Earlier this week, we did a post on how Mexico is proving to be one of the biggest winners of the US-China trade war. That post, The China-US Trade War and the Winner is….MEXICO, utilized statistics to essentially show that with respect to certain products, China’s declining production has quite directly led to Mexico’s increasing production.
That post got me an email directing me to a video made by a long-time friend of mine, Andrew Hupert. Andrew has spent much of his life living and working in China as a China business consultant and business school professor. The video by Andrew was made in February, 2019, and it is entitled, Analyze Your China Business with the STEEPLE Framework.
A STEEPLE Framework (or Analysis) is the following:
STEEPLE analysis is a strategic planning tool. It can be helpful when planning the strategic positioning. SWOT Analysis is a popular alternative. STEEPLE is more advanced as it deals with macro-environmental external factors. STEEPLE offers an overview of various external fields. It is an acronym for Social, Technological, Economic, Environmental, Political, Legal and Ethical. You can get a practical insight on each of these factors. These elements can affect your business. So, carry out the analysis and take fitting measures.
Andrew’s video is on conducting a STEEPLE analysis for deciding “if you should stick in China or move someplace new – like Vietnam.” Per Andrew, one of the reasons for conducting this sort of analysis is to “avoid cognitive biases where you see what you expect to see or you hear what you expect to hear.”
What I found most interesting about Andrew’s video, however was the following somewhat off-handed comment comparing China to Mexico for manufacturing:
I have had a running argument with people for ten years about how Mexico might be cheaper than China as a manufacturing base for certain types of production if you are selling into the United States and now people are starting to accept this, but for years people were acting like I didn’t know what I was talking about.
I have to give Andrew a lot of credit because I can remember conversations I had with Andrew maybe 12-15 years ago where he would talk about how people had a herd mentality when it came to China and how many were going there simply because so many were going there. From the perspective of my firm’s China lawyers, there was a lot of truth to that. I can remember companies that would come to us to open a business and form a China WFOE or Joint Venture without much more reason than that “our shareholders are telling us we need to do this” or that “we need to do this to keep up with our competition.” That era is definitely over, but our China lawyers, especially our China manufacturing lawyers still constantly get retained by small and mid-sized companies that have chosen China for their manufacturing without first having explored other countries as well.
Just about an hour ago, I wrote the following to a long-time client of ours who was complaining about higher than expected costs on a new product it was looking to manufacture in China:
I’m curious why you have chosen China for producing your newest household good because most of our firm’s household goods clients (that are still in China) are leaving China as fast as they can for Vietnam or Thailand or Indonesia or Turkey or Mexico where prices are lower and the imposition of tariffs is a less likely and much else is better overall as well.
His response was (essentially) as follows:
You make a good point. I think we just always think of China because we have been doing so much there for so long. If we don’t get the production we want there I will go back to my team to discuss our other options.
My law firm’s international dispute resolution lawyers have been working on a bunch of Sinosure matters lately — for what constitutes a Sinosure problem, check out China’s Sinosure: It’s Back and It Wants Your First Born. One of the first things we always ask our “Sinosure clients” is how important it is that they do their manufacturing in China because, oftentimes, one of the best ways to dodge (or delay) a Sinosure problem is to move out of China entirely. The typical answer is something like the following:
The typical answer two years ago was virtually always, “we have to be in China.”
But I digress.
This post originally started as just an update to the Mexico post we did earlier this week, but when I started looking for a link on Andrew Hupert, I came across a surprisingly timely post we did way back in 2009, entitled, On The Demise Of China Manufacturing…..Kidding!
That post started by discussing a BBC interview with the owner of a Texas company who had moved his company’s manufacturing from China back to the United States for the following reasons:
1. His company pays its US employees $8 an hour. It was paying its China employees 50 cents an hour.
2. He had quality issues in China. He has pretty much zero defects in the United States.
3. His shipping costs from the new US base are considerably less, though he expects costs to run about $2.50 more per piece.
That post then went on to quote Andrew Hupert [the link to Hupert no longer exists] on the “setting sun” for China manufacturing:
The sun is setting on China as a manufacturing center. And if they are fortunate, China’s millions of unemployed grads are more likely to end up at a workstation in an office building than on a production line in a factory. Let us not forget that technology, namely the increasing cost effectiveness of industrial automation, also plays a constant role in reducing the size of the manufacturing workforce worldwide.
It then concludes with the following:
So what is going on out there in manufacturing? Is China really on the way out? I personally think not. Yes, China is getting more expensive and yes China is high-grading, but does anyone really believe China will not be the factory to the world in 10 or 20 years?
It has been ten years. What are your thoughts now? Is the bloom now off that rose? Are you too getting the sense that China is no longer the knee-jerk option for manufacturing or for anything else? And if so, is this a good thing?