China Losing Manufacturing Luster. I Buy That.
I am always saying that my law firm's clients (virtually all of whom are SMEs doing business internationally) are not leaving China because of its new Labor Contract Law, not leaving China because of its increased costs, and not leaving China because Vietnam is better. In fact, I virtually never hear about those things in terms of their China expansions and contractions. There is one thing though that does seem to influence our clients' decisions to leave China or to scale down there: quality.
An Business Week article this week, entitled, "China Losing Luster with US Manufacturers," (h/t to China Challenges) discusses a recent survey indicating manufacturers are most concerned with China's lack of quality, followed by its lack of protection for intellectual property. The article rightly notes these views do not bode well for China:
The souring attitude should be disturbing to China's leadership. If the issue were just eroding price advantages, that would be less cause for alarm. Costs could swing back in China's favor, for example, with fluctuations in currency rates, commodity prices, or changes in China's job market. What's more, Chinese manufacturers have a long history of sacrificing profit margins with lowball pricing to win market share.The AMR study suggests, however, that U.S. companies are starting to better appreciate the less-visible costs of producing in China. Quality problems, rampant piracy (BusinessWeek, 10/2/08), allegations of sweatshop abuses, worker protests, and other factors not only drive up costs but also harm the value of brands and corporate reputations. "Companies are realizing that the fully loaded costs of importing from China are a lot higher than they imagined," says O'Marah.
Trouble is, China will not be able to improve its quality problem overnight. It will require a long-term transformation of China's regulatory bureaucracy, legal system, and management practices. And Beijing has been promising to control intellectual-property theft for decades, with unimpressive results. If China doesn't start making progress fast, the current slump in export manufacturing (BusinessWeek, 3/27/08) could be the beginning of a longer-term pullback.
In its defense, Western views on intellectual property protection in China lag the improving realities on the ground there, but my sense is that its views on quality pretty much jibe.
Comments (5)
Read through and enter the discussion by using the form at the endFons Tuinstra - November 30, 2008 12:53 AM
I'm not buying the argument that quality has become such an important factor for China. Has quality not always been a problem? Have manufacturers not always complained about IPR? The difference was that in most cases China was a sellers' market where if you would not buy products, there would be enough others who would buy those poor quality products.
Now the competitive situation has changed and China has become more a buyers' market. Now, making a point about quality might actually help. In the long run, indeed.
Bourgogne - November 30, 2008 1:23 AM
China makes transplanted US SME manufacturing presidents paranoid beyond productivity. They get pulled apart by their distribution people in the US and those who are in charge of everything from design to quality who are located in China.
US SME presidents are lacking in the hands off skills necessary to let quality improve and are to blame blame blame.
They are analogous to a government agent who has gone off the reservation, slipped into a concentrated paranoia about reality and then gone rogue.
David Oliver - November 30, 2008 3:18 AM
Blatant piracy and ripping off of ideas is an issue for sure, whether you manufacture here or not. One company I have started representing in China is a European manufacturer of playground equipment. Previously they have told me that one local company took their entire catalogue and simply put their own name on it.
Today I was in a housing compound in Beijing and saw what I thought was some of the European company's playground equipment. It was pretty much an exact replica, but with a local company's name on it.
outcast - November 30, 2008 7:47 AM
Wouldn't quality also be a problem in other developing countries?
Chinacomment - November 30, 2008 9:47 AM
If quality has become an issue, I think part of the reason is the rising transportation costs suffered in the summer that negated some cost advantages.
Transportation/energy costs will rise again (even in the near future. Barring systemic economic collapse; by February I bet energy prices will hit rock bottom, then start climbing again.) and any company which does not account for that would be foolish.
At ChinaComment, I discussed China quality a few weeks back: http://chinacomment.wordpress.com/2008/10/27/the-future-of-china-quality/
Will Chinese companies improve their quality significantly? Perhaps, but more likely the economic downturn will be a wash. Consolidation of some firms will improve supply chains and oversight; but other firms, like Sanlu, will be tempted to "cut costs." And without sufficient regulatory oversight, they may believe they can get away with that.