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Doing Business with a Pricier China

Why western companies should develop buyer relationships with China cautiously



Wednesday 26 November 2014



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In a recent talk at NUS Business School in Singapore, William H. Strong, former co-CEO for Asia Pacific at Morgan Stanley, was upbeat about the region's future prospects. He told an audience of students, faculty and industry professionals "I think this century is going to be the century for Asia-Pacific... I think you're at exactly the right place at precisely the right time."

On the other hand a recent survey by NUS Business School professor Neale O’Connor reveals new cost challenges for China-based suppliers and highlights the need for western companies to be cautious in how they develop their buyer relationships with China, the dominant economy in the region.

Although China maintains the strengths that it made it the go-to supply source in the first place, vis-à-vis other countries, it is facing significant new pressures on costs, and this needs to be born in mind by buyers.

Professor O’Connor, Founder and Director of the China Supplier 1000 Project, conducted face-to-face interviews with 1,000 suppliers in China and Hong Kong and found that, while suppliers in China continue to be in a good position, they are also facing some economic challenges. Wages are starting to increase (as they inevitably should in the growing economy); companies are facing a labour shortage, which will only be compounded in the future as the country’s population continues to become proportionally older; and the strength of China’s currency further puts it at a disadvantage compared to competing countries.

More than 50% of the Chinese and Hong Kong suppliers surveyed, recognizing the dangers ahead, said they were ready to take steps to improve and better manage operations. Their focus would be on improving production quality and efficiency, as well as R&D.

However there are lessons for western buyers for example:

  • One concern is that suppliers might start to take nefarious cost-cutting measures, including cutting corners, reducing their workforces, or missing their delivery deadlines. Buyers might eventually find suppliers even refusing orders.
  • One response, already undertaken by some buyers, is to start a China + 1 policy, which is to source supplies from China but also to have a source in another of the emerging markets to hedge your bets.
  • Buyers must also carefully manage their relationships with suppliers, ensuring continued rigor in their operations.
  • Finally, buyers can go further and consider supporting their suppliers by investing in improving their production capabilities; some buyers, for example, have invested in machinery and tooling for their suppliers. Such a strategy may seem to defeat the purpose of outsourcing; however, if the alternative is acquiring or building fully owned production facilities in low-cost developing countries, with all the social and political problems such a move would entail, investing in the success of their suppliers will have an immeasurable ROI.


This short video from NUS Business School's China Business Centre gives a background to the current state of China’s economy.




 
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