcing
SME Society of Manufacturing Engineers
Strategic Sourcing and Procurement

David Alexander is President of BaySource Global, a leading China consulting firm specializing in project management, sourcing, establishing China procurement, and selling into China. He can be reached at david.alexander@baysource.net

www.baysourceglobal.com