China Still the Place to be for Manufacturing

Reshoring naysayers believe China is still the place to be.

Yes, most US-owned and other foreign-invested factories are still in China. This is despite all the press that reshoring, often described as moving back production to the US, has been getting.

For many companies, three factors stand out as their reasons for staying: strong vendor base, excellent infrastructure and skilled labor pool.

These advantages are not lost even to suppliers of high-value products such as consumer electronics, automotive parts, construction equipment and appliances, segments said to be the most ideal “reshorers.”

Founded in California’s Silicon Valley, Flextronics is among the makers listing these factors as China’s strengths. The electronics OEM provider’s headquarters are in Singapore. It was established in 1969.

Manufacturers agree that it is difficult to replicate China’s supply chain, with every material or component vendor within proximity of the assembly or manufacturing facility. This easy accessibility to inputs and consequent costs savings are particularly critical now, what with makers being pressured by narrowing margins and price competition.

An interviewee commented that margins are currently very tight. Companies would not be able to compete without minimizing costs as much as possible and China is at present the only option to get this done.

“I just do not see how Apple and GE could stay cost competitive if they moved production away from China,” an executive from the mobile electronics industry said in an e-mail. “Apple and GE may be making more of a PR move than an actual large-scale production shift back to the US.”

The American Global Health Group has three aloe plantations in Guangdong and Hainan provinces, covering about 500 acres altogether. “This setup makes materials procurement convenient,” said Ms. Ma, a merchandiser for the company. “American Global will not simply reshore and abandon its long-term investment.”

Skills top costs

For many China-based FIEs, worker sophistication continues to trump rising wages. The electronics industry, in particular, requires specialized skills. Many China electronics factories are already highly sophisticated and finding this level of expertise, specifically in PCB design layout, and Bluetooth and other wireless technology, in the US is very difficult and expensive.

Moreover, salaries in China are still significantly lower than in the US, despite the recent spate of wage adjustments. Trade observers said the last is the main driver for reshoring.

To illustrate, labor costs in the Pearl River Delta region, one of China’s traditional and largest manufacturing hubs, are roughly just one-tenth of what US workers make in an hour. This is despite the recent 10 percent increase in local labor rates. Factories in key cities within the PRD such as Shenzhen pay $2 per hour during the workweek and $3.10 on weekends and holidays. It is about $22 an hour in the US.

American Global holds on to these figures. In addition to its aloe farms, the company has a 20,000sqm production complex in Taishan, Guangdong, with close to 250 staff members. The plant was established in 2003.

Industry and financial analysts, however, advise makers to consider total costs and not just manufacturing wages when weighing reshoring pros and cons. In a report, the Boston Consulting Group said higher productivity, an increasingly flexible workforce and a resilient corporate sector in the US will help close out the wage gap between the country and China. BCG estimated that by 2015, hourly factory salaries in the US will be $26.06 and $4.41 in China.

Silk Road Associates cited logistics as another reason to stay in China. In “The end of ‘Made-in-China’?”, SRA said the ability to deliver rapidly and promptly helps global retailers manage inventory more efficiently, thereby lowering working capital costs. Unsold inventory, not factory wages, is one of the biggest costs for a retailer.

The report adds that mainland China’s total port container capacity, including Hong Kong, is bigger than the rest of emerging Asia. This allows mainland manufacturers to stay competitive against other low-cost regional production hubs. Cambodia, for example, may pay only one-third of factory wages in the mainland, but its container port capacity is just 80,000 TEUs. In contrast, the mainland boasts 145 million TEUs.

Made for China

Domestic interests also have a strong pull for many FIEs, which initially turned to China for export-oriented manufacturing.

The country is now a major market for American Global, forecast to account for 70 percent of sales of aloe-based cosmetic and skin care products.

Encouraged by growing domestic consumer spending, American Global “decreased US export share and raised the price of China products,” Ma said, resulting in positive sales and profit projections. American Global’s head office and international sales center are in Seattle, Washington. It was established in 1999.

China’s population of 1.3 billion is a big enough reason for Flextronics to stay put. A spokesperson said the company is “committed to operating in China where a billion consumers create a huge potential market.”

AmCham China has noticed this expanding China-centric orientation among FIEs participating in its annual Business Climate Survey.

Since 2010, the number of survey respondents with plans of producing goods in and for China has grown steadily. In 2012, two-thirds of AmCham China members selected this option, said communications director K.C. Swanson. “Most members view the China market as a long-term investment.”

Not quite there

While reshoring in China has admittedly gained strength over the past few years, the movement has yet to take off in full.

The trend, in fact, can still be considered at its infancy and progress from industry to industry is at different stages.

