Manufacturing In China. Because There Are 1.3 Billion People There.
I expected the routine this morning from a Wall Street Journal article entitled "LG Display Plans Plant in China." I expected it would say that LG was going to be manufacturing in China either to save costs or, more likely, to diversify its manufacturing. But the following line from the article gave me an ah-ha moment:
"China's LCD market is growing rapidly, so we felt it's necessary to manufacture LCDs from the region in the long run," said LG Display spokesman Park Sang-bae.
Ah-ha!
Now I know many of you have already realized this (and on one level, so had I), especially those of you in the business of buying and selling product, but China manufacturing is in its second wave. China's first wave was strictly for cost savings; its second wave is for internal consumption. In a backward analysis brought on by this article, I realized that many (maybe as many as three quarters of them) of my firm's clients who we have been helping go into China are going there more to sell than to save. Now I realized this was true of the clients going there to start a restaurant, going there to sell beverages, or going there to provide business consulting services, but it only just occurred to me that many of our manufacturing clients are going there to sell as well.
After reading the article, I immediately recalled a recent conversation I had with a client who manufactures truck parts. I asked why they were going into China now (implying, as opposed to five years ago when things were even cheaper). The answer I got was that shipping costs had gotten too high and that they were worried about losing out to those already there. I also recall a similar conversation with a company that makes very high end, large and heavy testing equipment. Why was it going into China now, I asked (while thinking the answer would be that before now the capabilities had just not been there). The answer I got was that now that they had a strong sales and repair force in China, they were ready to start manufacturing there as well.
What are you seeing out there?
Comments (4)
Read through and enter the discussion by using the form at the endAndrei - August 26, 2009 11:00 AM
This summer I had a legal internship with an American company specializing in construction materials, and also had a chance to visit an R&D center of an automotive parts manufacturer. Both global companies who have been in China for a while, and all of their Chinese manufacturing plants manufacture almost exclusively for sale in China or the AP region, with very little made for export.
Although that was the first time I'd encountered the phenomenon, I got the impression that the wave had started years ago.
The auto parts company did present an interesting picture. Much of their equipment was also purchased from within China, with a few expensive exceptions. They said they were doing great business but the most difficult part of China sales was keeping pricing competitive in the China market. Often times their competitors would simply copy and use that company's regulatory specifications off the internet, forcing the company to maintain its European or American manufacturing standards in the Chinese market and lowering their profit margin.
Audall - August 28, 2009 9:50 AM
It's important that companies continue advancing beyond simply considering cost of goods. There are myriad reasons why a company might expand overseas and while the issue may be raised by cost, hopefully the analysis takes them through how their sourcing destination and partners support the company strategically. Gaining greater access to capture market share in China, or even developing the capabilities and operating experience of your employees and company in a place like China, so that in the future, when the market begins to ripen, your company will be ready--are all very good reasons, in addition to cost. Companies would do well to consider what their core competencies and competitive strengths are now and (hopefully) in the future, and incorporate this into their selection of manufacturing destinations and partners.
Linda Liang - August 30, 2009 2:36 PM
Despite of the increased number of product liability litigation, companies will continue to manufacture in China, not only because they can save costs but because it seems to be the only options. Growing up in manufacturing plant, I learned that it takes a lot to be a manufacturer. Manufacturing is not as easy as putting parts together.It requires great investment, skillful controls in every stage of production and other resources in vicinity...
It took China some 30 years to come this far, wehreas in other countries, manufacturing has shrunk almost completely.
Therefore, it is inevitable for companies to continue to manafacture in China.
R Mitchell - September 1, 2009 7:03 PM
Why did GM invest $2 Billion in the mid-nineties? For Chinenese consumption.