How to Have a China Ready Supply Chain

International Supply chain

Supply & Demand Chain Executive Magazine just came out with an informative article, The China-ready Supply Chain: Key attributes to ensure a high degree of readiness for doing business well with China [link no longer exists] , that does an excellent job setting out what foreign companies must be on the lookout for “doing business well with China and getting excellent performance from your supply chain.”

The article nicely sets out the following four key challenges for making your supply chain China-ready and then explains how to meet each of these four challenges:

1.  China’s vast and complex market landscape.

China crams its 1.3 billion citizens (estimates of China’s population range from 1.2 to 1.5 billion, the margin of error being the size of the United States) into a space the size of the continental United States, and it boasts more than 170 cities with a population exceeding 1 million residents. Almost 70 percent of economic, trade and investment activity is focused in a small group of provinces along the east coast, yet China’s domestic infrastructure is very inefficient. As a result, moving goods within China takes time and costs a lot of money. Transport costs can be 40-50 percent higher than comparable figures in the West. There is a shortage of railway and river transport capacity, internal toll rates can be obscenely high, and the technology of the freight movers and handlers is pathetically low.

2. Opaque financial and legal systems.

Those active in China know that things are often “gray.” Many Chinese firms will have two or more sets of books, with the real numbers in the head of the owner. While many new laws are being promulgated, their interpretation (not to mention enforcement) leaves much to be desired. China is still a country of “rule by man” versus “rule by law.” This lack of transparency makes it difficult to know what your real costs are and certainly makes it hard to know with whom to do business and, of course, whom to trust. As a result, financial planning must be done with an uncomfortable level of uncertainty.

3. Huge cultural and business system differences with the West.

In the scale of human development, China’s economy would be barely out of adolescence. Business systems are immature, and Western-style management experience is hard to find. This is coupled with sharp cultural differences with the West in terms of values, communication style, organizational hierarchy and even life experience. Understanding and appreciating the differences in business culture in China is one of the most underestimated challenges faced by Western management. Intertwined with these business and cultural differences is a pervasive level of corruption, either outright graft or more subtle gray tactics in business practices that often depend heavily upon relationships (guanxi). Progress in this area is taking place, such as in intellectual property protection, but it will take generations to fully eradicate the old ways of doing business.

4. Rapid pace of change.

The constant dynamism in all aspects of China’s economy only aggravates the above challenges. For example, within the last two years alone, China’s currency has appreciated by 20 percent, the VAT rebate on exports was reduced to almost nothing, oil reached $150 a barrel before falling back again, and a new labor law has gone into effect. The combination of these changes has cost many Chinese exporters about 30 percent of margin. (Interestingly, as this article is being written, China is again raising the VAT rebate for a number of products in response to the duress of many Chinese exporters.) The ripple effect to Western companies’ sourcing strategies has been equally disruptive as costs have gone up, suppliers have abandoned ship and transport costs from China to the West make current sourcing patterns questionable. Planning for China is like shooting at a moving target.

What do you think?

3 responses to “How to Have a China Ready Supply Chain”

  1. Thanks for the link, Dan, this is a good article. I’ve been seeing a lot of irresponsible articles advising people to get out of China and set up manufacturing elsewhere (as if anyone had the capital to do that right now). So it’s nice to hear Steven advise people to deal with their problems instead of running away from them.
    Chinese manufacturing is moving up the food chain, financial crisis or not. Electronics and semiconductor suppliers, in particular, will considerably expand in the next business cycle (much less ‘flee’ mainland China). Managing these supplier relationships is becoming more complex. And more important, because your competitor is sourcing from the same facility that supplies you.

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