China Law Blog

A friend of mine from Michigan who owns an auto supply business sent me an article today from the AutoChannel, which bills itself as "the largest independent automotive information resource." The article is entitled, "Study Reveals: Auto Suppliers Find No Cost Guarantee in China Sourcing."  We need a study for this? 

The article goes on to reveal the less than ground breaking news that an "efficient low cost country supply chain is a competitive weapon," but that for American auto suppliers, establishing that chain out of China will soon be essential.  But, there are no guarantees. 

Once one gets beyond these journalistic truisms, however, the study itself does contain some very cogent information.  Andreas Mai, a principal at management consultancy, PRTM made the following excellent points based on the study, which consisted of "more than 50 interviews and surveys with executives of global automotive suppliers located in the U.S:"

-- "China sourcing requires minimum savings of 20 percent to outweigh the increased costs of logistics, quality and intellectual property risk."  I agree.  Not sure if things like accounting fees and legal fees go under logistics, but companies should plan for those to increase as well when doing business internationally.   

-- "A remote 'test the waters' approach is bound to fail." I completely agree.  Do not expect to go over to China for a few weeks to "start" a complicated operation there and then turn everything over to your newly hired, but expert Chinese managers and engineers.  That simply will not happen.  It will take years before you have a really good team on board.  Years.  And, good Chinese management and technical people, no matter where you are in the country, cost more than $200 per month.  Always.

--"Highest savings were achieved by suppliers that deployed an integrated China strategy as part of Chinese market expansion and/or global product management."  This makes sense.

-- "Sustainable China sourcing results require high investment in local supplier development, technical and quality support."  This makes sense.

-- "Early adopters achieve the highest savings rates, shorter procurement lead times and lower quality and supply chain risks, but the learning curve was 6-10 years."  China has changed so much from 6-10 years ago, that I have to believe it will take far less time than 6-10 years now. I say this for many reasons.  First, the early adopters have made things easier for the next generation.  The Chinese government and the local facilities are now better equipped and better able to provide the suppliers with what they need.  Second, China's labor force is better now than ten years ago.  Third, China's legal and regulatory climate is much better now than it was 6-10 years ago, particularly for these sorts of industry. 

Bottom Line:  Business basics apply in China just like everywhere else.