China Business Blog and Podcast

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Jim Tompkins, president and CEO, of Tompkins International, has seen many opportunities that have gone unnoticed by companies in this more than three decades advising Fortune 1000 global companies. In this podcast we discuss Tompkins’ recent trip to China where he spoke with dozens business executives about their China business strategies and improving their supply chain to meet China’s domestic and exporting demands.

China is in a transformation, but perhaps more of an advancement. You’ve read the articles about China no longer being solely a low cost manufacturing center, but that transition will take many years according to Tompkins. Today, he sees a complex and dynamic manufacturing sector in China that must meet their growing domestic consumer demands, which presents unique supply chain challenges and solutions. In addition, as China’s government continues its progress toward incorporating market driven thinking, more integration is taking place among supply chain partners, more businesses are creating joint ventures, and mergers and acquisitions.

Jim Tompkins meeting with executives in China

Tompkins believes this environment combined with a global consumer sensitized to price makes it even more important to find the hidden profits in your supply chain. Profits exist in creating internal efficiencies that will allow companies to be more competitive, more profitable while having little to no impact on the consumer facing side of the business. Supply chain improvements are where many companies that Tompkins’ advises have been finding profits.

Tompkins writes more on supply chain issues at his blog Supply Chain and Logistics Issues. Tompkins International is the parent company of Technomic Asia.

Raleigh, NC and Shanghai, China – July 12, 2011 – Parts and service in China’s light passenger vehicle market reached an estimated US$55 billion in 2010, driven by strong expansion and continued aging of the vehicle parc, according to new research conducted by Technomic Asia, an international market consultancy specializing in China strategies for western companies.

The report, titled “A Strategic Assessment of China’s Light Passenger Vehicle Aftermarket, Sixth Edition,” stems from Technomic Asia’s ongoing primary research into the Chinese auto marketplace and its key players. Other major findings indicate that the light passenger vehicle car parc has expanded to more than 62 million units, with middle-aged vehicles (4-9 years old) reaching a 50 percent share. More information is available at www.technomicasia.com/auto.

“The aging and expanding parc, coupled with private ownership of vehicles at more than 70 percent today, supports strong growth in the parts and service market,” said Steve Ganster, managing director of Technomic Asia and primary author of the report.

“The market is fragmenting as more vehicles from recent market entrants, notably the Japanese, hit the road,” Ganster said. “Both local and international parts and service companies, as well as retailers and other service organizations, are aggressively developing their infrastructures to penetrate this dynamic market. Though many challenges exist, the outlook for growth remains robust, with the market expected to expand at 21 percent per year through 2015.”

“The market’s greatest opportunity, and also its most significant challenge, is in solving the complex and multi-layered distribution structure”, states Ganster. “For companies who can bring scale, expertise and sound strategy to solve distribution challenges, the prize will be great.”

This unique China auto report offers valuable statistics, insights and analyses to assist management to successfully address this important market, including:

• Perspective on China’s automotive market, including a long-term growth outlook for China’s light vehicle market in terms of types of vehicles, key OEMs, growth drivers and constraints, etc.
• Overview of the automotive aftermarket in terms parts and service, covering size, segmentation, parts types, key players and trends
• An assessment of China’s automotive parc in terms of size, vehicle composition, age, technology base and future growth
• Detailed descriptions of key market segments, covering maintenance and light repair, collision and other repairs with insights on market size, segmentation, services provided, pricing, etc., and current and forecasted 2015 value by vehicle and service type
• A detailed evaluation of the parts supply chain, with descriptions of structure, key players, pricing characteristics and future dynamics
• Perspective on key opportunities and challenges facing players in China’s automotive aftermarket

For more information on the report, or to purchase a copy, please visit www.technomicasia.com/auto or call our offices at +1-919-855-5437 (U.S.) or +86-21-6473-2588 (China).

