OPS Partner Factories Slowing

We have heard recently from our partner factories in China that their demand from export customers is down. It seems there is truth in some of the negative press lately. The downturn is resulting in excess inventories and plans for extended Chinese New Year shutdowns.

What does this mean for importers? First, it means prices will be more negotiable than early this year. Commodity price declines are also contributing to this. Labor costs are still up, but the exchange rate has stabilized.

Second, it means production schedules in early 2009 will be harder to manage. Also, low-end factories will likely get pushed out of the market as the slower economy helps cull the weak. Finally, it means US companies will need to be more diligent about checking quality from their Chinese factories as some will be tempted to cut corners to survive. It's more important than ever to have a strong relationship with your partner factories and work with them through these difficult times.

The Politics of Outsourcing

We are one week from the Presidential election in the US. I've posted a bit before about the politics of outsourcing and trade. I firmly believe that international trade can be good for all parties in a macro sense. I accept that trade also has downsides for individuals. Those people should be helped to find other employment or be re-trained for other jobs.

The macro economics behind trade being a good thing can be summarized by saying that buyers and sellers benefit when the most efficient producers of a certain good are selected. Buyers benefit from getting a lower price. Sellers benefit by getting the business and economies of scale. When countries start to specialize in certain industries or processes (like China specializing in high labor content manufacturing) and become low-cost producers then both they and the buyer country benefit. In that case, the buyer country should focus on other industries or processes where it can be the most efficient producer.

The graphic analogy for this is a ladder. The US economy grows best when we continually move up the ladder of technology and innovation. As we do that other countries with lower labor costs begin to take on those processes and industries at the lower rungs of the ladder. Our focus should not be on saving the lower rungs, but on finding the next higher rung. Personal computing was an example in the 70's and 80's. The internet was the next rung in the 90's until now. I believe the next rung will be in environmental technology, energy, or water. Our country should support research and development of the next rungs.

Many politicians focus on the populist message of, "We need to save our manufacturing jobs". I agree that we should work hard to compete and keep the manufacturing jobs that are best for America. We should make sure our tax policies and other laws do not put US companies at a disadvantage. We should also work with other countries to improve their environmental and labor safety laws. However, we should not try to save companies or industries that are not competitive just so we can save the jobs at that company/industry. That is not in the best interest of the country. Instead government should promote personal responsibility while offering help and retraining support.

I won't spend much energy at all on politics in this blog. This time of year I think about it more often as I see ads and read about politicians trying to get elected by promoting policies that are popular with some, although short-sighted and bad for the country.

According to USA Today - Economy Rocks China Factories

A story in today's USA Today tries to describe the economic slowdown's effects on Chinese factories. The article highlights the plight of a textile factory in Shaoxing that went from successful to completely shutdown and owing creditors $290 million USD in three months.

The article does point out that because of the slowdown, rising raw material prices, and the Chinese governments actions to slow economic growth and eliminate low-end factories, the situation with River Dragon is happening throughout southern China. Here is the address for the article:

http://www.usatoday.com/money/world/2008-10-21-red-dragon-china-factories-economy_N.htm

I find it very hard to believe the factors cited by USA Today were really the main factors in River Dragon's closure. More likely there was some bad and/or illegal things going on at this company that finally caught-up with the owners. Economic slowdowns do not close factories with 4,000 workers in three months.

It is clearly true that the global economic slowdown is affecting Chinese manufacturers. As I mentioned yesterday however, it is helping the Chinese government slow growth, control inflation, and better balance trade. It certainly is not gloom and doom. The economy is still growing 9% for goodness sakes! Some factories must be doing well and others must be starting-up.

The article is an interesting look at how the slowdown is affecting China, but it presents an overly negative view. There is lots of good news in China right now.

Chinese Growth and Inflation Slowing

As expected, the Q3 numbers from China show GDP growth slowed to 9% and the CPI (Consumer Price Index) for September grew 4.6% which continues the downward trend started in June. The PPI slowed to 9.1% in September. This is still a large number though.

The global economic slowdown combined with the Chinese government's interventions and some natural disasters have combined to slow growth and tame inflation. My view is these numbers are right where the government wants to be, but that further slowing of the economy will be seen as a problem. It seems a widely held view that the government needs 9% growth maintained in order to keep unemployment down.

For OPSA, we are working with our Chinese partners to reduce costs and prices now that raw material costs have come down and the exchange rate has stabilized. I'll let you know how that works throughout 4Q.

Milwaukee Bucks in China

I grew up in Milwaukee and get back there often. As a kid I was a fan of the Milwaukee Bucks NBA team. I still am a little, although I really don't like how the NBA has evolved.

Anyway, the Bucks are in China right now playing exhibition games. The blog at the following link is about their travels and is very interesting. They are amazed by the excellent service in China as are most first-time visitors.

http://www.nba.com/bucks/features/Paschketball.html

Their first-round draft pick, Joe Alexander, was born in Taiwan and speaks Mandarin. He is quite a hit over there I guess.

