OPS America

Helping Customers Through Difficult Times

2009-06-08T10:11:00.003-05:00

A few of our large customers are struggling in the current difficult economy. We are using our customer business resource concepts to do all we can to help them. It is during these difficult time that being a true customer business resource shows its true value for OPSA and our customers. Because we ask and learn about their entire business, not just the portions our services touch directly, we are able to offer suggestions, referrals, and ideas. It is during tough times that real strong relationships are built.

There's no sugar coating it - this is a difficult time. We'll get through it, but it will take a while.

If you are interested in learning more about becoming a customer business resource, check out Jerry Stapleton's book From Vendor to Customer Resource. It embodies many concepts I learned and have honed during my career at Little Rapids and OPSA. I believe strongly that becoming a customer business resource is the best method for a sales team. I've seen it generate excellent returns and I've seen the alternatives generate lackluster results.

Have a great week!

China Claims Stimulus Will Not Harm Environment

2009-06-05T05:49:00.002-05:00

An interesting story out of the AP today quotes a Chinese official comforting the world that the huge Chinese stimulus program will not be used for projects that are not environmentally sound. He claims several projects have already been rejected because of their negative environmental impact. Also, there is $30B US in the stimulus specifically for projects that help the environment.

The end of the article mentions some progress China has made in reducing pollution this year. The amount of sulfur dioxide, an air pollutant tied to acid rain, fell as did the amount of chemical oxygen, a measure of water pollution.

The amount of money the Chinese are spending on environmental clean-up is a huge opportunity for US firms. I've mentioned several times that environmental projects are a great fit for the US economy.

Also, one of my big problems with visiting China is seeing the pollution. It must get better, and I'm confident it will. Here's the article. Have a great weekend!

http://news.yahoo.com/s/ap/20090605/ap_on_re_as/as_china_environment_2

Communication Is the Key in Tough Times

2009-06-03T09:26:00.002-05:00

One of our larger customers is really in trouble. Unfortunately they've taken to not responding to questions or providing information. This means we can't respond correctly to questions from the factories we manage for their products. This is absolutely the opposite tactic to take when times are tough.

US companies need to communicate even more often and thoroughly when things are difficult. The Chinese culture is very collective and the Chinese people will respond positively to honest communication about difficulties. With a long-term view it can be an opportunity to build your relationships with your Chinese suppliers.

I suggest supplementing e-mail communication with skype calls and even video calls. A handwritten note of thanks for support and partnership can also go a long way. Using multiple forms of communication will build rapport and trust.

Things overall with the economy are improving and better times lie ahead. Build relationships now when things are difficult so you and your partners can react quickly to the opportunities the improved economy of the near future will bring.

June Starts with Upbeat News

2009-06-01T12:33:00.003-05:00

There is data out today that shows manufacturing activity in China grew in May. Two different purchasing managers' indexes were above 50 which means growth in activity. This is good news for the global economy as China appears to be coming out of the recession which will eventually mean most of the rest of the world will as well. The stimulus program in China is being touted as having an impact on this growth.

The global stock exchanges certainly think we are moving out of recession. The Hong Kong market was up 4% overnight and the Dow is up significantly today despite GM's bankruptcy filing.

I believe we will look back on this recession as a very difficult time, but a time that set the stage for further growth and prosperity long-term. Here's a link to a Newsweek article on the above data. Have a great Monday afternoon!

http://www.businessweek.com/ap/financialnews/D98HKJQG0.htm

Two Great Articles in Forbes about US Manufacturing Strength

2009-05-29T10:22:00.004-05:00

There are two great articles in Forbes online today on the strength of US manufacturing. I've mentioned before that I feel a resurgence of American manufacturing coming as we move out of this recession driven by several factors.

The first article describes the transformation of tape manufacturer TaraTape. It's a great example of a manufacturer adjusting based on the opportunities and threats facing it. It's a great story. Hats off to TaraTape and continued success.

http://www.forbes.com/2009/05/27/taratape-manufacturing-china-business-rivoli.html

The second article is by former Michigan Governor, and current President of the National Association of Manufacturers, John Engler. He highlights some of the strengths of US manufacturing and also the challenges. He briefly describes three companies/factory locations that adjusted to their opportunities and threats and are now thriving. This is another good read.

http://www.forbes.com/2009/05/27/john-engler-manufacturing-business-america.html

Even at OPSA we are moving to incorporate more US manufacturing and assembly into our service offering. It feels right and it's the right thing for our customers and our business. I'm looking forward to this phase of our transformation.

A Contrast in Directions

2009-05-27T10:00:00.002-05:00

There is an interesting contrast in two articles from today's China Daily. The first one describes how the Chinese government is pushing to privatize more industries including oil, power generation, and railways to "boost efficiency". The second article describes how the US government will soon be taking a majority ownership stake in GM.

Who would have thought twenty five years ago that China would be privatizing this quickly while the US government took majority stakes in large banks and auto companies. What a change.

I don't have alternative ideas for the Obama administration that I'd like to throw out to solve the GM or banking situations. I do know that they need to have an exit plan just like any investor, and I hope that exit plan has a short horizon. Government ownership of industry has not shown to be a benefit to citizens or economies throughout history.

These sure are interesting times. Here are links to the two articles:

http://www.chinadaily.com.cn/china/2009-05/27/content_7948433.htm

http://www.chinadaily.com.cn/world/2009-05/27/content_7948681.htm

Memorial Day Remembrances

2009-05-22T08:57:00.002-05:00

Memorial Day weekend is upon us. This is one of my favorite holidays of the year. Not only is it the traditional start of summer, but it's a very meaningful holiday for me. My father was a Air Force veteran, my father-in-law and his brother were both Army veterans who fought in WWII, and my partner Dan Cook and his wife are both Navy veterans. I sometimes wonder how my life might be different if I had entered the military either before or after college. I do strive to serve our country and community in very significant ways, but it still doesn't match the service and commitment required of those who join the military.

I am a bit of a history buff and hold in very high regard those who have sacrificed for our country by committing to military service. My family enjoys the lifestyle we have in this country in large part due to the service and sacrifice of millions of veterans. Thank you so very much for your service.

Our work in China relates in a small way to the security of the USA. China and the USA are the two main powers in the world right now. By fostering business relationships and cultural understanding, our two countries can work together to make the world a safer and better place. In my small way I'm working to advance this cause.

So, enjoy the holiday weekend. Please take time to fly Old Glory and reflect on the sacrifice of those who've served in the military, especially those who've died or been wounded in that service. I will do so several times this weekend and will be humbled when I do.

An "Edge" for China in Energy Efficiency?

2009-05-19T10:17:00.003-05:00

Hopefully not. An LA Times opinion piece today notes that China is becoming the leader in wind and solar energy products manufacturing and in electric cars. Most new technologies are coming from the US, but China is pushing hard to become the main manufacturer in these markets and also develop new technologies.

I've long stated that the US needs to move into energy and water technologies hard as these are the next great high-tech growth industries. The article discusses how the investment markets drying up in the US during the recession is giving China an edge. China is opening the "public purse strings" to fund energy technology development and manufacturing. Both private industry and the US government need to step up and keep the US in a leadership position in these key markets. Here's the article:

http://www.latimes.com/news/opinion/commentary/la-oe-silver19-2009may19,0,6622766.story

Beijing Touts China's Recovery Status and Plan

2009-05-18T11:54:00.002-05:00

There are several articles out today on the Chinese government's positive comments on its recovery and project 8% growth rate for this year.

The article linked below from Forbes is the best example of these reports. In it a top figure in China's economic planning body says the government has a handle on the economic situation and still has additional measures it can take if necessary. The article describes well the tax reductions Beijing has implemented to help manufacturers.

He also touches on domestic consumption in China and exchange rates which should be stable for the foreseeable future. Here's the very interesting article on this good news for the global economy.

http://www.forbes.com/2009/05/18/china-stimulus-growth-markets-economy-recovery.html

Four Year Anniversary with OPSA

2009-05-11T07:34:00.002-05:00

May 9, 2005 was my first official day at OPSA. Four years is a bit of a milestone in our culture. Both high school and undergraduate college degrees are earned in four years. Presidential terms are four years and the Olympics occur every four years as well.

My four years with OPSA has been a roller coaster. There have been great high points and some tough low points. We've grown significantly and reached annualized profitability. We've experienced many of the typical challenges of a start-up and some not so typical.

I am fine telling everyone that we haven't reached our financial goals. It's been an extended "beans and franks" period for our families. However, we are investing in and building a new business that will support our families and those of our employees. It's just taking longer than we expected.

We are not immune to the impact of the economic downturn. Some of our larger customers' sales are down, so their purchases from us are down. When we all get through this time we will have stronger businesses.

The last four years have been an outstanding ride. I've learned more and experienced more than I ever could have working for someone else. I would change some of the decisions we've made and not made as a company, but I wouldn't change the decision to join Dan and Joel in this adventure. I'm not sure what the next four years holds for me or OPSA, but I take all I've learned the last four years and look forward to new challenges and successes.

Happy Mothers Day (one day late) to all Moms out there. Mine is the best ever.

China Battles Protectionism in Europe

2009-05-08T16:09:00.002-05:00

Here's a link to a China Daily article on discussions between China and the EU on trade. It talks about China sending teams to Europe on "buying missions" and calling for the EU to reject trade barriers.

http://www.chinadaily.com.cn/china/2009-05/08/content_7755335.htm

When the economy is weak and unemployment rises, countries naturally turn protectionist. We are certainly seeing that in the US and this article shows the EU is having similar strains. A review of history will show that protectionist measures worsened the Great Depression. As I've mentioned before, free trade is the way to go.

Importance of Being Present with Chinese Vendors

2009-05-06T13:33:00.004-05:00

At OPSA we've cut down on our travel from the US to China just a bit over the last six months in order to conserve cash in case the recession continues impacting our customers and their purchases from us. I'm sure many companies that do business overseas are doing the same.

My word of caution in this regard is that it's vitally important to maintain live communciation when you can't be there in person. We use Skype for calls to our HK office and other locations in China. It has worked well for us and the quality has improved over the last two years. The video option has also been helpful for project management with our HK office.

To summarize - Being there in person is still important in successfully sourcing in Asia. However, when there are times that you can't be there as often as you'd like, it's important to use multiple communication tools (not just e-mail) to keep in touch with your Asian vendors. I need to remind myself to call more often this year.

A Rebound in the Chinese Manufacturing Sector

2009-05-04T13:52:00.002-05:00

April marked the first month since July 2008 that the Chinese purchasing manager's index showed expansion. The number of new orders increases also for the first time in nine months. Export orders continued to contract, but at the slowest pace in many months. GDP growth is also forecast to increase now for the second quarter. Here's an article on all this from Forbes:

http://www.forbes.com/2009/05/04/china-manufacturing-orders-markets-economy-stimulus.html

The news does seem to be improving on both sides of the globe. Equity markets are way up, of course, over the last several weeks. I believe if we can get past the swine flu scare and into summer, things will continue to look better. US consumerism may not rebound to where it was (which is a good thing as the savings rate may stabilize in positive territory), but the economy will adjust over a longer period.

Warren Buffett Makes Big Investment in China's BYD

2009-04-30T11:47:00.003-05:00

Warren Buffett's Berkshire Hathaway purchased a 10% stake in China's BYD Group recently. BYD makes rechargeable batteries, mobile handsets, and automotive parts among other things. Their strength seems to be taking manufacturing costs with high capital requirements and changing them to take advantage of China's low labor cost model.

This does seem to be a major statement of confidence in China from Buffett. BYD seems to be a Chinese company that is doing all the right things. At OPSA we need to find similar, although smaller, companies to continue partnering with. Here's a link to an article on the investment:

http://www.gurufocus.com/news.php?id=53933

Let the Sun Shine Down

2009-04-28T10:20:00.002-05:00

It's springtime here in the Midwest and that means we get to see the sun. OPSA is also incorporating the sun in our strategic planning. We already do a good amount of business related to solar energy and are planning to do more. This works well with what appears to be the Chinese government's focus on the solar energy industry.

