China supply chain logistics

MAKE: Why Keep China in your Chain?

Discounting China as a source of profitable manufacturing, supply chain opportunities, logistics improvements and sales could be a miscalculation.

During the long lead-up to the 2012 U.S. election, both candidates took their shots at China and claimed intentions to "bring manufacturing back home.” 

Also in 2012 we began hearing more about "near-shoring” "right-shoring” and "on-shoring” in the business pages and from corporate leaders. Subsequent conversations and actions have proven that there is indeed such a movement afoot, but the big picture on global manufacturing and supply chains is much more complicated. 

Take Lenovo, the giant Chinese PC maker that bought IBM’s computer unit. Lenovo recently announced the creation of hundreds of new jobs in North Carolina to produce its new high-end business computers. That’s great news for "re-shoring” but still, thousands of Lenovo PC assembly jobs will stay in China.

See Also: Global Supply Chain Logistics Management

James Fallows, the Atlantic’s international editor and resident China expert, recently addressed the phenomenon of high-tech and high value-add manufacturing moving back to the U.S. In one recent article, Fallows wrote about Liam Casey (who he has dubbed "Mr. China”), who built a huge electronics manufacturing and sourcing empire in southern China. Casey expounded on why, when and how he and others will bring a portion of their tech manufacturing back to California. 

Then, almost as if on cue, Apple announced its intentions to start limited production of iMacs in Silicon Valley. But still, like Lenovo, the vast majority of Casey’s and Apple’s products will be assembled in China. 

We are also hearing a growing chorus of voices proclaiming everyplace from Mexico, to Brazil, to Indonesia, to Ghana as the "next China.”

So what does this all mean? After 25 years of an almost default strategy of off-shoring to China, are companies going to shift manufacturing and supply chains away from China and Asia? Will global supply chains be completely transformed?

Globalization Waves & Change Drivers 

What all of these conversations about manufacturing and supply chains have in common is that they are part of what I see as "re-globalization.”

In the first wave of globalization (during the last 30 years), we generally experienced three phenomena that arose separately but converged to change the way the world does business: 

#1: The rise of China as a low-cost manufacturing hub. China manufacturing and sourcing spurred a growth in global consumerism due to lower costs of production and thus lower cost of products. What were once luxuries became commodities.

#2: The rise of the modern, integrated global supply chain. From the fractured past of disparate and not wholly connected disciplines, logistics, material handling, IT, warehousing, shipping, and other parts of the 21st century supply chain coalesced. More companies were able to harness the power of the six-mega-processes of "PLAN-MAKE-BUY-SHIP-STORE-SELL” for profitable growth.

#3: Technology allowed companies and individuals to work in a shrunken world in which almost anything was possible across borders. Consider customers in London buying directly from the J. Crew website, or Indian doctors reviewing X-rays overnight and having results back to U.S. doctors in the morning.

When the rise of "Cheap China” collided with the modern supply chain and world changing technology, we had Globalization 1.0.

What all the talk about right-shoring, et. al, is about is actually what I call Globalization 2.0.

Re-Globalization

In a re-globalizing world with continuous innovation and technology advancements, supply chain becomes even more critical to survival. The six supply chain mega-processes of PLAN, BUY, MAKE, MOVE, STORE and SELL are undergoing major changes due to:

  • The rise of the Chinese consumer; 
  • The transfer of wealth from West to East; 
  • The changing nature of how, where, when, and what Western consumers buy;
  • The rising cost of energy and fuel; 
  • A need to balance serving your home, near and far markets with your products and services; and
  • Technologies that shrink the world further. 

Companies need to balance the costs of R&D and development (PLAN), manufacturing (BUY/MAKE), shipping and logistics (MOVE), inventory (STORE), and customer satisfaction (SELL). 

Make no mistake, China is still very important as a continuing destination for profitable manufacturing and supply chain opportunities. Over the next decade, supply chains in Asia will remain a major part of the discussion, and a key piece of any strategy, for companies of almost any size, geographic location and product category. 