About Technomic Asia
Technomic Asia, a division of Tompkins International (www.tompkinsinc.com), is a business strategy and supply chain consultancy with more than 30 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success. Technomic Asia’s Steven Ganster authored of “The China Ready Company,” a book that details the process to develop a successful China strategy. www.technomicasia.com

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Media interviews with Steve Ganster contact amaruggi AT providentpartners DOT net or call 612-293-7640

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Twenty percent growth in China’s auto aftermarket in the recent past has slowed to under 10%, but the numbers disguise the opportunities that exist for auto parts companies. There are 350 different models of cars and light vehicles on China’s roads. New car sales since 2006 have doubled from under 7.5 million annual sales to 15 million units in 2010.

Technomic Asia produced it’s sixth annual China Auto Aftermarket report. This is a comprehensive report of China’s growing auto aftermarket. It covers the trends in auto part sales, regions of growth, and also details distribution channels.

Steve Ganster, managing director of Technomic Asia, shares some of the highlights of the report and describes the possible ways this market will change. The chart below shows how the category of other repair has spiked. These are repairs of middle-aged vehicles parts like, batteries, brakes, transmissions, and many others. This market is just at a transition point according to Steve Ganster. He believes the number of layers in the auto aftermarket supply chain can number up to five and is simply not efficient to service the tens of millions of vehicles and hundreds of millions of parts. “Simply put, it’s a mess, with more than 800 “parts cities” serving more than 350,000 service operators this current model is not sustainable as new car sales grow and the aftermarket that follows.”

The full report is available at www.technomicasia.com/auto and a short executive summary china auto aftermarket presentation is on Slide Share.

“I often get calls from companies that want to get their product into China or increase sales there. Many times, they are under the false impression that they have two choices: go it alone or form a joint venture with a Chinese company. Entering into a distributorship relationship with a Chinese company (or companies) is another option. From a strictly legal perspective, distribution relationships between foreign and Chinese companies are actually fairly straightforward and are far easier and generally less risky than joint venture deals and typically far less costly and time consuming than going it alone.”

-Dan Harris, China Law Blog

Here at Technomic Asia we do a lot of work for companies entering China (or already in China and seeking new channels, strategies and consumers) to sell their products and services. On the product side of things finding, vetting, working closely with and sharing the responsibilities with a distributor, or several of them, is a key to successfully marketing and selling your consumer products and in some cases B2B products as well. We largely focus on the market assessment, entry strategy, implementation and build out and where needed, Supply Chain services. A key part of our process is the assessment of and relationship building with channel, specialty, municipal, provincial and national distributors across several categories.

As he does regularly, Dan Harris author of the China Law Blog clearly, concisely and accurately describes the legal issues around China contracts and legal issues in distributor relationships. His post is a must read for anyone interested in the China market.

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We are working through a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  In Steve’s nearly 20 years of working in China, he has helped many foreign companies – primarily small and mid-sized ones – to establish operations in China.  We’ve been addressing a number of topics in this series, but today’s hits very close to home for a number of companies as Steve and I talk about the “China Price” syndrome …

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In our last Podcast, I had a conversation with Steve Crandall, Vice President in charge of Implementation Services here at Technomic Asia.  We talked about how important people are to a winning China strategy … how to look for them, recruit them, train them and keep them.  After we were done recording it, I asked Steve if he thought that maybe we were being too “basic” … that this was stuff that people already know.  He said, “People might know this stuff, but its always good to be reminded of it … knowing and doing are two different things.”

Well, it turns out that Steve was right … because since we posted that Podcast, we have had LOTS of comments on how useful the information was and how important it was to revisit the basics.  So to that end, we are going to go “back to the basics” again in terms of thinking about China and building your China strategy.  This is particularly critical during these times in the corporate business planning cycle … the silly season where bold strategies are considered and aggressive plans developed.  And China – given its centrality to most global business plans – is susceptible to such ridiculous hopes, dreams and schemes.  So let’s go “back to the future”, if you will, and think about our China strategies from the beginning.