Today it was announced that Canadian Solar (NASDAQ: CSIQ), which has all its operations in China, is receiving $2.2 billion in financing from three Chinese banks. The government seems to be supporting both domestic solar energy utilization and export of solar energy devices.

Solar energy is one of the industries to watch in the future. Not only will OPSA be watching, but we intend to participate.

Another Take on Quality in China

2009-04-24T13:58:00.002-05:00

There is an interesting blog posting from Kimberley Palmer at US News and World Report from yesterday. She interviewed an author that recently wrote a book about quality in China. Paul Midler is the author. In the interview on the posting he goes back-and-forth about quality in China. On one hand he says he's nervous to buy and use some products from China. On the other hand he makes a case that China is the place to be.

This is yet another opinion that points to the need for all the ingredients of successful sourcing I've talked about before - with planning, communication and having "feet on the ground" being the most important.

Here's the link to the blog post.

http://www.usnews.com/blogs/alpha-consumer/2009/4/23/explaining-chinas-quality-control-problems.html

The Rescue Mission

2009-04-22T10:53:00.003-05:00

It seems we are receiving a higher quantity of "rescue mission" inquiries lately. A rescue mission is OPSA-speak for a potential customer that has tried to do their own sourcing in China and has experienced problems - usually in terms of quality or communication issues. At that point they reach out for help. If the product or component being sourced is custom (rather than a commodity) and has reasonable complexity we will usually try to help. It's a different model than our core business, but we've made it work several times.

Helping involves contacting the customer's factories to diagnose and "fix" the problems and root causes. Usually the factories turn out to be completely inappropriate for the product and/or customer. If that's the case, usually the next step is a fairly complex negotiation to unwind the customer's work with that factory. Getting tooling out and closing PO's can be very tricky.

Sometimes the factories currently being utilized by the customer can continue to be utilized. Then we try to go in and address the specific issues. Most often communication is the problem.

The key learning from all this is to avoid requiring a rescue mission in the first place. Do your due diligence and planning upfront or hire professions on the ground in China (like OPSA) to help. If you are having problems, address them right away. Letting things linger or hoping they will improve has not been shown to be a good strategy.

A Take on the Recession's Impact in China

2009-04-20T15:20:00.002-05:00

There is a new article out by Einar Tangen this week. I've quoted Mr. Tangen several times in the blog. He is a former Milwaukee resident now living in Beijing. In this week's article he describes how the recession is hitting smaller firms in China harder than large firms. He claims this is the opposite of the situation in the US.

I will accept Mr. Tangen's argument about the recession's impact in China. However, I don't know why he feels smaller firms in the US are doing better than larger firms. He explains why he thinks this is the case, but offers no evidence. I don't see much distinction in impact between large and small companies here in the US.

Either way, the article is interesting as all of Mr. Tangen's are. Here's the link:

http://www.biztimes.com/news/2009/4/17/recession-has-different-impact-in-china

6.1% Growth for China in Q1

2009-04-16T15:26:00.002-05:00

The Chinese economy grew slightly faster than expected in Q1. Economists expected 6% growth and got 6.1%. This seems to be more positive news pointing toward a bottom for the economy.

Here's a link to an article on MarketWatch about the Q1 results. It reports economists as positive but cautious after the report. Interesting stuff. Will Q2 be the beginning of faster growth? We don't see it yet from our partners in China.

http://www.marketwatch.com/news/story/chinas-economy-downshifts-61-growth/story.aspx?guid={2D6F69D9-07E9-490B-B3C5-69C9C45FC5C0}&dist=msr_4

Growth Spreading West in China

2009-04-14T13:13:00.002-05:00

There is a great article in yesterday's NY Times about the spread of manufacturing and wealth westward in China from the traditional bases of Shenzhen, Guangzhou, and Shanghai. Maybe I think it's so great because it agrees with many things I've been suggesting we need to address quickly within OPSA. We are moving in the right directions, just not as quickly as I'd like.

I do believe that the best companies create an environment where spirited disagreement is accepted and encouraged as long as it is focused on how to move forward. That's good news for OPSA.

I've read much about the Chengdu area. The article also covers it. The earthquake rebuilding will make this a key area in China soon. It may be a little too hot right now, but areas around it or between Chengdu and Hong Kong may be an expansion opportunity for us. Here's the article. Enjoy!

http://www.nytimes.com/2009/04/14/business/global/14insideasia.html

China Begins Using RMB to Settle Trade Accounts

2009-04-09T07:45:00.003-05:00

This may be the start of something big. The Chinese government has allowed five major trade cities to begin using the RMB (Yuan) as trade currency with selected countries. This is a major development because, until now, all trade was settled in US Dollars. This move is intended to make the RMB an international currency to compete with the dollar.

Shanghai and four cities in the Pearl River Delta - Guangzhou, Shenzhen, Dongguan and Zhuhai have been designated as the RMB trade zones.

This could be nothing, or it could be the start of a decline in the prestige and value of the US dollar. I can't claim to understand all the implications or how this will impact our customers and business directly, but I do intend to study and learn about the situation. Here's a link to an article on this by China Daily:

http://www.chinadaily.com.cn/china/2009-04/09/content_7660017.htm

Terms Tightening in China

2009-04-07T16:21:00.003-05:00

We are hearing from several Chinese manufacturers that they are reducing their credit terms. These factories previously had offered US customers they have had for several years terms of 100% at time of shipment or even net 30. They are now moving back to 50% at time of order and balance at time of shipment.

We are hearing that factories just don't have access to the credit needed to offer terms. This will not help them keep their long-term customers, and if this action becomes widespread will further weaken China's economy. It will be interesting to see what develops during 2Q.

Looking For Another Family Trip Opportunity

2009-04-03T07:44:00.002-05:00

It seems lately that the family keeps bringing up our March 2006 trip to China. Our oldest asks most often when we can go back. She also talks about doing some sort of exchange program in China during high school or college.

The younger two often bring up memories from our trip to Hong Kong and Beijing. They remember Ocean Park, lunch with the OPSHK staff, Hong Kong Disney, The Great Wall, and all the other sights in Beijing. It was our favorite family vacation so far.

I'm hoping this fall or near Christmas might be another opportunity for a trip. Much depends on business conditions and airfares. We'll see.

Conflicting Information

2009-04-02T14:07:00.003-05:00

The Chinese government is reporting high unemployment, especially among migrant workers. Among the estimated 130 million workers that headed to cities after Chinese New Year this February, the government estimates 20 million returned home after not being able to find employment.

There are also all kinds of news stories about Chinese factory closings. However, nearly all of our OPSA factory partners report good business. They also appear busy, although not as busy as last year, when our employees are in their factories. Pricing has declined a bit, but not to the extent we would expect given the soft demand and steep falls in raw material prices.

It's a bit strange. With the recent bounce-back in the US stock market, I wonder if things are either not as bad as reported/feared, or if things are moving up from bottom. It will be an interesting Spring.

China Asserts Itself Before G20 Meeting

2009-03-27T12:45:00.002-05:00

There is a very interesting article at Barron's online today about China asserting its new global leadership position in the lead-up to the G20 meeting in London next week.

China has recently criticized US financial policies and those of other Western nations. It has not only criticized, but has offered concrete proposals for reform of global financial mechanisms.

The main suggestion is to end the US dollar's reign as the world's reserve currency. The article mentions how much this position has benefited the USA and goes on to say the G20 meeting may be the end of this run.

Very interesting stuff. See the link to the article below:

http://online.barrons.com/article/SB123812879219054939.html

Exchange Rate Stable

2009-03-12T12:55:00.002-05:00

As you can see in the chart, the RMB to USD exchange rate is essentially flat since about July 2008. There has been almost no attention paid to the exchange rate since this time when the economy really started to be in a recognized decline.

What will happen when the global economy starts to improve? A year ago I was guessing the long-term direction was for the RMB to continue to strengthen versus the dollar. Now I suspect this exchange rate is now set for a while and will not change much for the foreseeable future. The weakness of the economy has taken the pressure off and I don't see it returning for quite a while. In fact, I believe the probability of a reversal is higher than the probability of further RMB strengthening. However, I believe the highest likelihood is we see long-term stability.

The Value of the Plant Visit in China

2009-03-10T10:40:00.002-05:00

THe China Sourcing Blog (www.chinasourcingblog.org) recently had a good post on why companies should visit the factories they are working with in China before placing the first order. While a good idea in theory, most small and mid-sized companies can't be wandering all over China visiting factories they haven't even ordered from yet.

That's where OPSA comes in. We are our customers' eyes and ears. And better than a one-time visit, we are in the factories often obtaining all the benefits mentioned in the CSB post and more.

What makes us unique among our competitors is that we also encourage our customers to visit us in China and the factories we are working with for them. This provides and even stronger benefit. Now the factory knows that not only is the customer serious enough to work through OPSA, but they also are visiting China themselves. It's a powerful message.

Check out the post at the link below.

http://www.chinasourcingblog.org/2009/03/china-plant-tours-why-you-have.html

China Sourcing - Lessons Learned Survey Data

2009-03-03T15:57:00.003-06:00

Here's more information from the Deloitte survey presented at the last MITA meeting. Survey respondents reported six key lessons learned from their Chinese sourcing efforts:

- Make sourcing decisions not just on the basis of cost
- View China sourcing as a tool for ultimately gaining access to the Chinese market
- Be flexible and maintain some diversity of sourcing
- Establish stringent cost, quality and timing metrics prior to implementation of a sourcing decision
- Conduct detailed due diligence during the supplier selection process
- Take steps to watch contracts, delivery, and payments carefully so as to minimize misunderstandings

These are excellent lessons. I'm surprised there is nothing on relationships or contingency planning, although the flexibility lesson likely refers to having multiple options.

What Companies Are Focused on Regarding Overseas Outsourcing

2009-02-26T16:24:00.003-06:00

Here is some more from the MITA presentation by Deloitte. From Deloitte's recent survey, the top six things companies are focusing on as they examine current overseas outsourcing or consider new opportunities are:

1. Local market inflationary measures (labor rate, utilities, etc.)
2. Changing customs and duties environment
3. Intellectual property leakage
4. Currency rate fluctuations
5. Oil price volatility (as an indicator of transportation costs)
6. Potential legislative impacts (including potential carbon regulations and other potential trade barriers)

When evaluating an overseas outsourcing strategy these are excellent things to consider. I would add contingency planning - what will you do if your supply line is disrupted? Also add inventory and cash flow impact of the longer supply line.

Make sure to touch all these bases as you consider your current and future position relative to overseas outsourcing.

What Does America Make

2009-02-25T09:27:00.002-06:00

There is a really good article by AP this month that has been in several papers and on many web sites. It goes into some detail on how the US still produces $2.50 worth of products for every $1 China produces.

The article describes what we will people as well, that the US has moved up the "food chain" and now makes much more complex items. What people see in retail stores are what is made in China. US companies make computer parts, airplanes, software, and other complex items.

Manufacturing all over the world is taking a hit right now. History shows the US will likely emerge stronger than other countries as we are the innovators. I firmly believe this to be the case.

You can find the article at the following site:

http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090216&ID=9613102&Symbol=US:AAPL

US Wins WTO Dispute with China Over IP Protection

2009-02-18T12:25:00.002-06:00

In January the USA won what appears to be an important WTO ruling on intellectual property rights protection in China. This is important to all companies sourcing or selling in China. In both cases it is important that China's IP protection improves.

Since the WTO allows for appeals and the process of complying will be a long one, the impact of this ruling will not be immediate. It is another sign that IP protection in China is moving the right direction. This is good for US companies, but also good for the continued growth of the Chinese economy.

