Posted On 24 Ottobre 2018 By In Supply Chain With 933 Views

Is Outsourcing in China Still an Economically viable Option?

Muraglia cinese

Riportiamo di seguito l’articolo di Roberto Astorri, China Procurement and Contract Manufacturing Professional, pubblicato sul magazine “The Procurement – Qualifica Fornitori” (Anno 4 Numero 2) nella sezione International.

In the end, it is all about building mutual trust

Conducting any form of business in China demands a thorough understanding of the local culture and business practices as well as accurately defining each other’s expectations, objectives and requirements. More often than not this aspect of human relationship in pursuing business is perilously underestimated. Each time I found myself in need of explaining the profound differences in culture between Chinese businesspeople and Western ones, I turn to the following anecdote: during a presurvey factory visit at a purveyor of raw materials, I produced the data sheet for stainless steel for some semi-outdoor base station casings. The owner of the factory looked at the data-sheet for a few moments, raised his eyes to me and then asked “Do you want stainless steel that rusts or that does not rust?”.

Manufacturing costs increased in China

Manufacturing costs, as well as labour and CAPEX / OPEX costs have steadily increased in most of China’s Special Economic Zones and across the whole of China Mainland over the past few years. This has, in turn, created a rethinking of the manufacturing strategies for foreign enterprises some of which who have relocated their operations back to their home countries or to other perceived competitive regions such as Eastern Europe and South East Asian countries.

Technological competitive advantage in global markets

However, the range and scope of the physical infrastructure and logistical networks available within most of the developed areas in China are still unparalleled amongst the emerging countries leading to a competitive advantage for local supply chains. The quality and reliability of products from China are constantly improving while the local Chinese manufacturers look to automation and to the basic concepts of Industry 4.0 to respond to the ever-increasing demand for more efficient and sophisticated manufacturing systems. Chinese industries have also increased their R&D investments exponentially over the past decade in order to develop products and systems leading to technological competitive advantages over other global brands. Such shifts in policy and strategy adopted by many Chinese suppliers have further decreased the perceived risk factors in outsourcing away from the home markets.

Long-term relationships

Continuing cost reductions obtained from sourcing in The Middle Kingdom are still viable through already qualified and tested supply chains. Master Purchase/Manufacturing Agreements, while of fundamental importance when doing business in China, need to be accompanied by long-term, mutually trusting relationships with all suppliers in the chain to ensure the acceptance of mutually beneficial goals and objectives. Sourcing in China must be integrated into the long-term strategy of the company.

Companies must meet certain requirements

When is outsourcing and contract manufacturing really to be considered beneficial to a company’s overall production strategy? One or more of the following points must apply:

  1. Global strategy

When they are part of an integrated strategy aimed at focusing on core processes and corporate functions rather than diluting resources to non essential activities.

  1. Cost saving

When there are measurable, sustainable, medium-to-long term cost savings. Additional costs derived from transport of goods and relevant import duties, when applicable, must be also factored in when calculating the per-unit price.

  1. Large production quantities

When the monthly production quantities are substantial. Full run productions are what Chinese suppliers focus on rather than prototyping or small run. High volume / low mix is certainly required in order to achieve maximum savings as set up costs are spread over higher numbers.

  1. NPI (New Product Introduction)

When the ability of starting new projects, New Product Introduction (NPI), can benefit from freeing up internal resources.

  1. Local sales

When local sales are an integral part of the global strategy of the company. Local production facilities, along with after sales and maintenance capabilities, are seen by potential Chinese customers as a definite benefit.

  1. Risk sharing

Risk sharing is also a factor in the corporate decision to outsource as the responsibilities associated with procuring parts, components, sub-assemblies are shifted to the local vendor.

Risks related to outsourcing to china

There are some potential risks in outsourcing to China, including:

  1. Legalities

Legalities (local regulatory environment policy); outsourcing and manufacturing master agreements (implementation and compliance).

  1. Social responsibility

Ethical considerations (unacceptable working conditions, compliance of byproducts disposal, lack of supply chain social responsibility and commitment).

  1. Quality issues

Poor or lack of quality mostly due to the use of sub standard raw materials or manufacturing short-cuts on the supplier’s production lines.

  1. Shipment delays

Delays in delivery as a result of supplier’s under capacity or customers’ order back log. Also, goods border inspections at the China/Hong Kong border, the most employed point of transit for goods exported overseas from China, may be time-consuming and at times very discretionary and could result in goods being detained for long periods of time.

  1. Poor packaging

Poor or inadequate packaging due to cost saving activities by the supplier or strict regulations on packaging material in force at the destination country.

  1. Custom duties

Tariff and non tariff barriers where protectionist measure are seen as the only way to gain or retain a competitive advantage. A typical example of such barriers is the recent attempt by the Trump administration to levy high import duties on the imports of steel and aluminum from China as they were seen as to be sold at lower than cost prices.

  1. Production scheduling

Synchronisation of the production and delivery of goods in China as outsourced components. Parts and sub-system will have to timely fit in a final assembly and testing process at the country of destination. Internal production orders, their frequency and lot quantity as well transit times must reflect the requirement of the new overall production paradigm.

Chinese vs. Western business culture

A successful outsourcing strategy involving Chinese vendors most importantly requires an intimate understanding of the Chinese business culture where expectations and goals may differ from those normally accepted and followed in the Western business culture as pointed out in the opening paragraphs.

Implement risk management strategy

A risk mitigation and management strategy though offer a way to avoid or minimise such risks with constant monitoring at the suppliers premises. Risk mitigation strategy cannot be underestimated or taken lightly as it offers an essential tool for a successful outsourcing strategy that delivers constant cost savings over time. Ensuring business continuity and sustainable quality level s are a defining responsibility for managers working in China. In the next issue, we will explore the due process for selecting, qualifying and maintaining a reliable supply chain.

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