Description

More and more companies are moving their manufacturing operations to China to take advantage of lower costs. In order to remain competitive, companies are forced to explore these and other low cost approaches to manufacturing. Addressing this issue has never been as critical as it is now. However, there are a number of questions that companies must examine before they can make an informed decision:

• To what degree can China be used as a low-cost sourcing base for the Western market?
• What is the value of preempting a domestic or Asian competitor who decides to use Chinese factories?

This article helps explain and answer questions like these and develops a framework for making the crucial decision.

 Key Thoughts

There are three major issues that come to light when thinking about moving plant operations to China: economic benefits, barriers, and timing.

• Economic Benefits: When assessing a shift to Chinese manufacturing, companies need to evaluate all benefits, including labor, productivity, transportation, and inventory. This needs to be done at all levels of the value chain. It is also important to consider economic risks such as the protection of intellectual property. Many companies that make innovative products have been careful to avoid China when manufacturing components with high intellectual property content. In a recent case, General Motors in China was unable to stop Chinese carmaker Chery from making an automobile that resembled, almost exactly, GM's Spark.
• Barriers: Although cost-cutting frequently outranks other considerations in determining a manufacturing footprint, companies need to look beyond and see the bigger picture. In some cases, companies may have to pay additional amounts for more rapid response from Chinese manufacturers. Another barrier to entry is transportation. For many products, transportation economics from China are actually unfavorable. For example, sewage tubes and tires have unfavorable transport economics since companies pay for shipping "a lot of air."
• Timing: A shift to Chinese manufacturing is by no means a short-term decision. Rather, it is a strategic initiative that needs to be understood on all levels. Companies need to understand how the demand/ supply balance looks in China: Is this a good time to make the move? How does the regulatory environment look?

 Conclusion

There are many factors to consider when a company is thinking about fundamentally changing its manufacturing footprint. Cost factors alone should not dictate manufacturing decisions. Still, there are great cost savings and economic benefits that can be realized in China. By assessing all factors, executives can understand how and why utilizing Chinese manufacturing can add value to their organization.