Here is a link to the Office of the US Trade Representative where you can find the news release on this development:

http://www.ustr.gov/

26 Million Chinese Migrant Workers Unemployed

2009-02-17T21:46:00.002-06:00

The Chinese government now estimates the number of unemployed migrant workers is now greater than the population of Texas. This is a huge issue for the country and the world as it could lead to unrest. Many of the unemployed stayed in their home provinces after Chinese New Year and some are returning now. Others are staying in the cities hoping to find work. USA Today did a great story on this today. Here is the link:

http://www.usatoday.com/news/world/2009-02-16-chinamigrants_N.htm

Cost Savings Expectations

2009-02-13T16:34:00.002-06:00

More from the MITA Deloitte presentation mentioned in my last post. The Deloitte study on LCCS (Low-Cost Country Sourcing) found the following levels of expected savings:

6-10% savings - 7% of respondents
11-15% savings - 14% of respondents
16-20% savings - 0% of respondents
21-25% savings - 43% of respondents
25-30% savings - 21% of respondents
>30% savings - 14% of respondents

The actual level of reported savings for these companies was:

6-10% savings - 21% of respondents
11-15% savings - 14% of respondents
16-20% savings - 29% of respondents
21-25% savings - 21% of respondents
25-30% savings - 7% of respondents
>30% savings - 7% of respondents

So, what can we learn from this? First, the median actual savings fell somewhere in the 16-20% savings category. The median expected savings was 21-25%. Expected was higher than actual. No news there as returns on most investments are lower than expected. Is the savings enough to justify the efforts? At 20% I would say, yes. Below that it's more questionable.

It is safe to assume the top performing companies using LCCS were above the median. I guest the moral is to make sure you are top performing with regards to sourcing as you need to be in most key parts of your business to succeed.

This survey was taken in the last several weeks, so the savings likely represents experience from 2008. I'll post more interesting information from it in future posts.

Attributes of Sourcing "Top Performers"

2009-02-11T10:06:00.003-06:00

I attended an excellent meeting of the Madison International Trade Association (MITA) yesterday. The first speaker was from Deloitte and he described research his firm is finishing on Low-Cost Country Sourcing (LCCS) Strategies. Here was the findings on what attributes made companies top performers in sourcing.

- Dedicated LCCS team
- Established own International Purchasing Office (IPO)
- High percentage of local resources engaged
- Supplier selection process includes strong local market insight
- Have supplier development function to drive continous improvement

Deloitte works with large companies that have the resources to maintain dedicated LCCS teams and IPO's. Most small and mid-size enterprises (SME's) do not. OPSA is the solution for SME's as we provide the top four items above for our customers. We need to start a formal supplier development program and intend to do that soon.

Some Good News on China's Economy

2009-02-06T13:02:00.002-06:00

Some good news from Hong Kong as we come out of the New Year holiday time. We need more good news.

HK stock index jumps 3.6 pct on China prospects

The Associated Press

HONG KONG: Hong Kong's stock index jumped more than 3 percent Friday amid optimism about China's economic prospects.

The blue-chip Hang Seng Index advanced 476.14 points, or 3.6 percent, to 13,655.04, in line with gains in mainland markets.

Better-than-expected manufacturing and bank lending reports this week have boosted confidence in the success of Beijing's efforts to safeguard the economy through stimulus spending and monetary easing.

"People are hoping more will be done by the major governments and central banks," said Dariusz Kowalczyk, chief investment strategist for SJS Markets. "Investors are looking for any optimistic event to hang onto right now."

Chinese stocks were especially strong.

Chinese top lender Industrial & Commercial Bank of China Ltd, or ICBC, surged 4.6 percent to 3.65 Hong Kong dollars. Air China soared 8.3 percent to HK$42.36.

Lenovo Group rebounded almost 11 percent to HK$1.62 a day after the Chinese computer maker announced a quarterly loss and management shake-up.

____

China Announces Huge Increase in Rural Unemployment

2009-02-03T08:56:00.002-06:00

The Chinese government announced this week that over 25 million rural residents, most of them migrant workers who travel to industrial cities for work, are unemployed. This is a huge increase in unemployment for a group that has enjoyed increases in their standard of living as China's export economy has boomed.

The government announced it is considering even more intense stimulus efforts to address the situation.

I'm not sure what impact this has on our business yet, but I sure am keeping my eye on developments. Here's a story from AFP on this situation.

http://www.google.com/hostednews/afp/article/ALeqM5jVtf5IJZ-RKUQWenCnyw3dRG97DA

World Economic Forum Also Fears for Free Trade

2009-01-29T07:25:00.002-06:00

In a Reuters article this morning Jonathan Lynn writes about policymakers' concerns at the World Economic Forum in Switzerland. The article lays out more information and detail to follow-up on my post from yesterday. Here's the article:

Policymakers Sound Slarm Over Protectionism

DAVOS, Switzerland (Reuters) – Policymakers sounded the alarm about the growing threat of protectionism on Thursday as new data showed a sharp fall in air freight traffic that signaled a broader slowdown in world trade.

India's trade minister, Kamal Nath, warned at the World Economic Forum that the global economic crisis could fuel protectionism to safeguard national industries and jobs.

He told Reuters that India saw growing signs of protectionism and would respond with its own measures if its exporters were threatened.

"We do fear this because one must recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their non-competitive production facilities it's not going to be fair trade," he said.

"If there are protectionist measures India will be compelled to also take commensurate measures against those countries which will be good for no one."

Nath cited Dutch authorities' seizure last week of a Brazil-bound shipment of a generic high blood pressure drug made in India. He said India had taken up the issue with the Dutch authorities and the European Union, and hoped to resolve it.

India itself has raised tariffs on steel to protect local producers, a measure trade experts say was aimed at China, which India does not regard as a market economy.

The deepening economic crisis, and the failure to complete the World Trade Organization's long-running Doha round on freeing up global commerce, have raised fears that countries will block their partners' exports to protect jobs at home.

Such protectionism, if it led to tit-for-tat retaliation, would intensify the crisis, as happened in the 1930s during the Great Depression.

SLUMP IN AIR CARGO

In more bad news for the global economy, the International Air Transport Association said international air freight traffic fell 22.6 percent in December compared to a year earlier.

IATA called it an "unprecedented and shocking" drop and said: "There is no clearer description of the slowdown in world trade."

On Wednesday the U.S. House of Representatives approved a controversial "Buy America" provision requiring public works projects funded by an $825 billion stimulus package to use only U.S.-made iron and steel.

European steelmakers have already challenged the move.

The U.S. Chamber of Commerce, which opposed the provision, believes it will be of only limited impact.

"An expansion of the current "Buy American" rules would be a dumb idea, it would be a bad idea because the natural reaction would be for our trade partners to react in kind," Thomas Donohue, president and chief executive of the federation of 3 million U.S. businesses, told Reuters.

"The more difficult it gets the more we have to keep saying 'no isolationism, no protectionism'. We need to keep markets open, we need to keep our ability to sell stuff working and to do that we have to keep our own markets open," Donohue said.

Egyptian Trade Minister Rachid Mohamed Rachid expressed concern on Wednesday at the way countries were rolling out stimulus and bailout packages to defend local industries and called for a more coordinated approach.

Nath said it was important for trading powers to continue efforts to complete the Doha round, launched in late 2001.

"I think that at this point the multilateral trading system more than ever before needs strengthening," he said.

(Reporting by Jonathan Lynn; Editing by Timothy Heritage)

Free Trade Under Fire

2009-01-27T08:46:00.003-06:00

Is free trade in danger? It appears to be. The political landscape has changed in the US and the new administration is talking tough about China and its currency policies. Although it appears they are already backing off some now that they are actually in office, there were promises made during the election that will need to be addressed.

The Doha round collapsed and there are few signs there is a positive next step for the WTO. Will governments respond to the current economic problems by erecting the trade barriers that certainly contributed to the great depression? I hope we are all smarter than that.

The collapse of the government in Iceland is an interesting situation. As citizens of other countries protest their economic plight and blame their governments, will these governments respond by attacking the tenets of free trade? Lets hope not.

I don't have the answers, but I do firmly believe that free trade is a great benefit overall. I firmly believe the opposite of free trade causes great problems.

Recently the Obama administration has been talking about transforming the economy to compete in new areas and ways. Focusing on innovation and new industries is the way the US can continue to be successful. Focusing on what others do better or less expensively will only distract us from what we excel at. Dominating green energy and pollution control, like we did the introduction of the computer and the internet, are just two examples of what can help bring the next great period of prosperity for our country.

At OPSA we are involved in green energy projects and look forward to doing more.

gōng xǐ fā cái!

2009-01-26T11:57:00.003-06:00

Wishing you prosperity and good fortune! This is a traditional Chinese New Year's wish offered to you on this Lunar New Years Day. May you and your family have a wonderful Year of the Ox.

The ox symbolizes strength, calm, hard work, resolve and tenacity. All of these attributes will be helpful to people all over the world in the coming year.

Happy New Year!

4Q Growth in China Down to 6.8%

2009-01-25T16:02:00.002-06:00

The Chinese government reported this week that growth in the fourth quarter was 6.8%. Growth in the third quarter was 9%. Growth for all of 2008 was also 9%, which is a seven year low.

The widely regarded figure of 8% growth needed to employ all the workers entering the workforce each year is also the target GDP growth for 2009. However, several economists are predicting closer to 6% for '09.

It will be very interesting to see what the news is in early February as workers begin returning to factories after the New Year holiday. Will there be more reports of high numbers of closed factories? Will there be any social unrest issues? I don't think so, but we are clearly still in the transition phase of this slowdown where weaker factories close.

Lunar New Year and Relationships

2009-01-20T10:05:00.002-06:00

The Lunar New Year factory shutdowns are in full swing. Many factories are shut down this week and next. It will take into mid-February for many of them to be back at full speed.

With the very difficult economic environment there is no better time to build relationships with your Chinese suppliers than right now. Contact them to see how their business is and how you can work together during this difficult time. Also discuss pricing as it relates to the fall in raw material prices. Maybe you can forgo decreases now in order to escape increases later when inflation hits again. Maybe you negotiated in early 2008 to avoid large increases and your factory partners are now gaining back some of that margin. The point is, use this time to assess and build your partnership. The strongest bonds are built during difficult times.

The Lunar New Year's Day is Monday, January 26th. The new year will be the year of the Ox.

US Trade Deficit with China Shrinks 17.5% in November

2009-01-13T09:24:00.001-06:00

The US trade deficit with China plummeted 17.5% last November to its lowest level since June. It is likely December will show another decline according to economists.

The global economy is obviously under great strain. As I've mentioned before, all the stress may turn out to be a good thing in the future. The US government will be forced to deal with its structural deficit in entitlement programs and defense spending. The companies that emerge in China and the USA will be stronger as a result of their survival. American consumerism and debt spending will be moderated.

None of this makes the real-life struggles of losing a job or a home any easier in the short-term. I encourage the folks in these situations to search for opportunities in the adversity. Perseverance and determination are classic American traits. New careers can be exciting and rewarding.

As I've mentioned before, what is required is perspective and communication. At OPSA we are excited about the opportunity to help more companies reduce costs. We are also excited about the expansion plans we are putting in place for 2009. I continue to expect the global economy will improve significantly in 2009.

Einar Tangen - Bailout Blurs the Line Between Capitalism and Socialism

2009-01-12T14:05:00.004-06:00

I've discussed articles by Mr. Tangen before. He is insightful and interesting. On the 9th he did an interesting analysis on how the US government is buying equity interest in banks and car companies while the Chinese government continues to privatize its state-owned enterprises. I agree with his article and its conclusions. Here is one interesting quote:

"For both the United States and China, the sharp ideological differences between democratic capitalism and communist socialism, which defined the post war world, has become a muddle of mixed measures dictated by economic desires and circumstances."

He is absolutely right. The private enterprise system made the USA a world power. Now we are moving much more towards a socialist system where the government employs many of its citizens. Is this the right direction for the USA?

You can read the article from biztimes.com below. Have a great week.

Bailouts blur the line between capitalism and socialism

By Einar Tangen, for SBT

Published January 9, 2009
Dispatch from China

Deng Xiaoping, the pragmatic visionary who followed Mao, used the phrase, “One Country, Two Systems,” to describe socialist China’s decision to use capitalistic economics.