Click on the links to listen to today’s Podcast …

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I am going to start this post out with a warning: in the world of global economic intrigue and gamesmanship, the following ranks rather low on the excitement scale … but on June 22nd, China announced that it would scrap the export tax rebate it gives to China producers of 406 categories of export products.  These products include steel, non-ferrous metals, fertilizers, chemicals, plastics, rubber, and glass.  This was the first adjustment in the export tax rebate since July 2009, when it was increased as part of China’s stimulus program.

Now I know that, for most of you, the phrase “export tax rebate” doesn’t send a thrilling chill down your spine … and if it DOES, then maybe you need to get out more.  But we think that there is something deeper here that is worth exploring just a bit further.

This policy announcement is coming at an interesting time.  The communication between the U.S. and China on the global economy and the RMB valuation has had more passive-aggressive subtext than a Midwestern family Thanksgiving – “PLEASE pass the SALT, DEAR!!” – so one rather hoped that any move by China would be attempt to alleviate some of the stress … as in “Please ADJUST your RMB rate, DEAR!!”.  However, at first blush, there is not a huge material impact to the trade imbalance as the policy change is not expected to make a major dent in exports, since it affects only $11 billion in exports, or about 1% of the total.

However, we think that the importance of this policy change goes beyond any material impact.  We think that China is trying to telegraph some very specific messages to two constituencies: the international community and its own people.

First of all, the Chinese government is signaling to its own domestic manufacturers that it wants them to curb overcapacity, move up the value chain, and turn away from the export-driven model of growth.  In this new policy, the government has focused on the environmental benefits of discouraging the production and export of these 406 products, which are highly energy-intensive and polluting, thereby scoring a point with the Greens, both domestic and international.  Lower production will save energy and reduce greenhouse emissions, in line with China’s stated promise of reducing energy consumption per unit of GDP by 20% from 2005 to 2010.  Again, this move is not going to get China all the way to environmentally friendly heaven, but it’s a step in the right direction.

At the same time, this move is a response to recent global pressures on the RMB and non-tariff trade barriers, trying to get China to be an engine of global recovery, rather than continuing its export-driven model.  Europe and the US are trying to export their way to recovery, so someone’s exports have got to go down.  By partially eliminating the export rebate, in line with RMB revaluation, China can better claim that it’s pulling its weight globally.  Given that this is a partial rollback of the stimulus package, China can also claim that it’s dealing with stimulus-induced preferences for domestic industry, further reducing what some say is over-investment by the Chinese government in their own infrastructure which has led to an over-inflation of China’s GDP growth.  So that’s quieting 4 squawking birds of international conscience with one stone of administrative action … not bad at all.  The tortured metaphor of that last sentence does not give enough Kudos to China for this move … China is definitely starting to understand that, for its policy changes to have impact, symbolism – properly spun – can have more power than substance in the world of international diplomacy.

However, of the two possible audiences for this move – internal and external – we fall on the side of this being a stronger message to its own domestic producers, an encouragement to move up the value-chain and pursue domestic innovation, not just be the manufacturer for the world.  Steel is a good example.  48 of the 406 affected products are made, at least in part, from steel that, until this action, had enjoyed a 9 percent rebate.  Steel exports from China have grown 127% year-on-year, and 266% alone just this past May.  However, along with this growth have been the installation of new steel-making facilities in China … despite a general ban on adding more capacity, Chinese companies found a way to build 40 new steel plants in this past year.  This has resulted in the overproduction of low value-added steel which means that China’s steel industry profits have come almost entirely from the 9% rebate.

But this new ruling makes a fine distinction between the two types of steel products. The rebate on the commodity steel goes away but the higher value-added steel products such as cold-rolled and galvanized steel – which many US buyers are more interested in anyway – still enjoy a 13% export rebate.  So, by getting rid of only the rebates on low-valued added products, the government is sending a signal to the domestic industry: “Start moving up the value chain, and stop building so bloody much capacity.  Move away from the low-cost export model and start innovating.”

After over 20 years of concerted effort on building their economy through exports, China is going to take awhile to turn this ship around.  In other words, China is not going to becoming a domestically-driven (and particularly a consumer-driven) economy any time soon … I don’t even think the next 20 years is going to get them there.  But bit by bit, they are moving that direction … and this recent policy change is one of those bits.  And keep your eyes and ears open for future policy announcements … more and more you are going to see the double purposes behind policy changes as China navigates the dangerous waters between both the internal and external constituencies most impacted by such changes.