In a recent article on Cleveland.com’s The Plain Dealer, Reshoring Initiative founder Harry Moser said the movement is “more than a trickle. But we’ll admit that it’s less than a torrent.”

The report goes on to discuss the factors hindering full-on reshoring: a lack of financing and a dormant supply chain.

Reshoring, however, will continue to accelerate. He Zhi Cheng, an economist at the Agricultural Bank of China, expects the movement will grow in the next two or three years.

“Made in America, Again”, Boston Consulting’s report foresees 2015 to be the turning point for reshoring. By then, producing goods for the US in the US will be as economical as making them in China.

Nevertheless, China’s position as a manufacturing central will remain, particularly for low-cost exports bound for Western Europe. Asia importers will likewise continue to flock to China when sourcing for labor-intensive products.

Secrets to Sourcing from China

If you are considering sourcing from China, the following guide can help you avoid costly errors and make the process run much more smoothly. From finding a supplier to making payment and clearing customs, learn each step before making any commitments.

Types of suppliers
Some suppliers will pretend to represent a factory when they do not. The major types of suppliers include:

  • Trading companies: These companies will handle everything from finding the manufacturer to payment. While this is the easiest way and often best for small orders, the commissions taken on every order will increase costs.
  • Through a third party provider: For a onetime fee, this provider works for the buyer and will help find and screen suppliers.
  • Factory direct: This may not be an option for smaller orders and requires the most work to set up and monitor. However, it provides the greatest degree of control and lowest costs in the long run when done correctly.

Finding a supplier
Finding the right supplier is the first and most important step. Going directly to China or trade fairs are always options, but there are also a number of sites that connect Chinese suppliers with buyers. These websites offer numerous ways to evaluate the qualifications of suppliers before meeting with them or investing anything. Some of these sites include:

Selecting the right factory
There are number of factors to look at to ensure you have the right supplier.

  • References: Any good factory should be able to supply at least a few references from previous customers.
  • Communication skills: Although the general level of English ability leaves something to be desired in most parts of China, any good supplier with experience in the overseas market should have people that can communicate well in English.
  • Quality control: Ensuring quality is often the single biggest hurtle to successful sourcing from China. Make sure the supplier has an established system of ensuring quality control.
  • Product line: The supplier should have a product line of related products they can present.
  • Inspect factory: If at all possible, inspect the factory where the goods will be produced. Keep in mind that some factories will actually outsource what they do not have the knowhow or space to produce. Ask to see exactly where the production will take place to ensure the factory-direct price.

Pricing
Labor costs have risen significantly in many areas of China, and the price advantage is not what it used to be. Still, China has the relatively low costs and the infrastructure that makes it the best place to manufacture many products. Keep in mind that manufacturers outside the more established areas will have lower costs. It is necessary to check with different suppliers to get a good idea of what the market price generally is. Negotiate for the best prices but be wary of suppliers who give significantly lower quotes than everyone else. There is a good chance anyone coming in much cheaper than the market average will not be reliable.

To get the most attention and best quotes from suppliers, present your organization and the order size to look as large as possible.

In addition, keep in mind the price effects of VAT and China Sourcing.

Start with a sampleSourcing from China
As is explained in sampling  it is crucial to make sure the factory proves it knows exactly what it needs to produce by first producing a good sample. The sample needs to be the baseline established before placing any orders.

Start with smaller orders
Although larger orders will have lower unit costs, this is discussed more in production runs, it is advisable to start with smaller production runs until the factory can demonstrate its abilities and trustworthiness.

Making the deal
Everything needs to be carefully spelled out in a contract. Some points that need to be covered are:

  • Quality control: Assuring quality control is arguably the single most important factor.  The specifications for the products need to be clearly spelled out in addition to how quality will be assured.
  • Defects: How defects are handled and replaced must be clearly laid out. This includes the time frames for replacements and how shipping will be handled and paid for. 
  • Arbitration: Specify how and where any disputes will be handled. 
  • Payment: A percentage is usually paid up front with the remainder paid when the goods are shipped or on arrival as is the case if a commercial letter of credit is taken out.

Inspection
Some type of inspection needs to be performed before any goods are shipped. The surest, but most costly, way to ensure quality is to have someone at the factory inspecting products as they are made. At other times, the products are inspected before they are shipped from China. While this is cheaper and reduces the danger of the inspectors being bribed or compromised in some way since they are not at the factory, there may be problems with getting the supplier to replace the goods if production is already complete.

One good way to inspect goods at a lower cost is to find a professional third party inspection service.