Since that point, 30 years ago, the difference between the political ideologies and economic policies pursued in the East and the West have become less distinct.

Today, as China deregulates its banks and spins off its state-owned enterprises (SOEs), the United States is nationalizing its banks and bailing out private enterprises.

Some in the United States (mostly, it seems, those who were part of the sequence of events that created the problem) argue that drastic times require drastic measures.

Is it strange that we are being asked to trust the same individuals who created the problem to solve it? Should we be concerned that these pied pipers have voiced no coherent solution other than throwing money at the problem?

There are many such questions, but at the end of the day, we are faced with the fact that we have engaged in actions that contradict the foundations of our ideological principles.

In China, the culture of consumerism and the pursuit of capitalism have severely challenged its socialist ideology.

In response, the Chinese government has been searching for an ideological balance point that can rationalize its contradictory practices and ideologies.

For both the United States and China, the sharp ideological differences between democratic capitalism and communist socialism, which defined the post war world, has become a muddle of mixed measures dictated by economic desires and circumstances.

Instead of clearly drawn differences, we have become more like two countries with one system.

The effect of this ideological morass has yet to be fully digested by either side, but it is something to keep in the back of one’s mind as you go about your business in either country.

When the times are muddled, it is even more important to be clear about business. As recent events have shown (Bernie Madoff), due diligence is not just something you do in a foreign country.

When something is too good to be true, it generally is. When you don’t understand something, don’t get involved, and when it concerns money, it’s not about trust, just verification.

So, when you are looking at a deal at home or abroad, here are some rules to live by:

* If the cost of due diligence is too high, do not do the deal.
* If there is not enough time to do due diligence, do not do the deal.
* There are no substitutes for doing your own due diligence.
* The need to do due diligence is ongoing.

The first three points have been made before. The last one is an overlooked point which is an essential issue, especially during economic downturns.

Due diligence before the deal is essential, and for the same reasons, you have to periodically update your knowledge throughout a business relationship.

The last thing you can afford to do is be caught flatfooted because a previously reliable supplier/partner/client has run into problems or is about to shift direction.

In Shenzhen, China, more than 10,000 businesses went bankrupt in the first seven months of the year. Most were original equipment manufacturers (OEM’s) for foreign companies that found cheaper sources elsewhere.

Interestingly, those companies which had developed their own brands and distribution have so far, for the most part, been able to hang on. In other parts of China, suppliers who were warehousing products for foreign companies, as part of a just-in-time inventory system, suddenly disappeared, along with all the goods, which had already been paid for. You need to stay in touch with your suppliers, partners and customers at as many levels as you can and make sure the message you are receiving is consistent. You need to get independent reports about their financial and management health. You need to be proactive about quality issues and audits. You need to study your suppliers, as well as your customers’ pricing and costs.

For instance, sharp drops in the cost of materials, shipping and energy over the last six months mean that old price quotes are probably too high and can be negotiated down or obtained from other suppliers.

Just as important, you need to look at your relationships and attempt to strengthen them by creating win-win situations that allow you all to go forward. That is the stuff guanxi (friendship) is made of.

Good luck to all in this new year.

Top of Page Top of page

Einar Tangen
About Einar Tangen

Einar Tangen is a former Milwaukee business executive who now lives in Beijing, China, where he advises the Heilongjiang Province on its technology valuations and acquisitions. Tangen previously served as the chairman of Wisconsin’s International Trade Council and is a former advisor to KOTRA (the Korean Government’s Direct Foreign Investment Recruitment Agency). Readers who would like to submit questions to Tangen about doing business in China can send an e-mail to steve.jagler@biztimes.com.

Purchasing Managers Index Shows Decline in Chinese Manufacturing

2009-01-08T11:45:00.004-06:00

December's Purchasing Managers Index (PMI) in China rose slightly from November's all time low to 41.2. However, a level below 50 indicates shrinkage of the manufacturing sector. This is the third month in a row of contraction.

Monthly export figures are expected to show December was another bad month after the first decline in seven years was recorded in November.

It is being reported that thousands of factories have closed. It will be interesting to see if there are reports of many factories not opening after Chinese New Year.

None of this is a surprise. What it means is November was not the bottom for the Chinese manufacturing sector. We believe things will recover sooner than the media and government seem to be indicating, but we are still in a difficult time. It is a vital time for communication with all partners in the supply chain. Don't let the distance and differences in culture cause you to spend less time talking with you partners in China.

NY Times Claims Trouble Ahead for US - China Relations

2009-01-06T08:53:00.004-06:00

A very interesting NY Times article from December 28 talks about new "cracks" in relations between the US and China. The author points to the global economic situation and the incoming Obama administration as main causes of the new "cracks".

The article goes on the say that US lawmakers, businesses, and unions are preparing new tactics to try and push the Obama administration into forcing China to raise the value of the RMB versus the USD.

If communication continues I see no reason for the stress of the current economic situation to harm US - Chinese relations. In fact, hard times often cause closer relationships among partners. Also, I believe the team President-Elect Obama is putting together is too smart to try and force a partner like China to change fiscal policy. I believe the new administration will work even more closely than the Bush administration has to build bridges with China. Secretary Paulson has done a good job with China and there is a solid foundation to build upon.

Here is the link to the article:

http://www.nytimes.com/2008/12/29/business/economy/29paulson.html?partner=permalink&exprod=permalink

We are now three weeks away from the Chinese lunar new year. Factories are beginning their shutdowns next week already.

Happy New Year 2009

2009-01-05T09:45:00.004-06:00

Happy New Year 2009! OPSA is coming off it's best year ever in 2008 and looking to take advantage of several opportunities before us in 2009. We are planning a classic "expansion during a recession". Our business is perfectly positioned to take advantage of the current business climate and we're planning to do just that. More on that in many future posts.

I started the year in a similar fashion to last year. I did another polar bear plunge, this time a larger one in Jacksonport, WI. A friend and I jumped into Lake Michigan (all the way under the water is the only way it counts) at noon on January 1 along with about 750 others in one of the largest polar bear plunges in the country.

It was very windy and cold. Floating ice was a significant hazard. The organizers announced the conditions were the worst in the event's 23 year history.

My friend Dave and I couldn't get anyone to come along and take pictures. Everyone in our families' said it was too cold to stand on a frozen beach. So I don't have any pictures of me in the water. You'll have to trust me.

Taking a plunge in a frigid lake is a symbolic kick-off to a big year. Stay tuned!

Time for Reflection and Forward Thinking

2008-12-23T10:26:00.003-06:00

As we wind down 2008 we reflect on our successes and failures, and what we will do differently in 2009. We are blessed with a truly outstanding team and excellent customers. Some of our customers are struggling right now and we're working through how best to support them.

The general economy and how it's affecting our current customers is our biggest challenge. Opportunities abound as more companies need to reduce costs to stay viable and competitive. Raw material and oil prices are down dramatically reducing both production and transportation costs. More and more companies are considering outsourcing production processes that are not close to their core competencies.

We are considering new projects that will expand our business model and bring new directions to the company. I look forward to sharing these developments with you.

Merry Christmas to all.

100th OPSA Blog Post

2008-12-18T10:46:00.002-06:00

This is the 100th post for the OPSA blog. I started this blog on January 1, 2008 with the first post about my polar bear swim that day and announcing how I intended to post to the blog.

I've mainly stayed true to that plan by posting a combination of manufacturing news from China, OPSA news, and advice on sourcing from China. Since I will end up just over 100 posts for the year I have posted about once every 2.5 working days. I had planned to post 2-3 times per week so I am on the low-end of that scale, but within the range. I plan to increase the pace of postings in 2009.

I need to make the blog more visible now on the recently re-designed OPSA website and plan to do that soon.

Any suggestions for the blog are welcome and appreciated. I look forward to hearing from you.

I'll also state here that I intend to do the polar bear swim again this year. I may try the Jacksonport event in Door County this year. Since the temperature right now is -3F and we are expecting another 6 inches of snow tonight, this is not an insignificant announcement. Watch for the posting on Jan. 1 if your interested.

10+2 Import Security Filing Requirements Take Effect on Jan. 26

2008-12-16T12:14:00.002-06:00

The long awaited 10+2 requirements are now in the US Federal Register to take effect on Jan. 26, 2009. 10+2/ISF is an additional electronic document that will be required to be presented to U.S. Customs 24 hours prior to Laden on Board of the Vessel for ocean import. The new filing requires bonding. Importers with current Continuous Bonds will not need to purchase a new bond. Importers without a Continuous Bond should contact their forwarder for information on how to proceed.

Here's the "why do I care"...the penalty for a bad ISF filing will be $5000 per filing. These penalties will not be accessed in the first year (whew...).

The ten data elements for the new filing are:

• Manufacturer (or supplier) name & address
• Seller name & address
• Buyer name & address
• Ship to name & address
• Container stuffing location
• Consolidator name & address
• Importer of record identification number (IRS, EIN, SSN, or CBP assigned number)
• Consignee number (IRS, EIN, SSN, or CBP assigned number)
• Country of origin
• Commodity HTSUS number – will accept 6 instead of 10 digits

Complete and accurate data is important in this regard. Importers - you are required to know your supplier!!!

Know what you are purchasing, from whom and at what time. Know where it is coming from and who is involved in your transaction. This is your responsibility.

You should have a signed purchase order contract where you hold them responsible for correct information, on time documents, and itemized invoices. Importers are responsible for all ISF information.

Contact me at janderson@opsamerica.com if you have questions about 10+2. It's going to be even more important now to know whom you are buying from and that you have representation in Asia to confirm supplier information.

Comment on The Other Side of the Wall

2008-12-12T13:13:00.002-06:00

Einar Tangen is a former Milwaukee business executive who now lives in Beijing, China, where he advises the Heilongjiang Province on its technology valuations and acquisitions. Tangen previously served as the chairman of Wisconsin’s International Trade Council and is a former advisor to KOTRA (the Korean Government’s Direct Foreign Investment Recruitment Agency). I've never met him, but I enjoy reading his columns in the BizTimes.com - the web site of a very good business periodical covering Milwaukee and Southeastern Wisconsin.

His advice below is very valuable, although a bit overly negative I think. Maybe it's my optimism, but I don't sense as much distrust of other business people and disdain for rules as he describes. However, he has much more experience in this regard. Overall it's a very good article and highlights why it's important to have someone on your side that has experience in China.

A view from the other side of the Wall

By Einar Tangen , for SBT

Published December 12, 2008
Dispatch from China

The Chinese domestic market is brutal. Your average Chinese SME is locked in a hand-to-hand, day-by-day battle for survival. Any successes they create risk being copied by their competitors within months, and from there, the number of competitors will grow exponentially until a once lucrative innovation is nothing more than a commodity.

The local competition will do anything and everything to get ahead, reverse engineer products, bribe and/or steal employees, interfere with your credit and government relations.

They will go after their competitors’ IP, suppliers, customers and distribution systems. Or, in other words, it’s just like everywhere else in the world but, due to the number of competitors, a little more so.

The irony is that many Westerners like to point to Chinese business attitudes as flawed, immature and immoral without recognizing the impact that the West has had on Chinese attitudes toward business.

In the West, as our markets matured we created systems which were designed for efficiency. They required more transparency and cooperation between businesses, which were part of the same supply stream, predicated on the idea that “I take care of you and you take care of me.” That philosophy went out the window as companies pursued cheaper sources overseas as a way of adding to the bottom line.

However, what was once a competitive advantage becomes a competitive necessity when a critical mass of your competitors starts using the same sourcing strategy. This process has touched off an ongoing race to develop cheaper sourcing which has jumpstarted economies like China and India.

Still, the consequences for companies who were part of this process in China and India have not been universally beneficial. Initial profit lines for Chinese companies were eroded by stiff competition from other local companies, and those who were not able to see the sourcing tide moving away became casualties.