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OK… I am just going to put it out there: these last 10 years have kind of sucked.  Years from now, we are going to look back on the first decade of the new millennium and only the very strong among us are going to be able to avoid using a variety of four-letter words to describe it.  From the rise of terrorism to the meltdown in the global economy, these have been tough times.

Things didn’t start well, of course, with the futuristic “Y2K” problem. It was, for the most part, just IT consultants crying wolf.  But to so completely lack faith in our own technology so as to doubt its ability to handle a digit change in the thousands column does not speak well of our confidence or our technology.

But, for me, what started things off on the wrong foot was our inability to agree with simply what to call this decade.  The “Aughts”? The “O’s”?  The “Naughts”?  Given the current state of the average American’s bank account, “the Nils” sounds like it’s the most appropriate.  But c’mon, folks … if we can’t even name the stinking decade, how are we supposed to handle the real issues.  Frankly, I am a bit ashamed that we Americans couldn’t come up with the marketing slogan that we could all hold hands around.  We are a country that brought you such ditties as Hooters, Cabbage Patch Kids and the Pet Rock.  And we can’t name a decade?  How embarrassing!

However, contrary to the desperation much of the rest of the world is facing, China had a pretty good decade.  From a GDP of about $2,000 per person when 2000 started, China is projected to be over $6,500 per person heading into 2010.   And unlike other changing economies such as the former Soviet Union, China’s political infrastructure didn’t go through a meltdown in the face of such growth.  Certainly, there were many doomsayers predicting the imminent collapse of China, but so far, these people with their Nostradamus For Dummies guidebooks have been, thankfully, quite wrong.

The Chinese authorities are, certainly, giving themselves a big Attaboy for their performance in this past decade.  Not only has their growth been the best in the world, but they’ve landed some pretty big gigs to show it off including the Olympics and the Shanghai Expo.  Fair enough, let’s give China their due … but let’s also look forward to the next decade and make some guesses ourselves as to what we might expect.

Here at Technomic Asia, we are celebrating our 25^th year in China … that is, if I might say so, pretty impressive for a boutique consulting firm where many of our peer firms have burned out long ago.  However, if you would have asked any one of us when we first started in China in 1985 to predict what China would look like in 2010, there is NO WAY that any of us would have come close to envisioning what I can see out my window right now.  Back then, I had to bring in coffee from Hong Kong and now I have three Starbuck’s stores and seven knock-offs of the same within a 10 minute walk of my office.  So predicting the future in China is not a science; heck, its not even an art.  I would liken it to a pin-the-tail-on-the-donkey game played by at a birthday party of some cargo cult voodoo priestesses.   Yea, its that much of a crapshoot.

But what the heck … its only my job to assess the China market and plan growth strategies for my clients, so I am going to go out on a limb here and introduce 5 themes for 2010 that I think will become even more important as the decade continues.   They are, in no particular order because they ALL are important and impact each other:

1. Growth

2. Distribution

3. Consolidation

4. Mergers & acquisitions

5. The emergence of China as a global power

As a year-end wrap up, I want to introduce each of these themes today and then we will re-visit them throughout 2010 and explore their progress (or lack thereof).  So let’s get to them …

The last decade has seen China grow in importance in companies’ global strategies … from just a blip on their radar screen at the turn of the century, China is now a major – if not THE major – strategic initiative for many companies.  And the reason?  Growth!  And its not just because, in 2009, China was the only market in the world to grow more than 8%.  The rumor perpetuated by politicians and angry journalists that China is ONLY a source of low-cost labor and a way for evil capitalists to export jobs from the U.S. is dead-wrong: China is a source of good-old top-line growth. In the midst of all the management theory bouncing around boardroom walls, it turns out that customers are important.  As a former sales manager of mine once told me, tongue firmly planted in-cheek, “Kent, I’ve done some research and have determined that 100% of our revenue comes from customers.  We better focus on them.”  And you know what?  China can be a great source of new customers for many companies.