Shipping
If at all possible, order by full container load (FCL). This will significantly reduce the unit costs of shipping and lessen the likelihood of damage or other losses in shipment.  When this is not practical and your merchandise makes up a less than full container load (LCL), it will be combined with other shipments. This and other important points about transporting goods is explained in more detail in shipping.

Customs
If buying from a factory that does not have an export license, keep in mind that a third party will need to be paid to export the goods. The points laid out in the following articles on  tariffs, customs clearance, customs brokers and freight forwarders should be understood before the goods are ever shipped.

Doing business in China is a valuable reference to prepare anyone not familiar with Chinese business practices on how carry out any kind of business there.

Essential Tips for Doing Business in China

There are various aspects to doing business in China. From getting around to conducting business negotiations, the following points can help those doing operations there carry them out in the most efficient manner possible.

Accommodation
China is still a developing country in many ways, and those traveling there cannot make the same assumptions as they would in nations with higher levels of income. This is especially true with hotels. Maintenance can be spotty, and sometimes basic amenities like hot water will not work. In other cases, windows that do not shut properly or noisy karaoke rooms may be a real nuisance.

To avoid problems, try to choose newer hotels, since they are much more likely to be in good condition. Inspect rooms before checking in to make sure they are up to standard. If visiting a factory or other company, they will likely help find accommodations, but they may simply book the nicest and most expensive place without negotiating the price. Make sure the hotel is near transportation and any needed services.

Be wary of offers for special massages since they are often fronts for prostitution, which is illegal in China and can get a foreigner into lots of trouble.

Transportation
When booking domestic airline reservations, it is better to use a Chinese website that offers service in English, since they will show more flights than an outside site such as Expedia. Sites to include http://www.elong.net can be used to find both airline tickets and hotels. Remember that airline ticket prices are usually set and waiting for the price to come down will not work.

Trains are a good option if they are available. If not, buses can be used with many point-to-point routes between cities and other places.

If using taxis, make sure the driver turns on the meter, and that it is working before getting started. A taxi called by the hotel will likely cost much more than one flagged down on the street. Since the taxi driver will probably not understand English, having a phone number of someone at the destination can be useful.

Whenever using any form of transportation, having someone write down the destination in Chinese is always a very wise move that can potentially save a lot of trouble.

Keep in mind that tipping is not a custom and not expected. In addition, a service charge is already included in the bill in most upper-end establishments.

Another traveling tip is to only use official money changers and beware of fake exchange bills at airports.

Tips for doing business in China

Communication
The first major obstacle to doing proper business in China is the language barrier. Remember that reading, speaking and understanding English are all different skills. Just because someone can read most English and make themselves understood in the written word does not mean they will be ok in conversation. In general, the English proficiency is not very high in China. Be sure to speak slowly and clearly and pause between sentences. They are making the attempt to understand a foreign language, so be understanding.

Chinese generally do not like to say “no” directly and will often just nod and say “yes” (sometimes simply because they do not understand what has been said). Look for indirect hints that something is not acceptable.

If using the services of an interpreter, make sure that interpreter is familiar with the business terms that will be used.

In addition, be careful with written communication. Write in a way that is easy to understand while being detailed and accurate since Chinese put great emphasis on these details. Remember that credibility can be shaken if mistakes are made, not to mention the other potential problems that may occur.

Saving face
Maintaining personal honor is very important in China and other Asian societies so doing and saying things that will make the other side lose face must be avoided. Be careful of saying critical things too directly and in front of others.

While it is necessary to be firm at the appropriate times, it is often not wise to push for an instant decision. Be prepared to walk away.

Connections and delegating
Personal connections and relationships (quanxi) mean more in China than in Western countries, and the importance of building and having them cannot be overestimated. Work to cultivate these connections. At the same time, be wary of delegating too much to a partner in China. There are many stories of businesses losing to partners they put excessive trust in. Still, having a local representative is very important for many forms of business.

Verifying
Do not rely too much on documentation offered by a potential supplier as proof of their legitimacy. Look for outside verification. If visiting their facilities, look at size, level of activity, movement of materials, etc. In addition, try to visit more than once.

Talk to as many people as possible, including their competitors.

Entertainment
Chinese business contacts generally feel it is their responsibility to keep clients entertained during their entire visits and will plan dinners and events. They will often try to feed their guests until they cannot eat anymore and keep their glasses full of drink at all times. It can be hard to break away, but this is often were deals are made.

This is also part of building relationships. Chinese will usually expect initial contacts to be more small talk about weather and the like that gradually builds up to more serious business negotiations.

With its increasing dealings with the outside world, doing business in China is not as different as it used to be. Chinese businessmen are becoming more familiar with Western business practices. However, there still are differences to keep in mind.