These companies have learned the hard way that the magical, long-term, mutually beneficial relationship is often a myth. In Shenzhen, more than 10,000 businesses have gone bankrupt this year as lower labor costs and lax environmental enforcement has drawn business elsewhere. Even when these firms were running full tilt, they were pitted against each other in merciless cost wars instigated by foreign corporations. So, while the United States has preached a “win/win” ideology, both at home and abroad, the truth has been that it was always all about the Benjamins.

In addition, in China, due to the rapid political, social and economic changes of the last 60 years, the individual’s sense of stability and faith in the system is still developing, and the future is not certain. At this point, in the midst of an economic meltdown, the only thing that is clear is that the ideological practices of capitalist and socialist systems have blurred and that a clearly defined ideological path has not emerged.

Here is some gratuitous advice if you choose to do business in China:

Trust

When Chinese SMEs deals with other Chinese SMEs, it can be like a cobra approaching a porcupine. Each side endeavors to learn as much about the other’s strengths and weakness without disclosing their own. In the initial conversation between the companies the bosses will hint/brag about powerful connections and performance capabilities. If things progress, the employees take the field and shape the deal points as directed. Like playing Mahjong, each player is out for themselves, even if everyone is smiling while they play. Do not expect to be treated any differently just because you are a foreigner. In fact, you should be aware that they have even less reason to trust you. So do not be surprised that most Chinese businesses and people are highly secretive and distrustful. It’s not you, it’s just standard operating procedure.

Values

In China, to be caught and disgraced is unlucky, stupid or both. Under our Judaea Christian values, right and wrong are based on collective ideals which are enforced though the individual’s sense of guilt and (if religious) ultimate punishment. In China, 5,000 years of culture and philosophy has resulted in a more pragmatic view of human nature which, while it emphasizes family values and obligation, views war and business as competitions with no rules.

Truth

For the Chinese, truth is knowledge, knowledge is power and you do not give power to a stranger who could be a potential enemy nor do you expect them to give it to you. It is an outlook on life right out of Sun Tzu’s the Art of War. Rather than trying to figure out the “truth,” plan on verifying everything every time. You may never know the truth, but you will at least have a good chance of getting what you bargained for.

The law

China’s legal system has been developed over the last 30 years. Marrying capitalist mechanics to socialist controls has been difficult. There are many grey areas, and the legal infrastructure is immature. In addition, Chinese companies lack experience using legal means to solve disputes. In the past, the outcomes of a legal dispute were more about connections than right and wrong, but as judges are faced with stiff penalties for misconduct and the dockets fill up, a judicial economic model is evolving that puts more emphasis on the contracts and documents and a little less on who is involved.

Cooperation

Given the history and the current circumstances, Chinese businesses will probably only embrace those practices that create competitive advantages for them.

Ideology

Western companies should keep in mind that a missionary sense of ideological zeal is less useful than a hard look at the local conditions and norms when developing opportunities.

Conclusion

The difference is less about how we compete than the cultural outlook we espouse and the systems we have developed. The truth is that human nature – good, bad and indifferent – is fairly universal. The difference is how it plays out in different sociopolitical economic situations.

China Reports 2.2% Decline in November Exports

2008-12-11T07:47:00.002-06:00

This is the first decrease in seven years and followed a 19% increase in October. This report shows a very abrupt slowdown in exports. Imports also declined 17.9% which may mean factories imported less raw material because future orders are weak. It also is partially caused by consumer demand in China decreasing as consumers there tighten their belts in the shaky economy.

This is not good news at all, but not surprising either. There certainly is a correction/recession going on in which US consumers are cutting back their consumption and Chinese factories will have to cut production. I believe most Americans bought too much (too much house, too much car, too many toys, etc.) in the past which is one of the causes of this correction. If Americans settle on a consumption rate that boosts their savings rate, long-term this correction will have been helpful. Having the Chinese increase their consumption in a rational way that matches their GDP growth will also help.

In China now it appears the marginal and low-quality factories are closing. This can also be a silver-lining of the correction.

At some point the recession needs to turn the other way or the global economy will sink into something worse. Hopefully the actions of global governments will help along with a reduction in factory closings and layoff notices so the nervousness of consumers subsides.

RMB Weakening Causes Tension with US

2008-12-09T11:55:00.003-06:00

An article in the December 5th USA Today describes the impact the weakening RMB is having on relations between Beijing and Washington. The RMB has fallen against the USD since my last posting on exchange rates. The article implies this change in direction from the fast rise earlier this year to the stabilization in the fall and now a slight downward trend against the dollar is due to intentional manipulation by the Chinese government. The reporter presents no evidence in this regard. It seems to me the change in direction could be caused by the market within the trading range set by Beijing, but I haven't investigated. The dollar has strengthened against most currencies since the fall I believe.

The exchange rate stabilization is good news for US consumers and OPSA customers. The strengthening dollar is bad news for all exporters in the US, but this is not unique to the situation with China.

Lots of snow here in Green Bay today. Here is the link to the article.

http://www.usatoday.com/money/world/2008-12-04-china-urges-washington-to-protect-investments_N.htm

A Problem Solving Attitude

2008-12-02T11:03:00.002-06:00

I understand we are in the problem solving business and that if manufacturing in Chines were easy, companies would not need our help. However, there are times when it seems every issue becomes complex and things don't move forward quickly enough. This business, like many small businesses, is quite a roller coaster ride. Many days are big highs. A few days are really tough. Despite a wonderful holiday weekend with my family, I'm in the middle of a tough stretch right now.

I even had a difficult school board meeting last night.

Now, I'm not talking "tough" like we're not doing a good job. I mean tough in the sense that everything seems to be complicated. Nothing is easy. I know that, "if it were easy anyone could do it", but it would be nice to have something sail right through sometime soon to offset all the tough projects.

I hope you'll indulge this bit of therapy blogging for me. I expect readers are OK knowing everything isn't wine and roses all the time. I feel like it's OK to express that I realize a small business is a roller coaster and I'm looking forward to the next big, fast and fun ride downhill. I'm off to solve some more problems now.

Chinese Government Takes More Action on Economy

2008-11-26T12:05:00.002-06:00

The Chinese government aggressively lowered interest rates yesterday by more than one percentage point to stimulate the economy. The story below from the AP is a good summary of the action.

China slashes interest rate to spur growth

By JOE McDONALD

BEIJING (AP) — China announced its biggest interest rate cut in 11 years on Wednesday to spur private borrowing and support a multibillion-dollar stimulus package to boost slowing economic growth.

The 1.08 percentage-point rate cut — the fourth cut in three months — reflects the government's urgency about raising private consumption and investment to supplement state spending on the stimulus package.

"This is the most aggressive monetary easing in recent years and should bode well for China's market performance," said Jing Ulrich, chairwoman of China equities for JP Morgan & Co., in a report to clients.

The 4 trillion yuan ($586 billion) stimulus aims to insulate China from a global slowdown by injecting money into the economy through spending on new highways and other public facilities. But its ultimate goal is to increase consumer spending, which a rate cut is meant to encourage.

Beijing is trying to shore up consumer and investor confidence and reverse a sharp downturn in growth. China's economy is expected to expand by at least 9 percent this year, down from 11.9 percent last year. But communist leaders worry about rising job losses — especially in export industries hit by weak global demand — and possible unrest.

China has avoided a big hit so far from the global financial crisis because its banks are healthy and exports strong. But conditions are expected to worsen in coming months as export demand weakens and growth in real estate and other domestic industries slows.

Just this week, the World Bank cut its forecast for China's growth next year from 9.2 percent to 7.5 percent, the lowest level since 1990.

Beijing had been rumored to be considering a rate cut and Chinese stock markets fell Monday after one failed to materialize over the weekend. The cut Wednesday was announced after markets closed. The Shanghai Composite index, down two-thirds from its peak in October 2007, edged up 0.5 percent to 1,897.88.

Also Wednesday, the central bank cut the amount of money commercial banks must set aside as reserves, expanding the pool available for lending.

The moves are meant to "promote stable credit growth," the People's Bank of China said on its Web site.

Interest on a one-year loan will fall to 5.58 percent, effective Thursday, while interest paid on deposits will fall to 2.52 percent.

The rate cut was several times the size of other recent cuts on Sept. 15, Oct. 8 and Oct. 29, which were only 0.27 percentage points.

It was China's biggest rate cut since 1997, according to Standard Chartered economist Stephen Green. But he cautioned that rate cuts alone might not be enough to trigger a wave of house purchases and corporate investment.

"To be honest, rate policy in this environment is a marginal factor — businesses think about possible returns on investments, and households will look at house price prospects," he said in a report.

"We have almost exhausted traditional monetary tools now," Green said. "What happens next is mostly fiscal policy and encouraging the banks to lend."

The amount that China's biggest banks must hold in reserve will fall by 1 percentage point to 15.5 percent, effective Dec. 5, the bank said. The minimum reserve for smaller banks would fall by 2 percentage points to 14.5 percent.

The change frees up 360 billion yuan ($53 billion) in additional money for lending, according to Green.

The rate cut will lower borrowing costs for state companies, which are expected to provide a big share of the promised investment in the government stimulus.

A key issue will be whether banks are willing to lend more. They have tried to shield themselves from global turmoil and the slowing real estate industry by cutting back on lending to exporters, developers and small companies.

"The degree of benefit realized from China's monetary stimulus will hinge on whether banks increase their lending to the most troubled sectors of the economy," Ulrich said.

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This new rate reduction combined with the stimulus program are welcome measures for Chinese businesses. The world economy will also benefit as any instability in China would be bad all around. I'm looking forward to my next trip to China to hear for myself what people there have to say about the economy. Happy Thanksgiving!!

Cost Reduction Time is Here

2008-11-25T17:31:00.002-06:00

I realize the economy is not good and possibly really bad. It's clear that this is making people stop all decision making until "things improve". So, does that mean now is a good or bad time to consider cost reductions from global sourcing. Here are the reasons now is a great time:

1. When things are bad is exactly when cost reduction is important. Our efforts are focused on selling the benefit of cost reduction to potential customers.

2. Commodity prices have fallen rapidly. As prices on oil, steel, and other commodities have fallen we are starting to see manufacturing prices fall now as well.

3. Chinese factories are clamoring for more business. Demand is down so new projects will get all kinds of attention.

4. Chinese New Year is almost upon us. Starting new projects coming out of CNY is excellent timing.

5. Any stigma of global outsourcing is quickly receding. The global economic problems are making it clear that this really is a global economy so protectionist measures just don't make sense on the import or export sides.

It appears from recent OPSA lead generation efforts that there are lots of companies thinking the same way.

FDA Opens First Overseas Offices in China

2008-11-19T09:03:00.002-06:00

The US Food and Drug Administration is opening an office in Beijing this month. This is the first FDA office in a foreign country and will be followed by two more in China before year-end and another to follow in India.

Here is a link to an article on this development from USA Today:

http://www.usatoday.com/money/world/2008-11-18-china-products_N.htm

The FDA has realized that OPSA has the right model - do the inspections and build relationships in China to avoid problems when containers are opened here in the US. Also, being "on the ground" in China helps to optimize operations there for better efficiency and effectiveness.

This development is a positive one for US consumers and for the US and Chinese governments. It shows continued development of the relationship between our two countries. As long as the Obama administration does not take a protectionist tact as it takes power, things are looking up.

Chinese Stimulus to Change Relationship with US

2008-11-18T18:57:00.002-06:00

The Chinese government is addressing the worldwide economic crisis by investing more than $600 billion in infrastructure and other public works. This seems to indicate that China is moving even faster to spend it's huge surpluses on internal development rather than US debt. Over time this will be a good thing, but in the short-term it may mean more expensive debt for American consumers and the government.

It seems the impact on our business in the short-term will be minimal. Much of the Chinese economy will be export-based for quite some time, although the trend is certainly toward domestic consumption. As I've mentioned before, OPS America will need to adjust to the changing landscape by looking in new regions (for us) of China and by focusing more on complex projects that fit us well. We also will begin to help our partner factories improve their productivity. This will be the best option for continued viability of factories in Guangdong Province.

