Vecta on China

Vecta Consulting

Vecta on "Made in China"

Just when you thought you had used technology to squeeze all but the minimum amount of labour from your product, a competitor comes up with a simpler, more labour-intensive, approach sourced in China or India at a fraction of your cost.

The playing field has tilted irreversibly in favour of the East and South.

Now firms, more than ever, can only afford to make or do things that noone else can make or do and then possibly only those parts that noone else can make or do to the time, quality or price required.

Finding the right way to include China or India in the right parts of your value chain has become key to survival. If they are too far away, Portugal or Poland may have a similar answer.

Established competitors may master China sourcing before you; worse still, a China source with little regard to intellectual property protection or environmental impact, can emerge to take the game away from all established suppliers.

Labour costs have already been squeezed out of manufacturing by 24/7 automation; global marketing has made it possible for one or two suppliers to meet the global demand for a product.

Risks have increased. Capital and development costs have increased. Political risks have also increased as the great technology monopolists have discovered.

And a Chinese supplier, without the massive capital or design investment can still come up with a competitive part that, although labour-intensive, is deliverable at much lower cost.

If you can't beat them, join them goes the saying.

Developing and taking a global product to market alone is now virtually out of the question. Local manufacturers may be used for heavier products and have to be used when labour costs are significant; licensing, or options on licensing, may be the best option to generate maximum value in the shortest time; otherwise suppliers rely on wholesale and retail partners for distribution.

The preference should always be to buy volume parts, and buy from the lowest total cost source, taking account of logistics, quality, and other costs that may increase as you offshore parts of your operation.

If you cannot buy economically then consider a collaboration to reduce prices or costs, share risk, or reduce time to market and cash.

Only if all else fails should you make; noone is lowest cost and best provider in all aspects of their value chain.

There are always opportunities for those who focus on the application-specific aspect of the product that delivers most vlaue to the user. Fortune no longer favours those who carry unnecessary features into their products if those features incur a user cost in resources used, reliability, or cost.

How do you ensure that your products combine the lowest cost commodity parts and the best available product and process technology so as to minimise costs while maximising performance?

How do you ensure that your foreign partner is trustworthy and reliable?

How do you know when it is time to change the partner?

All suppliers understand the China price in their uindustry but many do not understand the China cost. There are risks:

China is a long way from home, restricting the practical frequency of routine or ad-hoc visits;
That distance restricts agility, restricting the possible intensity of innovation;
New technologies cannot readily be initiated in China due to both distance and risks of IP leakage;
Chinese business culture is very different; blood and community connections can be stronger than contracts;
Financing a Chinese venture can be very expensive; ask Pat.

However, those risks can also create opportunities. Maybe somewhere lese is better for you; maybe you can succeed.

What should you retain yourself?

Which form of collaboration - licensing, purchasing, consortium, JV, investment - is most appropriate in which situation?

How do you ensure sustainable win-win for the partners?

How long should the partnership last?

How many partnerships do you need?

We can help you decide if, how, where, and when to collaborate; how and with whom.

"Made in China" is becoming increasingly necessary to maximise financial return as product development costs and risks escalate and costs of capital and/or labour are lower elsewhere. Choosing what and where to source key parts with the right partners using the right forms of collaboration is the foundation. Changing partners from one product generation to another is also necessary to minimise the threat from market disruption as other areas and suppliers become more competitive. Emerging economies, such as China, India, Russia, and Brazil or - closer to home - Poland or Portugal - are the disruptive economies of today - large markets that can only be satisfied by local manufacture; but that local manufacture rapidly reaches the scale to outsupply the local market creating a dash for exports that undermine other economies.

Our Operations Experts Network is dedicated to exploring the key issues related to developments in business performance. This involves projecting the evolution of enterprise and plant level functionality, identifying strategic business needs and understanding revenue models and valuations.

Our extended network ensures we have the expertise to help you solve just about any business or technology problem.

More info from:

Frank.Morris@vecta5.com

Vecta Consulting Limited, Mulberry House, 2 The Spinney, Broad Lane,
Cottenham, CAMBRIDGE, CB4 8RN
Tel: +44 (0) 1954 250222, Fax: +44 (0) 1954 252333

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