China is such an interesting subject! There is so much going on out there, so following the recent news about its stock market instability, I decided to share my thoughts on some developments.
During my 2-week visit to China last May, I got a sense of how the economic downturn is impacting the ‘awakened dragon’. After talking with several entrepreneurs, market experts, government representatives, University professors and multinational senior managers there, I realized that their hunger to grow hasn’t diminished and they are looking around to find alternatives to pick up the slack of a weaker export sector.
At the same time, Chinese citizens are becoming more educated and the consumer market is growing, with more consumers and higher incomes. Here are my thoughts on some particular changes:
- There is a high level of unmet domestic needs, especially given the internal mobility (people moving from country side to larger cities), so Chinese companies are turning internally to support growth. The economic crisis is only accelerating this process.
- China is also looking to expand partnerships and trading agreements with countries in Latin America and making inroads with other developing countries worldwide.
- The government wants to transform the country from a manufacturing hub to one of more value-added activities, like services and alternative energy (they are the #2 wind energy producer today).
- Chinese are giving more importance to development of their own brands rather than manufacturing goods for multinationals. See examples of Lenovo (“Global Company with Chinese heritage”, wants to be #1 international brand for computers) and Huawei.
- The market is demanding that Chinese manufacturers meet environmental, health, and safety standards (better quality and control from products made in China). American corporations that have supply chain ties to China want to keep and attract consumers with green awareness. For example, Wal Mart has announced that the top suppliers in China will need to become 20% more energy-efficient by 2012 (“Wal-Mart: Making Its Suppliers Go Green”, Business Week 14 May 2009). More educated Chinese citizens that are beginning to protest against pollution and environmentally unfriendly practices, which is also another factor to increase pressure in pro of the green mandate movement.
All of these changes will have some impact on Supply Chain practices, including plenty of opportunities, whether you are operating in China or not:
- Multinationals have the opportunity to review their strategy to serve the Chinese market, but they need to understand its complex environment first
- Incentives for manufacturing might not be as attractive as in the past, unless it is in an industry in which China lacks knowledge and that the government is targeting for development (like energy and services)
- It’s becoming expensive to establish manufacturing in the more developed provinces; some companies are looking to relocate to more remote areas in the country
- Increasing competition will require Chinese companies to improve quality and productivity. In general, software systems are still not well developed and there are a lot of opportunities for software firms to sell to local companies (inventory control, manufacturing execution, supply chain management systems to name a few categories)
- In the short term, the “green mandate” may increase cost and force some companies to look for sourcing alternatives. Companies interested primarily in competitive prices may have to look for new suppliers. Could this benefit other countries, like Vietnam?
There are certainly many changes happening in China and although we don’t know what will happen given the number of variables, one thing is for sure: everyone has an opportunity to succeed. Others have already blogged here about the fact that outsourcing to China is not as easy decision as it used to be due to the rising costs over there, so I did not even include this other important change in this discussion. It’s important to be aware and reflect about how the local and macro changes are impacting China and your business – how are you reacting? What’s your bet?