Comments from Dongguan

Here's what the factories we met with this week are talking about when you ask how is business:

• Increasing cost of labor
• RMB appreciation versus the USD
• Shortage of skilled labor
• Government actions to try moving factories out of Guangdong province
• Low-tech factories moving further into China, or to other SE Asian countries
• Rain and flooding

I did not prompt. This was not a scientific study, but one to help with my MITA presentation. No mention of transportation costs, VAT rebates, or other cost issues.

The rain here is crazy. It's rained hard pretty much every day since I arrived last week. While driving you can see all the water. It didn't hinder us, but factories did mention it impacting their transportation and raw materials flow.

Insights from Hong Kong

Hello from rainy Hong Kong. This is my first trip to China this year and since I started the blog. It's been raining here for several days and landslides are an issue. This morning it is literally pouring rain. I'm hoping it stops later so I can get a run in.

In the news here in HK this week are lots of articles about cost issues in China and their implications for the economy. The stock market here has had its worst few weeks in years. There is lots of uncertainty. It's all good information and background for the presentation I am giving on June 23 for the Madison International Trade Association (MITA) on Cost Increases in China.

I am here working mainly on one key project for one of my customers, but I'm also working on others while I'm here. It's good to get here and re-connect with the staff in person. It's tough sometimes to judge when to travel here. I miss lots of stuff at home (this weekend I'm missing Father's Day), but it's important to build relationships with the staff and to work directly with factories. I probably will be here more in the future than I have over the last 18 months.

That's it for now. I'll post more during my trip.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #4 Lack of Control

#4 Lack of Control

If you know that China is pretty much on the opposite side of the earth from the US, you can begin to understand that it's difficult to have control over what happens there. Add in the significant cultural, political and language differences and it's clear control is difficult to achieve.

The things you normally want to control - product quality, intellectual property, production time lines, cost changes, and maybe compliance with non-production policies (child labor, etc.) are still controllable with some help and a different outlook.

Here are my suggestions for gaining and maintaining control of your suppliers in China:

1. Have a champion in your organization responsible for your Chinese outsourcing efforts. We often see companies that treat their Asian suppliers the same way they treat US suppliers and it results in less than superior results. Put someone clearly in charge and make them responsible for making the project work. Then give them support to get educated and put in place the right processes and procedures.

2. Negotiate and agree on processes and procedures with your suppliers up front. You can't think of everything that may happen, but you can agree on quality criteria and other things up front. The more of this you do, the greater your chances of not having problems.

3. In order to do #2 well you need to build a relationship with the supplier. This necessitates either going to China to meet in person or having someone be your stand-in presences in China. In person audits are important.

4. Start small and gain experience. I've mentioned this one before.

5. Have contingency plans. If you have other options it won't seem like the sky is falling when things need to be brought back into control.

6. Communicate often and clearly. An obvious one, but one that still gets missed and is a main cause of misunderstandings.

New Challenges - First Triathlon

I've mixed business and personal news and information in this blog as I believe it keeps things more interesting and because I write about what I'm thinking about. Yesterday, I completed another first, similar to the first day of this blog when I did the Polar Bear swim on 1/1/08. I entered and finished the Green Bay Triathlon, sprint division, in a steady rain.

I am not a strong swimmer, so a few weeks ago I took some private lessons at our local YMCA. It helped enough that I got through the swim. Luckily, much of the swim course was very shallow.

The "sprint" (meaning shorter than an Olympic or iron man) course was a 400 yard swim, then a 16 mile bike, and finish with a 5K run. Here were my goals, in order of importance, and how I did on each:

1. Finish - This was my first "tri" and I wasn't sure I could do it. It actually was never a thought to not finish, and I never stopped to walk during the 5K.

2. Finish under 2 hours - I did much better, finishing in 1:33. I'm sure I can do better now that I have experienced the swim and the two transitions.

3. Don't finish last in my age group - Again, I did fine on this one. I haven't seen the results online, but when I left the event there were at least two guys with slower times than me in the 40-44 age group. I was 20th. I just don't know how many total competitors there were in my group.

I don't have any pictures of me because it rained too hard for my family to come watch and take pictures. The picture above is from last year's event.

So, as OPSA embarks on more change and transition, I am ready for it as I've tackled these new challenges personally.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #5 Not Identifying All Risks

#5 Not Identifying All Risks

Traffic in Shenzhen is not one of the risks to which I refer. I am referring to the big risks to your outsourcing objectives. Here are the main ones:

1. Exchange Rate Risk - As the RMB appreciates against the US Dollar your savings is eroded. Actually, this can be a catch-all category for all cost increases in China that are not global. Right now labor, raw materials, and general inflation are all increasing faster in China than in the US.

2. Political Risk - There is the risk of conflict over Tibet, the Straight of Taiwan, or other issues. There is also the risk that the Chinese government will take some action that otherwise affects the outsourcing viability of your products.

3. Environmental Risks - Boy, we saw this with the earthquake didn't we. There is also the risk of pollution impacting your business, although that would take significantly longer than an earthquake. There is risk in the availability of water. I would also include the loss of electricity impacting your production in this category. The Chinese natural environment is not in good condition, so there are significant risks here.

4. Quality - This is the big one. There is a big risk that you will open that first container and there will be some major problem with your product.

5. Intellectual Property Theft - Another huge one in China. The Chinese just don't respect the value or claims to intellectual property. This is changing, but slowly.

So, what do you do about all these risks? Well, you don't miss-out on all the opportunities in China because of them. Rather, you take actions to reduce your risk and prepare contingencies in case bad things happen.

1. Get Educated - Learn about each risk and assess your level.

2. Prepare Contingencies - We encourage our customers to have plans in place for what they would do if they lost their Chinese suppliers for a significant period of time. Inventory can be a hedge against delays and quality problems. Having alternative suppliers in the US in mind is also a very good contingency step. There are others.

3. Get Help - Obviously having a firm like OPS America on your side in China greatly reduces many of the risks. There are also firms that just do quality inspections. Finally, there are resources in China supported by the US Government, like the US Commercial Service, that can help with risks.

4. Start Small and Gain Experience - I will write more soon about our clients that try to use a new product development project as their first foray into Chinese outsourcing. It's not a good idea. Much better is to start with non-critical items and learn. Then you can move to your key items and more complex projects as you gain experience.

Sichuan Earthquake May Accelerate Manufacturing Devleopment in the West and North

There is an interesting article in today's USA Today about the rebuilding process in the earthquake areas. The link is below:

http://www.usatoday.com/news/world/2008-06-01-china_N.htm?loc=interstitialskip

One of the comments in the article is that the earthquake may slow the government's plans for developing the interior of the country.

I completely disagree. There will now be a huge amount of investment in new infrastructure and there will be greater incentives from the government for factories to locate in the affected areas. I believe relatively soon that we will be reading about all the companies locating in and around Chengdu.

Another comment in the article is that reconstruction will be very expensive, but that the Chinese government can afford it as they are running budget surpluses of more than 1% of GDP.

In summary:
1. The money is there
2. The motivation is there - to avoid social unrest and follow-through on the 5-year plan
3. The capability is there - a communist regime can make it happen fast, although not efficiently or necessarily effectively

Infrastructure and management talent are the main things holding back the development of the interior of China. The earthquake will accelerate the process of both moving to where they are needed.