We just completed the annual business survey for the American Chamber of Commerce in Shanghai and determined that over 60% of American companies were in China primarily to serve the China market … they were looking for growth!  As U.S. and European companies are emerging from the dark depths of economic depression in the past couple of months, I have increasingly had serious discussions with CEOs about ways to grow in China.  They have all said that they feel they have just scratched the surface of what they could – and should – do in China and they need to do more.

A sub-topic under our “Growth” theme for this year will be companies’ expansion into China’s Tier 2, 3 and 4 cities – its not only important to be in China but you have to expand across markets here as well.  Remember that a Tier 2 city in China can still have nearly 8 million people in it so we are not yet talking about selling into rural areas … this is still urban marketing.  But gone are the days when  company could just set up a sales office in Shanghai, Beijing or Guangzhou and hope to do enough throughout the country.  We see many companies today making significant efforts to expand their China footprints and throughout this year we’ll talk with some of these company leaders to find out what they are doing and how they are doing it.

Closely associated with the “Growth” theme is our second theme, “Distribution” … I guess this is overstating it but if you want to grow, you’ve got to actually get your products to market.  Companies who are already in China need to find a better way to get more products to more markets.   Companies are discovering that China is a VERY large and fragmented market and your route-to-customer in one region will not be the same as in another region.  We’ve said it before in these Podcasts but you will never – repeat, NEVER – find one distributor to represent you all over China.  I don’t care what industry you are in, it ain’t gonna happen.  Sure, your distributor will TELL you that they can do it, but they cannot, at least not as well as you need it done to realize the growth that you need.  You will need to take over that responsibility yourself, to find the right combination of distributors to reach the right markets.

In 2009, we did a lot of work for clients to assess the strength of their own distribution, typically benchmarking their operation against their competitions’ (both local and foreign).  And more often than not, we found huge gaps … geographies not covered, certain sectors totally missed and important customers under-served.  These clients are using 2010 to rebuild their distribution.  Sometimes they need to tear things down and then rebuild them … but more often than not, they just need to identify the gaps and start to fill them.

Not only do we need to address the people part of the distribution equation but we also need to consider the supply chain infrastructure.  From sourcing to manufacturing to transportation to warehousing and, finally, to distribution, foreign companies in China are reassessing how they handle their entire operation.  Growth without a firm distribution and supply chain foundation is impossible so 2010 will be the year when companies will start to get very serious about improving both.

The third theme that I think will be important in 2010 and beyond is “Consolidation”.  As I just said, China is a large and fragmented market and a key contributor to that fragmentation is purely the number of players involved in any particular sector.  For example, China has over 100 automotive OEMs … not just 100 brands but 100 distinct auto manufacturers (a long way from what we used to call the “Big Three” in the U.S. which is now, depending on how you count it, probably more accurately described as the “Big One-and-a-Half”).  In pharmaceuticals, there are over 3,000 manufacturers in China and over 10,000 pharma distributors.  Most of these are what China calls “sub-scale” which is a polite way of saying, in effect, that they are too small to survive very long on their own and really have no opportunity to grow very much.

The Chinese government is strongly supporting consolidation and are, in many cases, selecting key companies (often State-owned) to move to the top of the food chain in this Darwinian, survival-of-the-fittest process.  I did a Podcast recently on the Big Four automotive companies (including First Auto Works, Shanghai Automotive, Dongfeng and Changan) and how they are looking to acquire companies inside and outside of China to bring under their rapidly expanding umbrellas.  Look for some major automotive moves in 2010.  In pharma, the government is forcing the smaller distribution companies to merge with the larger ones, so much so that the rumor on the street is that there will be only one distributor per province in the end.  Personally, I don’t see how this can happen, at least in my lifetime, so while the end state is unknown, it is absolutely certain that consolidation will be the trend.