But we no longer live in a world in which companies can simply make something in Asia, ship it to the U.S., and distribute to retailers without considering the realities of re-globalization and the factors that are driving change.

Don’t Count China Out

So, what does all of this mean for China and your company’s relationship with China?

Do higher labor costs, a needed shift to a more consumer and service driven economy, increasing wealth and the rise of "the others” mean China is over as a manufacturing power and less important to your company’s global supply chain? The answer is simple. No and No. 

China will remain relevant as a manufacturing and supply chain hub for the foreseeable future and to prematurely write it off would be a big mistake.

I will list the reasons why China is and will be important to you and your company from a global strategic market, manufacturing and supply chain point of view.

In the re-globalized world, China will still be an important part of your manufacturing and supply chain mix because developed countries don’t go backwards. Yes, some manufacturing is and will continue to return to developed economies in the U.S., Europe and Asia, but on the whole these countries cannot and will not reabsorb low-value-add, dirty, low-margin manufacturing at scale. This will remain the domain of China and other emerging countries for the foreseeable future.

China for China – The rise of China’s consumer class means companies are shifting their China strategy in three ways: making products in China for the China market, making products in China for the Asia and Western markets, with a focus on higher value add products, and making products in their home country for the China market. This is where the importance of near, far, right, on and off comes into play and where the right supply chain makes it all work. But the China for China manufacturing play, more than others, will keep that industry in China.

Infrastructure – Many of the countries touted as the next China still do not have the infrastructure to handle the kind of scale China is capable of now. You can hire an Indian laborer for 1/3 the cost of a Chinese laborer, but you don’t have the factories, ports, roads, electrical grids, not to mention business environment or political will in India needed to absorb mass manufacturing. This applies to many other countries as well.

Capacity – Other countries are catching up in terms of skills, experience and quality and in some cases are investing in infrastructure and R&D, but there is no country in Southeast Asia or in the Western hemisphere that can provide both the cost savings and capacity China offers at present. Yes, China will shift to higher value-add manufacturing but will retain low cost manufacturing in the West and undeveloped areas to balance the economy.

The "New China” – Yes, we see it on the horizon, but as we have learned over the last two years the pace at which China is transitioning to a majority consumer and services economy is not nearly fast enough that the government can allow millions upon millions in the manufacturing sector to go jobless. In other words China still needs an export economy as well as manufacturing for its domestic needs. After the 2008 financial meltdown, demand from the West plummeted, millions of Chinese workers were on the streets and the Central Government got very nervous. The nearly 1 trillion dollar stimulus in China in 2009 put people back to work on infrastructure and in manufacturing. The Chinese government has sufficient will and cash to subsidize manufacturing until consumers and services reach their potential for at least the next ten years.

China is quite advanced in the MAKE and MOVE (export) processes, but there is still work to be done and improvements to be made in PLAN (China for China, global SC strategy), STORE (lack of cold chain is an example), SHIP (need for ecommerce fulfillment, need to distribute products within China, consolidate Southeast Asian made goods and China-made goods for a single brand or retailer) and SELL (a global rather than a domestic consumer base).

There are still boundless opportunities for brands, retailers and companies along the entire supply chain services continuum in China. 

In Summary

We are living and working in a re-globalizing world where the importance of "getting right” the supply chain basics of PLAN-MAKE-BUY-SHIP-STORE-SELL on a geographical, market and technology basis is critical to continued growth and in some cases the survival of companies of all sizes and scope.

The importance of supply chain services, functions and strategy in all six mega-processes is mission critical. 

Additionally the importance of China as a continuing destination for profitable manufacturing, supply chain opportunities, logistics improvements and sales cannot be discounted. Yes, the mix of manufacturing and selling for a given company may now include the U.S., Mexico and Thailand, but it will almost certainly continue to be in China as well.


Michael Zakkour is principal of the China/APAC Group at Tompkins International (www.tompkinsinc.com). He is the former managing director of ChinaBright Star LLC and was vice president of Beijing-Gongmei, a manufacturing conglomerate in China. 

 

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