Prices Still Frustrate

2008-11-06T09:28:00.003-06:00

Even though commodities prices have come way down over the last quarter, we are not seeing representative pricing reductions from our Chinese partners. For example, copper is down more than 50% from it's peak earlier this year. However, we are having trouble getting cost reductions on items made principally from copper.

Factories are pointing to labor costs and the exchange rate as major problems. The new labor law is being noted as having a large impact on labor costs.

Even freight hasn't come down with the decline in oil prices. When we quoted freight just yesterday the forwarders were still including the same fuel surcharges they were a few months ago when oil was well over $100 per barrel.

It appears it will take some more time for commodity prices to flow through to manufacturing and service prices. The economic slowdown should also encourage prices to come down a bit.

Taiwan Issue Risk Reduced

2008-11-04T12:55:00.003-06:00

One key risk we advise our clients to consider is political risk. The main risk in this realm is the risk of war between China and Taiwan with the USA getting involved. The chance of this risk becoming reality is declining recently as relations across the Taiwan Straight warm.

Tuesday China and Taiwan signed a trade agreement that will increase the number of direct flights and shipments between the two neighbors. Much of the current improvement in relations started in March when the new Taiwanese President took office with promises of better relations with China. President Ma's Nationalist Party also supports eventual reunification with China, although that does not appear to be on the agenda in the near-term.

Many factories we work with are owned by Taiwanese. The warming in relations is a good thing for them as well.

Just another piece of good news for our business. Happy Election Day!

OPS Partner Factories Slowing

2008-10-30T09:51:00.003-05:00

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

2008-10-28T15:12:00.003-05:00

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

2008-10-22T12:43:00.002-05:00

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

2008-10-21T12:56:00.003-05:00

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

2008-10-16T11:39:00.004-05:00

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

2008-10-13T09:11:00.002-05:00

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

2008-10-09T11:53:00.006-05:00

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

2008-10-08T11:13:00.002-05:00

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

2008-10-06T13:19:00.002-05:00

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

2008-10-03T08:56:00.003-05:00

China Targets Cleaner-Coal Power Plants: Scientific American

Posted using ShareThis

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

2008-10-02T07:29:00.002-05:00

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.

Cultural Stereotyping

2008-09-29T21:09:00.003-05:00

It seems several China-related blogs have recently written about negotiating tactics, interest in quality, or other business-related cultural stereotypes of Chinese people. Maybe the new milk quality issues are triggering this new wave of generaliztions.

Although there are cultural differences between Americans and Chinese people, the stereotypes are almost useless in individual interactions. Chinese people don't act one way in a negotiation or related to product quality any more than Americans. While it may be somewhat helpful to be aware of cultural differences while negotiating, my experience has been that the principles of establishing trust and understanding the other person's position far outweigh any perceived cultural tendancies.

I do sometimes catch myself referring to Chinese factories like they are one entity. Afterwards I usually reflect on how inaccurate my comments were. There are the same range of quality options in China that there are in the USA. There are high quality factories there just like there are here. It is a developing country, so the range of factories may tend to have more low-end factories than we have here, but there is no "Chinese quality" or "Chinese negotiating tactic".

Beware of Americans that claim to know how Chinese people "are" and how you should deal with them. These people likely have a pretty narrow view of the world and business. I advise keeping an open mind and judging people (Americans and Chinese alike) on their actions, not what you have heard about their culture.

Tainted Milk Crisis and What You Can Learn

2008-09-23T12:51:00.003-05:00

The pictures and stories about kids with painful kidney stones from tainted milk are extremely difficult to see and read. I can hardly imagine how mad I would be if my children were in such pain caused by a (seemingly) intentional act. Of course, those responsible should be prosecuted to the full extent of the law.

What can companies outsourcing to China learn from this latest crisis? Here again are my suggestions for avoiding quality problems in China:

1. Build a relationship with the supplier. All the detailed specifications in the world cannot protect your company from an intentionally bad action. Getting to know your suppliers and allowing them to know you and your company builds trust and shared values. OPSA has always encouraged our customers to get to know the factories we use for them and to visit as often as they want.

2. Have detailed specifications. They are still important. Supply contracts are an extension of your documented expectations and can also be helpful.

3. Get third-party inspections. Catching quality problems when you open the container is better than having your customers find them, but finding them in China before they leave the factory is much better. Because of the distance and cultural differences involved in dealing with Chinese suppliers it is very important to have additional inspections.

4. Communicate early and often. In addition to your specifications you need to be in consistent communication with your suppliers (or the link to your suppliers) to make sure all is well.

5. Finally, be a good partner. People cut corners when they are desperate. Listen to your suppliers. Be open to investigating when they say cost pressures are impacting their ability to service you well. "Bully" purchasing may get results in the short-term, but in the long-term is a losing philosophy.

Let me know if you have specific questions about quality assurance in China and I'll do my best to help.

Pollution Contols In Beijing End, But the Benefit Stays

2008-09-18T21:09:00.004-05:00

The pollution controls that the Chinese government put in place around Beijing for the Olympics end this Sunday. The most publicized control implemented was the limitation on driving only every other day depending on your license plate number. Some polls show a strong majority of Beijing residents favor continuing enforcement of the controls.

I've written before that the main think I don't like about traveling to China is the pollution. I know it's no worse that what the US was like during the stage of development China was in, but it still bothers me. I am optimistic for rapid improvement in coming years. I also believe US companies will have a large role in the improvement.

What's interesting about the Beijing controls is the response to them. Beijing residents have clearly enjoyed the improved air quality. Those that drive probably have not liked the limitation on when they can drive their cars. All tolled I expect this situation to expedite the Chinese public's call for cleaner air and water. The government will have to listen and improvement will accelerate. Watch for developments.

OPSA Just Right in the Middle

2008-09-18T21:09:00.003-05:00

While reading about some of our competitors this week I realized how much I like our model compared to theirs. We have many small "one-man or two-man show" competitors. These are mainly people who have made contacts in China and travel there a few times a year to work with factories. They have no consistent presence in China, or they have one partner there that makes contacts for them. These small competitors do not offer inspection services or engineering support in China. They essentially are trading companies and work well on commodity items. For custom components and assemblies they do not offer enough services to significantly reduce risk.

On the other side of the spectrum are our large competitors. These companies have lavish offices in premier locations of Shanghai, Hong Kong, and/or Beijing. They are sophisticated and offer special services like online order tracking. These companies have very high overhead and charge more than OPSA. They also work on very large volume projects. They are appropriate for large companies here in the US only.

OPSA fits nicely in the middle. Our offices in the US and China are utilitarian. Overall our overhead is very low, but our service is intense. We offer all the key risk reduction services in China and are improving them every month. We do not offer special services like online order tracking that our large competitors offer. We also don't work on any commodities. Our customers are SME's (small and mid-size enterprises) rather than very large companies.

I know this post sounds like an ad, but I really like the way we go about our business. Like almost all companies we have processes I'd like to improve, and we are getting there. We're growing fast and expect to be a much larger company in a few years. However, we'll still keep our overhead low and will keep the focus on what benefits our customers most.

How to Ensure Quality in China

2008-09-16T09:54:00.002-05:00

With all the recent news about more problems with baby formula in China, I am going to touch again on the number one issue US companies ask about regarding imports from China - quality.

Quality is an issue with suppliers no matter where they are. The same things that help ensure quality from suppliers in the US will greatly help with suppliers from China. First, have excellent specifications and update them as needed. Second, build a relationship with your suppliers so there is a shared value on and understanding of expected and required quality levels.

Because the supply chain is much longer (in miles and in terms of culture) when dealing with Chinese suppliers, there are other actions US companies can take to ensure quality. First, have a consistent physical presence at your suppliers. OPSA fills that role for our customers. Second, perform extra quality inspections during production and before shipment. OSPA does this for our clients and there are several third party quality control firms (3PQ's) that focus only on performing inspections and audits. Larger US companies that source significantly from China maintain there own offices there and have QC staff on payroll.

Supply contracts also can help, but some companies fail to take care of the issues above because their contract gives them a false sense of security. At OPSA we've begun using contracts more extensively. They are becoming more useful in China.

In summary, no action can guarantee quality from any supplier. It's all about reducing the risk of quality problems. I strongly suggest communicating clearly and often, building relationships, and verifying quality. With regard to the last point, Ronald Regan's famous quote comes to mind - "Trust but verify".

Inflation Slows, But So Does Growth

2008-09-11T11:29:00.002-05:00

The Chinese CPI (consumer price index) rose just 4.9% in August. Although the PPI (producer price index) is more important for OPSA and our customers, the CPI slowdown is significant. It is down from 6.3% in July and 7.7% back in May.

However, as price increases slow, so has growth. Second quarter GDP growth was only 10.1%, down from 10.5% in Q1. I've often read that China needs about 10% growth to maintain a stable employment level. Some economists are now predicting growth will fall to single digits in Q3.

Several economists in China are now calling for economic stimulus to businesses to jump-start growth. The stabilization of the RMB to the USD may be part of this stimulus.

It sure didn't take long to go from talking about an overheated economy, to a slowing one in need of stimulus. I will be watching to see what all the macro developments mean for our business and our customers.

Opportunities Lost and the Roller Coaster

2008-09-08T15:36:00.002-05:00

I've written before about how being in a small and growing business can be like a roller coaster ride. At OPSA we experienced the downside of the roller coaster in August. Because of shipments timing, we shipped fewer orders and volume than we planned in August. Although we are having another year of very good growth, a bad month still hurts.

We also had a potentially large new opportunity go away in August when an OPSA customer lost a large new contract they were working on. We had supported this effort and had quite a bit of time and effort into the project.

Luckily we have several other opportunities we are working on, and a handful are very high potential. It still hurts to lose one.

The answer to both issues is to buckle down and close the opportunities we have before us and generate new ones. If our history is a guide, tomorrow or very soon the direction of our roller coaster ride likely will look much better.

RMB to USD Rate to Stabilize

2008-09-02T08:59:00.002-05:00

I'm reading more and more from China that the exchange rate will stabilize longer-term. In the short term the RMB actually lost ground to the USD in August. It was a small depreciation, but a significant one given the history of the exchange rate since the July 2005 un-pegging.

In a Financial Times interview, Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, notes that the RMB does not need to appreciate any more versus the dollar. He notes the RMB will likely strengthen against other currencies, but as the dollar gains strength around the world it will stabilize versus the RMB.

Some stability in the rate would be very good news for US consumers fearing continued inflation and for OPSA. The fall of oil prices over the last several weeks is also good news for OPSA customers and the US economy. I'm betting and hoping oil falls to about $95 a barrel for a while. At the same time I look forward to new breakthroughs in energy that will reduce reliance on oil and be better for the environment.

Optimism reigns on this first day back to school for kids here in the US!

Home Office Balance

2008-08-29T08:39:00.003-05:00

I hope readers of this blog enjoy some of the more personal input about our growing company and my place in it.

Our US Headquarters is in Loretto, MN just outside of Minneapolis. I work out of my home office in Green Bay, WI. At first I really disliked working from home. I was used to working in a large office where I could interact with many people. Over time I've gotten used to working alone. I reach out by phone to contacts often and have joined several business and community groups to stay connected to others. It's a challenge though.

We have three children. When they are home in the summer they sometimes can impact my productivity. That is balanced by the times I work at night and early in the AM.

At times I've thought about getting a small office nearby. However, I'm not sure it would be any more productive as I'd have more trouble working at night with all my files and information in another location. Also, it wouldn't help the isolation issue and involves significant cost that doesn't help us serve our customer.

The kids head back to school Tuesday and I'm looking forward to the quiet. In looking back over the last three years I've gotten very good and working from home and rarely think about making a change anymore. There are still times I need to work hard to focus on tasks at hand when distractions are prevalent, but I've improved my organization over the years and am pretty well set now.

Have a great holiday weekend!