Foreign companies playing in China will want to play close attention to consolidation trends in their own industrial sectors.  The competitive landscape will change greatly as consolidation takes place … your competitors will be stronger, wealthier and have a larger geographical footprint.  In many cases, consolidation will result in a broader product portfolio, making it more difficult for you to compete with them toe-to-toe.

Our “Consolidation” theme leads us nicely to the fourth trend, “Mergers and Acquisitions”.  Not only will local companies grow through M&A but foreign companies are increasingly looking at growth by acquisition, particularly those who have been in China for awhile.  There are multinational companies who came into China through a joint venture many years ago but who are now, for all intents and purposes, operating as a wholly foreign-owned enterprise (or WOFE).  Once they did the deal, they started growing organically, adding products and distribution territories so that, over time, they have built quite a good presence.

However, they have gone about as far as they can go organically and, to speed up time-to-market and increase depth of market penetration, they are looking at acquisitions.  In the past couple of months, we have done some Podcasts on China M&A and will continue that again in the New Year.

Our fifth and final theme is a bit trickier and I put it under the heading of “China as a growing global power” … however, this requires some unpacking.  Here on the China Business Blog and Podcast, we tend to avoid so-called “macro views” and, instead, dig deep into the specific strategies and tactics that companies are using to succeed in China.  We don’t talk much about the goings-on in Beijing, the ins and outs of political leadership.  Its that not this is NOT important – it is – but such palace intrigue can often be quite far away from the day-to-day issues that company management faces in China and, for most of us anyways, we have very little direct influence on the seats of power.  Besides, our daily experience is in the trench warfare of markets, not hanging out in the rare air of the Zhongnanhai leadership.  And my momma always told me to talk about what you know…

However, I think we are seeing an emerging power and even “attitude” from Beijing that warrants mentioning and awareness.  Basically put, the Beijing leadership has been making more unilateral decisions lately and is doing so quite confidently that the rest of the world will not punish or even censure them all that much.  Just a few days ago it was announced that China executed a British citizen for drug trafficking, despite the VERY loud protests from the West that China should take some time and think about it.  The view from Beijing since the execution is that this is an issue of their “judicial sovereignty” and that the rest of the world should butt-out.  In the many articles I have read on this, the journalist inevitably mentions that Britain is China’s third largest trading partner and hints that British authorities are trying to “keep lines of communication open”.  Which means that, although they will whine a bit, nothing is going to happen to China because of their actions.

I mention this, not to criticize either side for their behavior – and I am sure there is lots of criticism to go around – but rather to highlight that we are moving into some new territory here.  2009 was a heady year for China … the Olympics, the fastest growing economy in the world, huge cash reserves, significant investments in U.S. t-bills all added up to an administration that, frankly, thinks they are pretty bullet-proof.  You can be sure that, increasingly, the Chinese government will be making more unilateral decisions and will be less and less sensitive to the opinions of other international players.  How it plays out is anyone’s guess … but suffice it to say that this will be a factor, starting in 2010.

One word of caution here – just because things are happening in Beijing does not necessarily mean that there will be a direct impact on what you are doing in your local area.   All governments move along their own timelines … and some would say their own dimensions of reality … and these timelines are often best measured using carbon-dating methods, things move so slowly.  So please don’t assume that I am prophesying doom and gloom … this is just another data point you will need to include in the algorithms you use to understand what is happening in China.

So there you have it … my predictions for the future.  Radical and cutting edge?  Probably not, but I am very certain that we will see these themes come into play and interact with each other this coming year.  As for each of you and your companies – include these themes in your strategic planning.  Assume that your competition is moving in these directions and challenge yourself and your China management to be able to articulate, in detail, how you are going to handle all of these, both defensively and offensively.

One of my favorite quotes about the future is from Alan Kay, the American computer scientist, researcher and visionary, who said “The best way to predict the future is to invent it.”  It has been true for the past quarter century I have been in China and will be so for the next 25 years – China is a unique environment where you can, literally, create your own future.  And this is what we at Technomic Asia hope for you in 2010 and beyond which is why we end every Podcast with our motto: “In China, everything is possible but nothing is easy.”  We wish you all a very Happy New Year and we’ll see you next time on the China Business Blog and Podcast.

