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Using China as a Resource to Stay Competitive in the USA

By: Doreen Huro Michelini and Simin Zhou, New America Partners

It has become a fact of life for most small to medium sized U.S. manufactures to look to China as a resource to stay competitive. As U.S. wages climb, these companies are finding it increasingly difficult to stay competitive and meet their customer demands to reduce costs. It has also become more common for large corporate customers to demand that their suppliers join them in China as part of their supply chain. For those forward thinking companies, this can open the doors to opportunity. High labor projects relocated to China can see a reduction in cost of up to 50% due to lower hourly wages; including benefits, hourly wages are between $0.80 and $1.50. Another benefit of China is the large labor pool. In many areas of the country this has helped keep the hourly wages under one dollar.

But what about the skill set of the workforce? You will find the Chinese to be very well advanced in the area of education and training and are eager to learn new skills. In the southern part of China, where it is customary to house the workers in dormitories, after hours are spent taking classes in English, SPC methods, Kaizen, Lean Manufacturing and ISO/QS procedures. You may be surprised to learn that the majority of young, upcoming Chinese workers can either speak or understand English. This can be attributed to the fact that 90% of those customers, who visit are either from the U.S. or an English speaking country. The young Chinese worker understands that the road to advancement starts with the ability to communicate with the customer.

China also boasts to having some of the most modern and advanced factories in the world. It is not uncommon to visit newly built facilities with the latest equipment and processes in place. The Chinese are also good at planning and tend to build their facilities twice as large in anticipation of future growth. This allows them the ability to provide space to other companies that compliment their business. What company wouldn’t want to have their suppliers and needed services under one roof!

It has also become increasingly easier for business travelers to travel to China with new hotels and restaurants that simulate a western environment. New airports with hundreds of daily flights throughout the country along with comfortable trains and busses make getting around easier and faster.

With all that China has to offer, there are also areas of concern that should not be taken lightly. The greatest concern is the protection of Intellectual Property. Everyone is familiar with the stories of knock-off watches, purses, golf clubs and CD’s. Although China is probably the biggest producer of these items, other lower cost countries are also guilty of these practices. The companies who should be weary of manufacturing in China are those with products that are manufactured by proprietary processes. For these companies, if reducing cost is a must, they should consider sourcing components, tooling, or separating processes, if possible. Also, China has its own trademark and patent systems, so filing should be one of the first things you do.

Another area of concern is the reliability of utilities. In many regions of China there is a power shortage that dictates a mandatory shutdown of all electricity one day a week. This can wreak havoc on your manufacturing schedule since in many cases that shutdown day may vary from week to week. Phone service, although inexpensive, is not always reliable. Consider using fax and email as alternative modes of communication and proper planning is very important to manage the uncertainties.

The biggest advantage of manufacturing in China goes to those who routinely ship to customers in China or its neighboring countries. This allows for shorter lead items and lower cost of shipping as well as a local office that can communicate directly with the local customer in the same time zone avoiding those late night crisis’ and phone calls. Other advantages include low cost tooling which can allow you to get to market faster with less cost.

Those companies whose projects have little “hands on” labor can also use China to their advantage. Plastic injection molders and metal stampers are manufacturing with Class A tools made in China and imported to the U.S. at a fraction of the cost. Tool and die makers can work with the Chinese counterparts having them machine high labor components for assembly into tools made in the U.S. These situations take advantage of Chinese low cost labor, but still allow the day to day manufacturing to be still performed in the U.S.

To stay competitive in the U.S., small to medium sized companies need to look at China as a partner rather then a competitor. Whether it’s entering into a joint venture, sourcing high labor components or opening a satellite facility, the key to success is an open mind.

Simin Zhou and Doreen Michelini are part of New America Partners, a Boston based investment firm that specialize in providing capital to U.S. companies who can benefit from a China strategy. For a free assessment on whether your business is right for a China strategy, please contact Simin Zhou, Vice President, at [email protected] or 781.839.7066.