By: Benjamin Jurken
On the heels of the APEC Summit in Beijing, China and the US have recently announced an agreement to eliminate tariffs on hi-tech products which will mostly likely result in these two great economies being tethered closer than ever before. In reflecting on the state of US/China trade relations over the past fifteen years and our firm’s experience in aiding hundreds of clients in multiple industries, it is amazing how many myths still permeate throughout our country relating to importing from China. From misconceptions on supplier capabilities to macroeconomics, thousands of US importers active in China continually fail to minimize management expenses and capitalize on significant opportunities. For those currently importing, I challenge you to look beyond the following myths and create stronger more profitable global companies.
Top 5 Myths
We have the best supplier in China-Too often, US importers fall in love with their Chinese suppliers which can lead to increased supplier dependency and a loss in competitive advantage over more nimble competitors in the market. On the surface, importers should feel confident adding a Chinese supplier to their supply-chain that successfully passed through a comprehensive supplier vetting process, but you never know if there is a supplier better suited for your company if you don’t look. According to the Bureau of Labor Statistics, in 2009 (the last year of available data) China employed over 99 million individuals in manufacturing positions compared to only 14.1 million individuals in similar positions in the United States. With such an expansive and ever evolving marketplace along with significant over-capacity in many industries, companies should seek to regularly re-examine the performance of their existing Chinese suppliers and identify alternate or suitable replacements on a regular basis.
Increased labor rates have made China uncompetitive-You are right, wages have grown tremendously over the past decade in China, somewhere close to 290% in some areas. But do you know what the current hourly wage is for a Chinese employee in a manufacturing setting… $1.74. That is approximately 8.8% of the average hourly wage paid in the United States not counting additional benefits. So how does this impact you? For many, suppliers can use media headlines as an opportunity to raise prices on their customers above and beyond increased cost of labor, but if you know what percent of your products price is comprised of labor, you can ensure any price increases are warranted. In turn, wages are rising in China but still remain competitive compared to the United States.
Alibaba will help us find a qualified Chinese supplier-For businesses that have global supply-chains and genuinely want to extend their supplier network into China, any online manufacturing directory or portal should be used with an abundance of caution. Over the years, many unsuspecting companies have struggled with trading companies proclaiming to be manufacturers, poor product quality, and other unscrupulous business practices. China like many other foreign markets is not an easy place to do business, so while it may take extra time and energy, all suppliers, regardless of how they were identified should vetted and audited in-person to verify the supplier is truly a reputable company.
Chinese suppliers can be effectively managed with quarterly visits and nightly emails– The key here is “effectively.” Frequency of supplier visits and daily communication is a poor barometer of effective management. With vastly different cultures and time delays, countless companies have been lured into the quicksand of over-traveling to China while still failing to resolve recurring issues. When it comes to traveling to China, simpler is better. Send the right personnel: procurement, engineering, operations, etc. Issue pre-meeting objectives to all suppliers in advance to frame on-the-ground discussions. And most importantly-hold all parties accountable for their performance.
Our suppliers do not outsource any processes- Veteran importers are the most likely to believe this myth. The truth is, Chinese suppliers often outsource various manufacturing processes from machining to finishing. This can be due to in-house capacity constraints or because a long time customer (You) are seeking new products that are not capable of being made by your existing Chinese supplier. The key here is, a supplier outsourcing a product or process is not your main concern, rather it is not knowing that a process has been outsourced that should keep you up at night.
In debating which of the many, many myths around importing from China would make this list, it became clear that like any myth, there is a kernel of truth to all of these statements but that with further examination business leaders can move beyond this stale rhetoric. In the coming years and decades, it will be interesting to see if these same myths will soon be applied to other emerging markets. Do I see “Puruvian Nuevo Sol Appreciation Against Dollar Creating Case for Re-Shoring” in my future?
About The ABC Group LLC:
The ABC Group LLC is an international supply-chain and sales channel management firm focused on assisting companies more effectively conduct business throughout Southeast Asia. By creating transparent business relationships and offering a diverse array of services tailored to meet our clients’ specific goals, we aim to create significant long term value for stakeholders.
For additional information please visit www.theabcgroupllc.com