An article in CNN Money a couple of days ago was headlined “Mexico overtakes China as the number one location for manufacturing goods destined for the American market.” A survey was done among U.S. manufacturers who said that, on average, fully landed manufacturing costs on products manufactured in Mexico were cheaper than those from China.  OK … interesting so far as it goes.  But that is also like saying: “News Flash: Mexico is Geographically Closer to the U.S. than is China!!”

Maybe I am being unfairly smarmy, but smarmy is sometimes the only club I have in my bag.  However, there is a potential flaw here in that, in the interest of coming up with the Index That Explains All, we are missing a TON of subtlety.  And trust me, I do the same thing … it is very human to want to find a Unified Theory.  Oh … and I am usually not very subtle.

But I think there are a couple of things we should be thinking of here …

First of all, a single manufacturing index is potentially misleading because there is not a single manufacturing environment in the world.  Sure, saying that “in general” Mexico is cheaper than China is OK, but you start breaking this down by manufacturing sector and you’d start to see a lot of differences.  The article says that Mexico makes a lot of sense for things like automotive components being shipped to the U.S. … well, auto manufacturing in the U.S. just got the rug pulled out from under them and they DRASTICALLY cut all sourcing.  And it would make sense that the first cut sourcing from China because, for landed cost to the U.S., it is not as competitive.  Look at individual sectors: alternative energy; wafer fabrication; food and beverage.  We might find the same thing but we might not.

Secondly, the business press tends to gloss over a key point of international business by focusing on EITHER cost savings OR growth, but never in combination.  The simple fact remains that, while China might be getting more expensive on a bill of material line-item basis, the pull of its growing markets is enough for companies to ignore one-sided thinking about costs and, instead, consider their entire businesses.  If I am an auto parts manufacturer and am thinking about the sales from a factory, I am going to look at my global sales opportunities … and if I am located in China where the auto market is still growing at double digits, I might be willing to trade a few points of manufacturing cost over a plant in Mexico where the markets in their sphere are receding faster than my hairline.  As we’ve said before in these pages, cost cutting will only get you to business heaven … all companies need to find a way to GROW!  And China is leading on the growth index in almost every sector, far greater than anything in North America.  I’d rather see an index on manufacturing costs to products shipped to China … this is where the growth is and where our eyes should be also.

Third, I don’t think we should be looking at this as a competition, a horse-race between nations where we identify winners and runners-up.  Some very grave errors have been made over the last 30 years by companies swinging on the Manufacturing Pendulum — first we move everything to Taiwan (and close down the U.S.), then we move it to China (and close down Taiwan) and finally back to Mexico (where we close down everything else and start all over again).  A mature global business thinks in terms of “and”, not “or”.  We should ALWAYS be thinking “China and Mexico” (and Poland and Russia and Brazil and…).

Fourth, I am very hesitant to base any view of global business on a survey done this year.  We are in the Twilight Zone in terms of our understanding of the puts and takes of the global economy … the floor has dropped out and we are suspended in mid-air, Wiley Coyote-like with an “Acme” anvil in our hands an a panicked look on our face.  Any survey of ANYTHING this year should have a big ‘ol asterisk on it making a disclaimer that the results may not have any relationship to a future reality.  Based on points 1-3 noted above, I think we are going to be seeing a lot of changes in these numbers in the very near future.

In no way do I want to minimize the findings here … it is very true that manufacturing costs have been on the rise in China for a number of years.  It is a fact of life.  But as those costs have risen, the world in and around China has changed drastically and companies should not only look at raw manufacturing costs to plan their global strategies.  First ask the question “How can we grow?” and then (and only then) decide where to put your operations.

Technomic Asia’s Kent Kedl was interviewed on Marketplace Radio on Tuesday, May 26. The story focuses on GM producing cars in China, not only for the China market, but perhaps to export to the US. It’s a story that illustrates the interdependence of global supply chains. The piece is reported by Marketplace reporter, Scott Tong