Wednesday 14th Nov 2018 - Logistics & Supply Chain

Dual approach to China most profitable, says study

The advantage of China solely as a low-cost, manufacturing-for-export market is diminishing. Companies that integrate China into their global supply chains as a source of competitive advantage are far more successful than companies that pursue narrower objectives in China, finds a study jointly conducted by management consulting firm Booz Allen Hamilton and the American Chamber of Commerce (AmCham) Shanghai.
 
More specifically, companies that pursue China as both a growth market and a market for lower-cost labour and sources, and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives. Companies that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 per cent compared with 17.8 per cent). Despite the returns that this approach can generate, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations.
 
The first annual study, China Manufacturing Competitiveness 2007-2008, found that while a stronger Chinese currency and rising wages were putting pressures on manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labour and products are also limiting profits. 
 
‘The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,’ says Ronald Haddock, vice president, Booz Allen. ‘China’s changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy. At the same time, China is increasingly a major source of product and business model innovation. We’re seeing globalisation at work and China’s role has changed.’

More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China.   
 
Among the study’s key findings:
Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market  penetration. Survey respondents cited a number of best practices that have yet to be fully applied in China.  Just 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP).  Even fewer companies – only 7 percent – had fully deployed analytical inventory calculation tools and processes, and 4 percent employed best practices for supply chain risk management.
Declining competitiveness: More than half, or 54 per cent, of companies surveyed believe that China is losing its competitiveness  to other low-cost countries. Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 per cent of those polled. Wages for white-collar managers and blue-collar workers have jumped 9.1 per cent and 7.6 per cent, respectively.     
Companies eyeing Vietnam and India: Nearly one in five companies surveyed (17 per cent) say they have concrete plans to relocate at least some of their China-based operations to other countries. Although 88 percent of these corporations say that they originally chose China for its  lower labour costs, they are finding that cheaper labour and tax benefits have  made alternative locations more attractive.
Majority staying in China: Despite the rising costs of manufacturing in China, 83 per cent of manufacturers said they will maintain their operations in the country. China’s vast domestic market was cited by 78 per cent of respondents as the reason to maintain the status quo, while 39 per cent were unwilling to establish a new supply chain, motivating them to remain in China.

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