December 2005 | Commentary | Viewpoint

Building a China Strategy

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Every manufacturing company needs a strategically focused business plan for outsourcing supply chain activities globally. Too often, near-term pressures to reduce product costs or increase overall profitability precipitate outsourced or supplier recruitment activities in product design, manufacturing, and logistics.

The decision to source value chain activity in China is certainly no exception.

While the pressures to outsource some—or even all—manufacturing to China continue to mount for many manufacturing-oriented companies across industries, the need for a long-term, well-thought-out strategy cannot be overemphasized.

Companies should make outsourcing decisions in strategic context, and should have a risk-and- reward assessment that balances the benefits of low-cost manufacturing in China with a broader need for access, leverage, and distribution to growing markets in China and the rest of Asia.

To ascertain the obstacles and challenges related to supply chain activities within China, Manufacturing Insights, an IDC research advisory company, recently interviewed companies that have embarked on the China outsourcing and supplier recruitment journey. The company also analyzed benchmarking and other fact-based research data related to supply chain activities in China.

Here are some observations and conclusions:

Current and future risks for China lie in five key areas: intellectual property protection, in-country infrastructure, supplier relationships, logistics/transportation, and the potential for national/political event disruption. Intellectual property protection is most consistently cited as an overall concern. Logistics and transportation within China's interior regions are also troublesome, and need constant attention.

Very few manufacturing companies rate their current supply chain activities in mainland China as "highly effective." Companies can take nothing for granted when managing day-to-day activities involving China operations.

Strategies for incorporating value-chain activities in mainland China remain mixed, and reflect regional and industry dependency. Industries such as high-tech semiconductor and consumer electronics are deeply involved in China, but other industries are rapidly expanding their presence.

Manufacturing companies need to be diligent in understanding obstacles. Businesses must weigh and analyze the trade-offs of low-cost production with added transportation cycle time, inventory, and other landed-cost variables.

An overall strategy for China should balance net production—exporting manufactured products for consumption in other geographic regions, with net consumption—manufacturing products within China for the Chinese and greater Asian markets.

If the primary motivation for sourcing within China is labor cost savings, firms should realize that China is experiencing both labor cost inflation and the prospect of continued currency revaluation. Chinese manufacturing companies will attempt to offset these trends with continued investments in advanced technology, and manufacturing agility and productivity.

China needs to beef up its resident information technology and infrastructure to compete with India's IT capabilities. Because China has long-term potential to become the world-dominant manufacturing powerhouse, manufacturing firms need a strategy that incorporates China into an overall framework of global outsourcing and markets.

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