Education News for Migrant Workers

2008-08-27T15:01:00.004-05:00

An article in today's China Daily has big implications. As I think I've mentioned before, I am the school board president for our local school district. It's a great way to give back to the community in an area, education, that I am passionate about. I also love to learn more about the Chinese education system.

The Chinese government announced that the children of migrant workers can now receive free education where their parents work. Previously the children had to be in their registered home town to take advantage of free elementary education. This kept many families apart most of the year. With this new rule it may make life for migrant families much easier and better. Here's the article:

Free schooling for migrant kids
(China Daily)
Updated: 2008-08-27 08:06

Children of migrant workers will have the same education opportunities as their urban counterparts before the end of this year, the Ministry of Education (MOE) said Tuesday.

"The central government will allocate funds to local education departments sufficient to cover extra education expenses in accordance with the number of migrant children they accept," the ministry said on its website.

The ministry is now drafting policies that provide special bonuses to local education departments that accept non-local children.

"The ministry intends to extend the free education umbrella to cover children from migrant worker families," the ministry spokesperson Xu Mei said. As from the new semester in next month, urban residents nationwide will be exempted from incidental expenses, making compulsory education totally free in these areas, according to a policy launched earlier this month by the MOE.

Shijiazhuang was the first in the country to provide in 2004 equal education opportunities to children of both local residents and migrant workers through introduction of a unified system of education charges. Consequently, almost all classes are seriously overcrowded, as 50 or 60 children are generally crammed into classrooms designed for 40 students, Zang Dajian, an education bureau official of Qiaodong district, Shijiazhuang, Hebei province, said.

China provides a nine-year compulsory education system for children aged 6-15, comprising six-year free pfrimary education and three-year secondary education. The system has long subsisted on government funds and been the privilege of children with local residential certification or hukou, and excluded children living with parents working in cities away from their registered home.

Peng Shengzuo, 40, a construction worker in Beijing, is one example. His 11-year old daughter had to return to his hometown in Shangrao, Jiangxi province because schools in the capital do not accept pupils without a hukou. As Peng's wife also works in Beijing the family can only be together once a year during the Spring Festival.

In 2007 a total 7.66 million children of migrant workers reached the age at which to start compulsory education, according to statistics. Most were concentrated in developed areas such as Beijing, Shanghai, Zhejiang and Guangdong provinces.

"Made In China" Brand Bolstered by Olympics

2008-08-25T16:06:00.002-05:00

An article in China Daily today joined several others I've read in the last few days on how the excellent organization and world class facilities of the Beijing Olympics will bolster the perception "Made In China". I totally agree with this conclusion. From the hoards of volunteers projecting a friendly and welcoming posture to the flawless organization and the extravagant ceremonies, it all was awesome and will pay long-term dividends for China.

This is all good news for OPSA and for proponents of free trade. Here is the article:

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'Made in China' brand reaps Olympic dividend

The Olympics had a negligible direct impact on China's economy, but analysts say the near flawless organisation of the Games was a priceless 17-day advertisement for the "Made in China" brand.

Fireworks explode at the opening ceremony of the Beijing 2008 Olympic Games at the National Stadium, August 8, 2008. [Agencies]

Billions of television viewers saw athletes performing in gleaming high-tech stadiums in a city rebuilt by some of the world's most renowned architects, projecting the image of a modern and cutting edge economy.

For a country traditionally seen as a low-cost manufacturing hub, the Olympics was a timely re-branding exercise.

"If you go back 12 months, 'brand China' was in tremendous difficulties with toxic toys and a number of other issues," said Beijing-based Greg Paull, who runs market research firm R3.

"They've come a long way in a year," he said.

A virtually glitch-free Games in terms of organisation could bring profound changes in the way China is seen by the rest of the world.

"China's amazing haul of gold medals has mirrored its spectacular economic growth to signal to the world that China has truly arrived," said Seth Grossman, a Shanghai executive with media communications agency Carat China.

"From the grandeur of the opening ceremony to the self-assured way Chinese athletes expected to win in so many events, China exceeded every expectation."

Paull said many Chinese companies would be able to use the Olympic dividend to expand outside their domestic market and make their mark on the global stage.

He cited the example of sportswear maker Li Ning, whose founder lit the flame at the Olympic opening ceremony on August 8 after a spectacular skywalk around the top of the "Bird's Nest" stadium.

"Companies like Li Ning that are looking to expand globally are going to use the Olympics as a chance to do that," said Paull.

China is the world's fourth-biggest economy, and the concrete impact on the economy was always going to be minimal.

"It won't do much to lift growth as the Chinese economy is so huge," said Qiu Qingdong, an economist with Guodu Securities.

Even for the city of Beijing, the economic impact of tourism and other spending has been limited.

Beijing hotels have received fewer visitors than they expected, with the occupancy rates for three-star hotels and lower lingering under 40 percent, according to the Beijing Statistical Bureau.

"Before the Games, people were anticipating a business boom in tourism, benefiting hotels, airlines and local restaurants," said Li Wei, an analyst with Standard Chartered.

"Now it's becoming clear that the impact wasn't all that big. I don't think industries like that are likely to benefit greatly from one month of Olympics and Paralympics," he said.

But to many analysts measuring the impact of the Olympic Games, it was never going to be a simple question of, say, August tourism revenue.

Instead they focused on the big picture, the profound changes taking place in China and their effect on the rest of the world.

"Analysing the one-off macroeconomic impact, or the 'economics of the Games', is not really an issue of such great importance," Daniel Chui, head of investor communications at JF Asset Management said.

Focusing on the little figures might even distract attention from the fact that we are witnessing an epoch-defining event, he argued.

"The Beijing Olympics are another milepost in China's transformation into an efficient, market-oriented and financially sophisticated economy and a more open society," he said.

Growth and Optimism Continue

2008-08-22T16:32:00.003-05:00

I continue reading much about how costs in China have made manufacturing there too expensive. A few different blogs that I read this week had posts on the subject. Both concluded that for some things China was not the right place before and really isn't now. Low-end and commodity items are having the most trouble. As I've said before, OPSA hasn't ever done commodities or low-end items. We do have some component-level projects that have lost their advantage. As I've also mentioned in other posts, OPSA is shifting even more strongly to sub-assembly work and finished goods.

I can say that our business is growing nicely and that we are working on new projects every day. We are becoming more selective on what we spend our time on, but that's been a good thing. It's brought some more discipline to our sales efforts.

So, the old saying about not believing everything you read in the media is certainly valid in this situation. China and Asia continue to be a great option for the right projects.

Olympic Lessons for OPSA and Me

2008-08-21T09:14:00.003-05:00

I love the Olympics. Watching the Beijing Olympics is even better because of how much I respect and like the Chinese people. Here are a few lessons I've been reminded of while watching the games:

1. Family is what it's all about - Most athletes look for their families after they compete. Although competing for god and country are important, it's the people closest to each of us that makes life wonderful. The people of OPSA are what make it fun and interesting for me.

2. Success takes time - When I hear the stories of all the training and work these athletes undertake I am reminded that hard work over time, based on a plan, leads to success. Our business has a very long selling cycle. From the time we meet a potential new customer it typically takes nine months to a year until we realize our first sale. I often get impatient with this. I need to keep a focus on the long-term, while balancing the short-term, but we as a company need to get better at long-term planning.

3. Mistakes are learning opportunities - There are so many stories of athletes who failed in some way and built on that experience to find great success. I read a biography of Lincoln this year and that also reminded me about the value of perseverance and optimism in the face of adversity. Mistakes are problems are part of life, how one deals with them is the important thing.

4. Respect is to be given freely and earned consistently - I noticed the differences between two Olympic stars - Michael Phelps and Usain Bolt. Phelps seems to have genuine respect for his team mates and competitors. Bolt acts arrogantly and disrespectfully. I predict over time Bolt will mature and improve his behavior, but that Phelps will be more admired for this Olympics.

5. Working together is better than working individually - Seeing players that individually aren't that strong compete so well as part of a team reminds me again about the principle of synergy. This is a tough one for me as much of my work in OPSA is individual effort and I'm sometimes a little detached from the team working here in Green Bay. I need to keep looking for opportunities to collaborate with the OPSA team and the OPSHK team.

6. People want to be around and work with others whom are fun and create fun - It's interesting to me that Shawn Johnson seems to get more attention than Nastia Liukin even though Nastia won the individual all-around gold. I believe the main reason is Shawn seems to easily smile and to be truly enjoying her experience while Nastia looks more serious and stressed even after she wins.

Enjoy the rest of the Beijing games!

Supplier Audits and Product Inspection Reports

2008-08-18T15:23:00.003-05:00

The documentation of these two things is a developing art for OPSA. As with most rapidly growing business we are more focused on doing the work that documenting it afterward. However, as we've gotten larger and more sophisticated I've realized we need more and better documentation in these two areas for our customers.

First in supplier audits we need to focus more attention on environmental and legal compliance issues that just product and process quality. This will be facilitated by having a standard form which our inspectors use at every factory audit. This form needs to be bi-lingual so we can share it directly with our customers. We also need to document audits of factories we work with on a continuing basis. Each should be audited at least annually.

While our internal documentation of product inspections is good, it is not in a format for easy understanding by our customers. We need to revise and refine these forms as well.

These types of administrative needs present a challenge for a growing company like ours. It is necessary, but the time required for implementation is a large investment and it's time that is taken away from customer service and new customer prospecting activities. As with most initiatives in business, balance is required. We are working to find the right balance as we move forward.

Surprise - Export Growth from China to US Slows in 2008

2008-08-15T08:40:00.006-05:00

Ok, it's not a surprise. China Daily is reporting that in the first half of this year, exports from China to the US were up 8.9%, which is 9 percentage points lower than last year's growth. This is significant and caused both by the slow economy in the US and all the cost factors in China I've mentioned before.

At OPSA our growth in new customers has slowed, but our existing customers are rapidly increasing their business with us. The growth in existing customers impacts our ability to add new customers as we haven't added much new capacity in the US or Asia.

Here's the article:

----------------------------------------------------

China's exports to the US in the first six months totaled $116.79 billion, up 8.9 percent from the same period last year. The growth rate was 9 percentage points lower than a year earlier.

China Customs said the slowdown was partly due to economic problems sparked by the US subprime mortgage crisis. A stronger Chinese currency, the renminbi, also contributed to the declining export volume.

The central parity rate of the renminbi was 6.86 yuan to one dollar Thursday. The renminbi had appreciated more than 20 percent against the greenback since its peg to the US dollar was removed in July 2005.

The appreciation raised the cost of the country's goods on the international market and impacted on Chinese products' competitiveness, China Customs said.

China's processing trade industry saw its US exports stand at $70.68 billion in the first half, up 5.7 percent over the same period last year. The growth rate was 3.2 percentage points lower year-on-year.

Exports of mechanical and electrical products, two of the country's major exports to the United States, hit $71.9 billion, up 8.6 percent over the same period last year. The growth rate declined 8.4 percentage points year-on-year.

China's export volume stood at $666.25 billion in the first half of this year, representing an increase of 21.8 percent over the same period last year.

According to government statistics, China has become a major export partner of the US, exceeding Japan and Canada to rank the third in export volume last year. Meanwhile, the US is China's largest export partner. In 2007, the total trade volume between China and the United States reached $300 billion.

The Chinese government is paying great attention to the expanding US subprime mortgage crisis and the falling dollar.

The Report on the Work of the Government, delivered to National People's Congress on March 5, said China must be fully prepared for changes in the international environment and become better able to tackle risks.

A Return To Prospecting

2008-08-14T09:32:00.002-05:00

Over the last year I have greatly reduced the amount of good, old prospecting for new clients. Instead I've been busy servicing a large client in the middle of a large new project and gaining some new clients through referrals and networking. This approach coincided with some capacity constraints in our Asian offices. Although we are still somewhat constrained as we continue our strong growth, it's time for me to get back to sales 101.

I've now got the large client in a place where they require less daily interaction. There's still a lot to do for them, but the workload is down from the spring and early summer. Also, I just miss the excitement of pushing to get new clients from scratch. I will also be turning up my networking efforts and work to get new project from existing clients.

