By Steven H. Ganster
For a successful supply chain in which China is a main source of your raw materials or destination for finished goods, you need to operate in a high state of readiness. The combination of stark differences in business systems with the West, long travel distances, and constant and sometimes turbulent change make it imperative that you have a "China-ready supply chain." This article first describes why your supply chain needs to be "ready" and then discusses the key attributes that indicate a high degree of readiness for doing business well with China and getting excellent performance from your supply chain.
Whether China is "here to stay" as a market is no longer a debate. Depending on which economist you believe, China will be the world's largest economy in about 15 to 20 years. Further, China is so inextricably intertwined with the global marketplace that, like it or not, China will affect you, your customers and your supply chain. China is not just another emerging market that will move from a sunrise to a sunset state, politely giving way to the next "hot market." China is a locomotive economy. The group of G8 countries now patronizingly reaches out to emerging countries like China to be unofficial members of its elite group (what is now known as the G8+5). In reality, China has economically blown by most of the G8 markets, like Russia, France and Canada, to name a few.
In short, we must proactively deal with China. Any global strategic plan without China as an integral part needs a reality check. Despite its rising costs, China can still be considered the workshop of the world, boasting exports approaching $1.5 trillion in 2008. At the same time, China's 1.3 billion consumers present an almost unimaginable latent market potential for a broad range of goods and services. As a result, our supply chains are umbilically connected to China's economic womb.
In preparing your supply chain to be China-ready, a number of key challenges must be addressed:
- China's vast and complex market landscape. China crams its 1.3 billion citizens (estimates of China's population range from 1.2 to 1.5 billion, the margin of error being the size of the United States) into a space the size of the continental United States, and it boasts more than 170 cities with a population exceeding 1 million residents. Almost 70 percent of economic, trade and investment activity is focused in a small group of provinces along the east coast, yet China's domestic infrastructure is very inefficient. As a result, moving goods within China takes time and costs a lot of money. Transport costs can be 40-50 percent higher than comparable figures in the West. There is a shortage of railway and river transport capacity, internal toll rates can be obscenely high, and the technology of the freight movers and handlers is pathetically low.
- Opaque financial and legal systems. Those active in China know that things are often "gray." Many Chinese firms will have two or more sets of books, with the real numbers in the head of the owner. While many new laws are being promulgated, their interpretation (not to mention enforcement) leaves much to be desired. China is still a country of "rule by man" versus "rule by law." This lack of transparency makes it difficult to know what your real costs are and certainly makes it hard to know with whom to do business and, of course, whom to trust. As a result, financial planning must be done with an uncomfortable level of uncertainty.
- Huge cultural and business system differences with the West. In the scale of human development, China's economy would be barely out of adolescence. Business systems are immature, and Western-style management experience is hard to find. This is coupled with sharp cultural differences with the West in terms of values, communication style, organizational hierarchy and even life experience. Understanding and appreciating the differences in business culture in China is one of the most underestimated challenges faced by Western management. Intertwined with these business and cultural differences is a pervasive level of corruption, either outright graft or more subtle gray tactics in business practices that often depend heavily upon relationships (guanxi). Progress in this area is taking place, such as in intellectual property protection, but it will take generations to fully eradicate the old ways of doing business.
- Rapid pace of change. The constant dynamism in all aspects of China's economy only aggravates the above challenges. For example, within the last two years alone, China's currency has appreciated by 20 percent, the VAT rebate on exports was reduced to almost nothing, oil reached $150 a barrel before falling back again, and a new labor law has gone into effect. The combination of these changes has cost many Chinese exporters about 30 percent of margin. (Interestingly, as this article is being written, China is again raising the VAT rebate for a number of products in response to the duress of many Chinese exporters.) The ripple effect to Western companies' sourcing strategies has been equally disruptive as costs have gone up, suppliers have abandoned ship and transport costs from China to the West make current sourcing patterns questionable. Planning for China is like shooting at a moving target.