Milwaukee has established a sister-city relationship with Ningbo that seems pretty strong. There is a delegation from the Milwaukee Chamber of Commerce also on the trip. I'm hoping to spend more time with this organization in the near future.

Protectionism Not the Answer

I certainly don't have the answers for how to solve the current economic situation (although much of it is clearly psychological), but I do know moving to protectionism is not one of the answers. Without going into all the reasons international trade is a great thing, suffice it to say I think the case is made that regions have specialties and trade amongst regions in which they share what each does best is a very good thing.

An article in today's USA Today reports on US Secretary of the Treasury Henry Paulson's comments recently about protectionism and how it will make current problems worse. I completely agree. Here's the link:

http://www.usatoday.com/money/economy/2008-10-12-financial-crisis-washington_N.htm#open-share-help

In this election season one also hears much about "US jobs going overseas". This is another example of fear mongering by politicians. Our local US representative is one of the worst in this regard. In a recent TV add he actually made this quote, "I think it's time we started shipping our values overseas, not our jobs".

First of all, I don't hear many countries asking for our values to be shipped overseas. I believe the values embodied in the US Constitution and Declaration of Independence are the basis for our success as a country. However, there is no reason to believe they are right for all other countries. The world is a big place and people are different in many ways around the world.

The protectionist statements of this uninformed representative are not helping the situation at all. Blaming an overseas bogey man for some of our problems takes away from the sense of personal responsibility and self-efficacy needed to fix them.

Protectionism - NO. Innovative problem solving and personal responsibility - YES

Exchange Rate Out of the News

You haven't heard much about it lately, but since August the USD has been holding steady versus the RMB. I did post about this back on September 2 and the trend has continued. With all the news about credit and world financial markets, the exchange rate has completely fallen out of the news. We are watching it carefully however and it is helping our customers and contributing to the decline in US inflation over the last two months.

Economic Rumbles

There certainly is a lot of uncertainty in the global economy these days. Here are some interesting bright spots related to our industry:

1. China's central bank coordinated with those around the world in reducing interest rates last night. China is becoming a world player and this stability will help its economy in the long run.

2. Commodity prices are in a free fall. All our recent quotes are looking better.

3. Oil prices are also in a free fall which makes transportation less expensive.

4. Doom and gloom is everywhere, which makes for lots of opportunity for those of us optimists. While we are watching expenses even more closely, we are focused on growth and improving our business model.

We are keeping our heads up and maintain perspective. All the bad news and panic in the news can help create a self-fulfilling prophecy if you let it. We know that to grow we need to add value and be better than our competitors and substitutes while continuing to add projects and customers. That's what we are focusing on.

The Perils of New Product Development in China

I am currently working with a customer on a product development project. The customer decided this product had to be made in China to be viable right from the start so we've been working through the product development process for the last 18 months. We are almost done and the first full container will ship this month.

It's been a very stressful process. Change after change and adjustment after adjustment we have struggled through the issues. Our staff in China has done a very good job and the customer has been patient for the most part. Here are a few of the lessons that have been reinforced for me during this process:

1. If possible don't do new product development in China. Develop the product here and make the first few runs here. Then transition to China after the bugs are worked out.

2. Have very detailed specifications and inspection criteria.

3. Evaluate and test all samples comprehensively.

4. Have realistic time lines that allow for complications.

5. Take the customer to the factory during at least one key approval stage.

6. Be patient, and positive, and keep your eye on the big picture.

Those are kind of broad strokes, but they contain key components of a successful product development project if you really break them down. I am going to have a big celebration when this project is complete.

China Targets Cleaner-Coal Power Plants: Scientific American

China Targets Cleaner-Coal Power Plants: Scientific American

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As I've said before, the only thing I don't like about China when I visit is the pollution. The brief article above is from this month's Scientific American. It describes China's new effort to capture emissions from coal power plants. I am excited and heartened by China's recent efforts to reduce pollution and carbon emissions. The Olympics had a big impact on this effort I believe.

Last night's vice presidential debate included comments about clean-coal technology and the potential to share it with China. The attention to this issue is great to hear. I look forward to hearing more and to supporting efforts to reduce pollution in China in any way I can.

Cultural Stereotyping II

I may have been a little strong in my comments on my last entry. Balancing ones expectations and tactics is probably better than nearly ignoring cultural differences. I do believe most bloggers and advice givers focus too much on cultural stereotypes when suggesting how to work with or negotiate with Chinese people. However, there are some differences to keep in mind.

For example, it is true that decisions happen slowly in China and are more often made by groups. Also, social interaction to build relationships is more important to Chinese business people than to Americans.

There are differences in the perception of some ethical issues (intellectual property piracy is one example), but generally there are good and bad actors in China just like there were in the US at a similar stage of development.

People are people, but cultural background does have an impact on how different people respond to situations. Balancing your understanding and perception is what I suggest.