Although the exchange rate and other cost factors in Asia that I've previously discussed are working against us, the slow economy is in our favor. Companies need to reduce costs more aggressively when the economy is slower. OPSA needs to focus less on clients who only purchase components and more on companies that will purchase sub-assemblies and finished goods where our services are more valuable. Targeting the right companies will be the challenge this fall as I prospect aggressively. I'm looking forward to it and will keep you updated on my progress.

Let the Games Begin

2008-08-08T10:05:00.002-05:00

The Olympics are a huge deal for China with long-term implications. If all goes well they take another step toward being a world super power. If negative perceptions reign for whatever reason, there will likely be political and business implications. Pollution control could become a big new industry in China. A war on terrorism could start if terrorists try to disrupt the games.

I believe the US and China will grow closer or further apart as a result of the games. President Bush did not get things off to a good start with his political comments this week. Face is an important concept in China, but his advisers do not seem to understand it.

I've read that "hot money" or money invested for large, short-term returns may stream out of China after the games causing economic problems. I don't believe this and expect the games to have very little short-term impact. Long-term however, I expect their impact to be important for the future of US and Chinese relations and for China's relations with the rest of the world.

I love the Olympics and can't wait to watch. Enjoy.

Change of Yuan Direction?

2008-08-06T15:01:00.002-05:00

The Chinese central bank set the mid-point for the Yuan's trading range lower for a fifth consecutive day Tuesday according to China Daily. The Yuan has fallen slightly against the USD since it's peak on July 17, but overall the Yuan is up against the dollar 6.6% so far in 2008. Some analysts believe the Yuan will now trade up and down but not get higher than the 6.6% level.

It appears the Chinese government needs to slow the growth of the RMB versus the dollar to give exporters a break even though this might be harmful to the governments battle against inflation. It's a difficult balance to maintain. Also, the expectation of continued strengthening of the RMB has attracted "hot money" to China. Varying the exchange rate direction will keep speculators from causing problems like they have in the US real estate market.

It will be interesting to see where the RMB goes from here.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #1 Lack of a Plan / Strategy

2008-08-05T14:02:00.003-05:00

#1 - Lack of a Plan / Strategy

This is what I call the "pitfall maker". It is the root of all the previous pitfalls. Starting with a plan for outsourcing is the number one action companies can take to avoid problems and realize the many benefits of Chinese outsourcing.

A plan should include objectives, time lines and evaluation points, progression of projects (which comes first or how will this be determined), contingency planning for key risks, and quality assurance plans.

Although OPSA is not a consulting firm, we do help our customers with their plans. It's in everyone's best interest to have a plan, follow it, and modify it as appropriate.

I hope the "pitfalls" series has been helpful. Feel free to contact me if I can expand on any of the points.

Buyer Beware (Or at least specific)

2008-08-01T15:40:00.004-05:00

On a summer Friday I want to write about being specific about what is important when buying something or having something made overseas.

My mother-in-law is having a condo built near us here in Green Bay. She found a great location and worked out a very good deal. However, the model she looked at had high ceilings. She picked out a different plan and just expected it would have high ceilings as well. Now that the roof is on we can see the ceilings are a standard 8 feet. The builder's specification sheet said "ceiling height per plan". The plan only shows something about stud height being 92 5/8" high. We never asked about ceiling height, but realize now it is very important to my wife's Mom. We should have been specific about the key factors of the purchase.

Similar things happen with our customers. They forget to mention that some attribute of the material is important. After we've purchased some, they do testing and mention a problem. Then we have to work something out. We've gotten much better about asking many, many questions and drafting inspection criteria for all projects that has eliminated almost all of these issues, but we are still surprised sometimes.

So, today's suggestion for buyers (especially those building custom houses or products) is to TALK AS MUCH AS POSSIBLE WITH YOUR SUPPLIERS ABOUT WHAT IS IMPORTANT TO YOU AND TO ASK MANY, MANY QUESTIONS. We are certainly trying to help in that regard as well.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #2 Rushing The Process

2008-07-30T08:34:00.003-05:00

#2 - Rushing The Process

Unfortunately, at OPSA we keep forgetting this one. Either that or we get so excited about a project we overlook that it will be a time line project with lots of hurdles.

The best projects are:
- From a company we already work with
- From a company with experience outsourcing outside the US
- An established product with few anticipated design changes, predictable demand, and not a key item for a company

The most difficult projects are:
- From a company with no outsourcing experience
- A new product still in development that has a firm launch date in the near future

You can see the problem here - we need to add new customers to continue growing, but new customers present the most risk. Also, new customers usually want to start with a new product to them, or the company is new and all their products are fairly new.

Rushing the process is the most common mistake made with new projects. Customers sometimes go into the process without a plan and don't understand all the steps needed to be successful. Also, they fail to anticipate that there will be delays. We do help customers plan, and working with a company like OPSA helps avoid most delays and problems, but it's still a complex process to begin outsourcing in China (that goodness, or there wouldn't be a need for us).

So, make outsourcing a strategic decision and plan accordingly. Pick an established product you can afford to learn on and gain experience. Once you do, you can begin working on development projects. Most importantly, try not to pick a new product with a firm launch deadline that is coming up soon. Of course, OPSA can help with all of this.

MITA Presentation - Recommendations II

2008-07-28T13:34:00.005-05:00

I covered the first three recommendations for responding to cost increases from China in an earlier post. Here are the remaining four.

First, you can choose to add more value in China. We have customers that are responding by moving up the value chain from component sourcing to having sub-assemblies made in China. This allows for additional labor savings and improves leverage if current suppliers can also perform some assembly.

The next option is to make design or BOM changes to find cost savings. Customers are now motivated to test whether locally available materials in China can be substituted for their currently specified materials. We are helping by stepping up our efforts to help our factories with global sourcing initiatives. We often can find electrical components less expensively in other countries and export them to our factory partners in China.

Getting input from Chinese suppliers on what design changes can have significant cost impact is a great strategy. Something you think has little impact on cost may be a large driver due to special set-up requirements or other issues. Ask and learn.

Finally, finding ways to save on logistics costs is an opportunity for most importers. As a program grows we often find customers paying much more for freight than they hoped because their planning is not good. Being more intentional with order planning really helps avoid the very costly express shipments and rush orders.

We'll get back to trends in Chinese outsourcing next.

Random Thoughts from The OPSA Office

2008-07-23T12:01:00.003-05:00

I'm in the OPSA office in Loretto, MN for a few days this week. Doug Peterson from our HK office is in town and we have some meetings set-up for him. Here are some random thoughts impacting me today:

1. It's great to spend time in the office. I get reconnected with everyone's projects and also get a feel for our progress as a company. Even though I do about the same things I do when I'm in my Green Bay office, time here has added benefits. It is a 5.5 hour drive, but worth it every six weeks or so.

2. Isn't summer awesome? The weather the last several weeks has been so great.

3. I'm concerned about further strengthening of the RMB and the impact on us. I read an article this week where an economist feels the RMB should strengthen another 30% to help fix the USA's current account deficit. That would not be good for OPSA or the US economy (more inflation), at least in the short-term.

4. I'm really excited about the new technologies we are specializing in and offering, and the one new product we are developing (the first OPSA product!).

5. Doug tells us the renovation and de-cluttering of the OSPHK office is underway. Can't wait to see the progress. I likely will be there this fall and in December.

Enjoy the summer days!

MITA Presentation - Recommendations

2008-07-21T12:39:00.004-05:00

Whoa, where did the month go. A few business trips, a few days off with the family, and "bang" you haven't blogged in 12 days. I'll be more consistent going forward.

The last section of my MITA presentation was on what companies can do in the face of rising manufacturing costs in China.

In the presentation I went from most extreme option to least. Radical partnering is partnering with a competitor. I used the example of several US airlines now considering sharing planes to reduce costs.

Going to other countries was the second option. If setting up a factory I suggested looking at Vietnam and other options, but for sourcing from established factories I presented several reasons and opinions from others that China is still the best option.

The third option is looking further west in China. I suggested this is difficult today, but will get much easier very quickly as the Chinese government implements its 5-year plan to bring prosperity to the rural west and as rebuilding after the earthquake improves infrastructure and brings new management talent west.

I'll cover the other options in another post soon.

MITA Presentation - Trend or Fad

2008-07-09T13:31:00.004-05:00

The second part of the MITA presentation mentioned in my July 1 post examined whether each of the main cost increase factors was a trend or fad. That the RMB is up 20% against the USD since July 2005 when it was uncoupled from the USD is not news. What's interesting is what will happen going forward.

The two articles in the slide below were in different papers in Hong Kong on the same day. One writer argued that to contain inflation the RMB should be allowed to rise faster. The other author said it should be controlled and the value reduced to protect factory employment.

The conclusions I reached in the section are on the last slide in this post. They were meant to stimulate discussion and give the attendees something to consider and discuss when they returned to their companies. It worked well with these objectives.

As you can see, I am calling transportation costs a fad as I believe we will see energy technology improve quickly and oil prices drop drastically in the next few years. Labor costs is a reversible trend if production moves West in China or to other countries.

Raw materials can be lowered by switching to alternatives, but it's still a trend that they are up. The RMB will continue to strengthen, but at a much slower rate going forward.

Next time I'll go through the things I suggest companies can do to address the rising costs. This was the big finish to the presentation.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #3 Lack of a Relationship

2008-07-08T08:22:00.003-05:00

#3 - Lack of a Relationship

Guanxi is the Chinese concept of social capital. I believe it literally means "relationships". Having guanxi can build opportunities, reduce frustration and mitigate risks when doing any kind of business in China. Without it you are just a customer or supplier.

Here's a case study. A tooling shop we worked with in Hangzhou had to close down and did so with very little notice. Because we were close to the situation and had good relationships within the company we found out early about the problems and were able to get tooling out of the plant before the closure. Several customers of this factory that did not work through us or have good relationships were stuck when their in-progress tools were stuck in the plant at the time of closure.

Here's another case study. A company in the US that we never did business with but talked about it, had promotional umbrellas made in China for schools. They kept their supplier relationships at arms length and used intimidation and threats when discussing pricing, delivery, quality, etc. They demonstrated the "I'm the customer and what I say goes" mentality some purchasing people use. Eventually their suppliers stopped answering their e-mail and ignored purchase orders. The company came to us to save the situation, but we declined because it wasn't a good fit for us. I believe they went out of business because they could not secure sources for their custom umbrellas.

Here's a quick list of things to do to build up gaunxi. Most are rather obvious.
- Do the right thing and be honest, dependable and consistent
- Be open with information that can be shared
- Have a long-term perspective
- Communicate often and consistently
- GO THERE - building guanxi requires some in-person time
- Have multi-level relationships with your customers and suppliers
- Be aware of cultural norms and issues in China

It's not hard to build relationships and earn guanxi in China. It does take time and a sincere interest in others and in doing the right thing.

Madison International Trade Association Event

2008-07-01T09:08:00.005-05:00

Back in May I was asked to be a speaker at a Madison International Trade Association (MITA) event on rising prices for goods from China. The event was last week and I will be sharing information from it here in our OPSA blog.

I am a MITA member, even though I'm 2.5 hours away in Green Bay, and it is an outstanding group. I met some very interesting people that day and hope to follow-up with several of them.

The first section of my presentation was on whether producer prices in China are rising faster than producer prices in the US, and obviously they are as the chart below indicates.

The chart compares the Producer Price Index in the US (excluding energy and food) to the manufactured goods PPI in China.

Next I summarized the reasons for this situation. I've discussed most or all of the factors in previous posts, but I'll use slides from the presentation to give additional details on them in future posts throughout July. I will also continue on the Top Ten Pitfalls to Avoid in Chinese Outsourcing series.

Comments from Dongguan

2008-06-17T17:48:00.004-05:00

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

2008-06-14T17:27:00.003-05:00

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

2008-06-10T10:24:00.002-05:00

#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.