If you can't Beat 'em Join 'em. Working with/in China
Many companies are wrestling with how to address a changing competitive environment as Asian companies and specifically Chinese companies gear up their industrial capabilities and capitalize on low cost labor. While choosing to compete in specialty areas is a viable option; many companies are looking to operate in or work with Asia. Some reasons to assess working with Asia include:
Customers require Asian sourcing for competitive pricing
Customers continue to move production facilities offshore and want their supplier base to be located near these facilities
Asian markets are emerging growth opportunities and regional production facilities are important in order to meet the demand for this region.
In this article we explore the above options through company interviews with three different companies to gain insight into how each company approached the above issues and learn from their experience.
Power Electric - Design to Leverage Asian Competitive Advantage for US Customer Base
Power Electric provides motors to its customers. Power Electric found that its customers wanted the advantage of low cost motors made in Asian without having to deal with the sourcing and logistical problems. Richard Pula saw this as an unmet customer need and set up Power Electric to specifically meet this need. Power Electric sources products from low cost producers (usually in Asia) and provides logistics support for their US customers. Power Electric not only sources product from Asia, they also integrate and assemble them, when necessary in the US with specified US produced components. Power Electric was one of the pioneers in China, working to qualify sources that would produce the quantity, quality and timeliness of product to meet US customer requirements. Power Electric chose to see China as an opportunity rather than as a threat.
Keys to Power Electric's success:
Identification of a market unmet need
Ability to evaluate Asian manufacturing facilities and accurately assess production capabilities and quality
Ability to understand what would work in Asia vs. what still needed to be done in the US
Knowledge of import/export logistics
Ability to provide JIT or consignment inventory to customers, thus shielding them from long lead times due to shipping
Work with facilities who already have Western-style quality systems in place (e.g., ISO and statistical process control)
Source only those items where the production capabilities actually exist - not ones that were under development - if you do not see it, assume it cannot be done
Use NCNR - non-cancelable, non-returnable contracts, insist on contractual agreements with the customer - if you are going to hold inventory for JIT delivery or on consignment be sure you have a contract that ensures that all production will be purchased and that there are timeframes for release of product to the customer.
Increased Demand in Asia for CommScope Cable Product
CommScope, the leading producer of high quality coaxial cable, has enjoyed growth, not only in the US, but in global markets where coaxial cable is required to meet the needs of an increasingly affluent population in emerging regions. Over the years CommScope's strategy has been to locate regional production facilities once demand reaches a certain level to ensure that products meet unique regional requirements and regional demand. As demand increased in Asia, CommScope saw the need for an Asian facility. In evaluating sites, CommScope found countries that had lower cost of labor than China. However, it was the low cost labor combined with the ability to source raw material needs that made China the ideal location for CommScope's Asian facility.
Keys to CommScope's Success:
Draw on lessons learned from industry contacts with significant experience in China. This shortened the learning curve.
Workforce recruitment processes: Recruit, filter and develop criteria
Supplier support--US and global suppliers supported CommScope's start-up in China
Leveraging reputation for quality- CommScope's cable is the recognized industry standard in coaxial cable and, as demand increased, the desire for quality product also increased.
Recruit Chinese nationals working in US who wanted to go back. These people act s a cultural bridge, they understand both US business culture and Chinese culture and can facilitate communication
Since it takes two years for an employee to become proficient it was important to motivate them to stay
Most of the industrial parks are built on farm land - hire people who used to live on this land rather than those coming in from the provinces. Those that come in from the provinces tend to stay 2-3 years then head back home. For those who used to work the land - this is home.
During the recruiting process for factory workers, give prospects a facility tour so they can see what it would be like to work at the facility - 20% will screen themselves out because they do not want to do the work they see. Easier for them to screen themselves out before they are hired than to have them leave after they have spent several weeks in training.
Develop perks for the workforce: long-term bonuses for staying, housing perks, educational assistance that must be paid back if the employee leaves
Provide a good place to work with a family environment, communication and addressing people's concerns (this does not come naturally to all Chinese management)
Great food--great food doesn't cost much more, but is greatly appreciated
Treat people with respect
English is a job requirement for management personnel
Customers Move Production Facilities Abroad and Expect Suppliers to Move with Them - M&C Specialties
M&C Specialties' customers requested that M&C locate a production facility close to their Chinese production facility. In order to meet this customer request, M&C, known for their adhesives converting expertise, first developed a joint venture in China in 1998 when wholly-owned foreign subsidiaries were not yet an option. M&C found the JV unwieldy, due to the different objectives of the partners. When the laws changed , M&C chose to set up two wholly-owned subsidiaries in China in order to meet its customer needs better. M&C then transferred the technology resident in the US so that these facilities would mirror US capabilities.
Keys to M&C's Success:
Finding a key person on the ground to run the wholly-owned foreign subsidiary; M&C selected a Chinese national from one of M&C's customers
Being open to blending the US way of doing things with Chinese culture and different manufacturing realities
Swapping people back and forth between US and China
Learning the Chinese culture
Hiring people who can speak English--English is paramount for communication
Hiring younger, less experienced talent, who are more open to taking initiative (Chinese people with experience tend to do what they are told rather than thinking up new ways to do things)
Don't assume what works in the US is necessarily right for China. Due to the relative differences in the costs of labor and raw materials inputs, one process was more efficient in the US while another was more efficient in China. For example, given the high cost of labor in the US, items that were defective were not reworked. However, in China due to relatively low cost labor and relatively high raw material cost, defective items were reworked. In addition, due to high raw material costs it made sense to run the machines slower in China to reduce scrap
M&C finds that the Chinese management associates are highly innovative, specifically in factory automation. M&C now brings its Chinese associates to the US to enhance the use of computers and further automate the US manufacturing facility.
