China: Think Localization, Not Just Global Sourcing

Many of you have already seen excerpts from a recent Booz Allen / American Chamber of Commerce Shanghai that looks at what types of organizations are getting the most out of their procurement and operations efforts in China. They key to success, a summary of the study notes is that "companies that pursue China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives." Specifically, those "that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 percent compared with 17.8 percent)."

A few other highlights from the study suggest that many companies remain ill-prepared from an operations perspective (both technology and process) to maximize their success in China. And a number of respondents are also beginning to consider other regions as well. Consider that "although 88 percent of these corporations [surveyed] say that they originally chose China for its lower labor costs, they are finding that cheaper labor and tax benefits have made alternative locations more attractive." This echoes what I'm hearing from a number of companies in the US manufacturing space, which, while intended to maintain a presence in China for the long-haul, are also investigating other options -- notably Mexico -- when it comes to sourcing for export sales and production.

For those who have seen me deliver my "predictions" section of my Spend Management stump speech -- which I include in many presentations -- you might take note that I recently changed the entire section. And a new prediction I added is how the US is getting over its love affair with Asian and China sourcing in particular, especially as it pertains to looking at the region just from an export perspective. The reasons I cite should not be news to anyone: the falling dollar, changes in China's VAT / tax / tariff export regulations, underlying commodity price inflation, energy challenges in the region, regional supply risk and how productivity gains are not keeping pace with rising labor costs.

All in all, these thoughts -- and some of the underlying sentiments in the recent Booz study -- are echoing the same thing. Namely, that companies which are invested in China for the long haul (including localized Chinese sales operations) are those achieving the best returns and have the brightest prospects. But many others are beginning to seriously consider different options -- or at the least, not automatically assuming that going to China is the right decision.

- Jason Busch

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