Don't assume that normal US business processes are in place in China. Everything is different, even routine processes like transferring funds and bank deposits-- it takes time to learn how the system works.
Training takes longer than expected
Asia Provides Needed Competitive Edge: Heat Controller
Conditioned air: heated, cooled, humidified, de-humidified - the US market is not only big, but also very competitive. The competitive nature of the market caused the Heat Controller team to assess alternative sources for its conditioned air products. The team found that a combination of solutions worked best and included the following:
US supplier with Asian production facilities
Korean supplier with world class production and quality
Thai supplier, interested in low volume specialty items too small to interest the big players
Constantly evaluating sources based on the product/market requirements to ensure the supplier capabilities and product requirements are a fit
Heat Controller finds that the mix continues to evolve as product requirements change and supplier capabilities are enhanced.
Keys to Heat Controller's Success:
Continuously look for new ways to provide products to meet evolving customer needs - solutions depend on the product - on size (one supplier) does not fit all needs
Reliance on trusted partner (fluent in many Chinese dialects and Asian cultures) to develop sourcing options
Frequent trips abroad to inspection current facilities and look at additional options
Make sure suppliers are financially sound through due diligence - talk to other vendors, other suppliers and check D&B if available
Tour facility to understand their manufacturing and quality processes
Understand the company's philosophy, long range plans, goals and objectives - are they consistent with your objectives? Are they looking for a high volume commodity product when you are looking to develop a market and the volumes will start out small? If so, this is not a fit!
Develop a checklist of requirements - this list will grow as you learn from your experiences. Heat Controller received a shipment with damaged packaging due to high moisture content. The checklist now includes the number of moisture absorption bags required by size of shipment to prevent repetition of this problem.
Have a solid insurance package - check and check again
Communicate - get to know your contacts, make sure they understand your company's goals and objectives. Make sure they know what is important to you. As personnel changes occur you must re-educate. This will take time, but will prevent issues from arising.
Use the competencies of your suppliers - if one of your suppliers has more leverage in the logistics area use them to move your goods across the ocean and perhaps to the final destination.
Develop your own Installation and Operation (I&O) manuals - suppliers may offer, but this is one area you need to control due to language differences.
Key Points Learned Across the Board
Everything must be in writing - document, document, and document!
Learn your supply chain - where are the risks? How can you mitigate the risks?
Develop concrete agreements with your customers; consider non-returnable, non-cancelable contracts
English is the language of business - but beware of cultural nuances, "no problem" means you better take a second look
Understand the impact on manufacturing processes that differences in the relative costs of the factors of production in China have on your manufacturing process.
The squeaky wheel gets the grease - if you are sourcing goods from Chinese manufacturers, be there, be visible, inspect, keep up the communication
The legal framework is not developed. However, in place of the pluses and minuses of a legal framework is a slow bureaucracy - you have to work through this and it takes time
A Chinese initiative takes a full-time resource - do not make this a part of someone's job - make it their whole job
The amount of support required will far exceed any other global expansion opportunity you may have pursued in the past
Be aware of corruption, a diminishing but lingering problem
Spend time hooking up with friendly industry contacts - it will shorten your lead time.
Ceremonial parts of the culture are overplayed, they don't expect you to fit in - but you must be respectful
Be accepted as an American company--be local, be friendly
Quality is improving significantly in Chinese manufacturing facilities
Take the time to learn the Chinese culture
Chinese companies are beginning to understand the importance of intellectual property protection for their own goods and services. This heightened importance for the Chinese nationals will aid enforcement as US and other foreign companies for protection. As the Chinese business community develops, this protection will continue to evolve.
In some cases, there is nothing to protect: motors, Power Electric's product, have been around for over half a century, and while there have been some advancements, there is no new news and nothing to protect. Power Electric finds that the uniqueness of each customer's application set specific requirements not applicable to a mass market, so there is little incentive to produce like products.
Some companies choose to have several manufacturing facilities so that the whole process is not resident in one place. CommScope has a twist on this theme. While the whole process is in one facility, the workforce is not cross-trained and no one knows the complete process.
Use non-disclosure/non-compete contracts for management employees to discourage their leaving to join a competitor.
Where to find help:
Suppliers in the US who have Chinese sites
Multi-national consulting groups (e.g., Mercer for recruiting, HR packages)
Local consultants (least helpful due to conflict of interest)
Consider using engineering consulting firms
Intertech/Science Center International
Meeting prospective manufacturers at trade shows
Capitalize on past relationships in Asia
Attended State of Michigan and banking seminars - however, these were not as helpful.
As your company addresses the threats/opportunities that China provides, do it thoughtfully-learn from others' experiences as to what issues need to be addressed and, only after careful consideration and research make the move the will give you the best future results.
Denise Harrison is a Consultant with Center for Simplified Strategic Planning, Inc. SHe can be reached via e-mail at
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