The China Price and why China should buy Wal-Mart

Many know that the “China Price” has been, for so many years and decades, a reason why so many companies have come to China to source products from all over the world. It’s been written so many times that China is the factory to the world. Most people already know this. Most people also know the story of Wal-Mart and China. If you don’t, then do some searches on Google and you will find plenty of information that talks about how Wal-Mart sources a high percentage of their products from China and how, over the years. This along with their operational excellence in their supply chain has helped them to destroy their competition. Wal-Mart is possibly one of the largest driving forces of China being the factory to the world. Also, Wal-Mart is what any large scale supplier in China would wish to have – a connection to the final customer. The greatest amount of profit is secured through this demand chain and it is the final battle for Chinese companies that currently export to the world but have ambitions to go where Wal-Mart is today – being the end retailer to the world and not the low cost supplier. Look below on the reporting done by FRONTLINE in 2004 at PBS examining the close relationship Wal-Mart has with China and how Wal-Mart, as a retailer facing the customer and owning the demand chain, has changed the ownership of power from the supplier to the retailer.

FRONTLINE explores the relationship between U.S. job losses and the American consumer’s insatiable desire for bargains in “Is Wal-Mart Good for America?”. Through interviews with retail executives, product manufacturers, economists, and trade experts, correspondent Hedrick Smith examines the growing controversy over the Wal-Mart way of doing business and asks whether a single retail giant has changed the American economy.

“Wal-Mart’s power and influence are awesome,” Smith says. “By figuring out how to exploit two powerful forces that converged in the 1990s — the rise of information technology and the explosion of the global economy — Wal-Mart has dramatically changed the balance of power in the world of business. Retailers are now more powerful than manufacturers, and they are forcing the decision to move production offshore.”

“Wal-Mart has reversed a hundred-year history that had the retailer dependent on the manufacturer,” explains Nelson Lichtenstein, a professor at the University of California Santa Barbara. “Now the retailer is the center, the power, and the manufacturer becomes the serf, the vassal, the underling who has to do the bidding of the retailer. That’s a new thing.”

Let’s repeat the above one more time – “Now the retailer is the center”. Now to examine some trends and get back to our Wal-Mart perspective in a few minutes. Given the current conditions in the marketplace see our article on 4 reasons why the “China Price” is changing with increases from raw materials to labor and oil reaching all time highs, many are saying that the factory of the world will lose its customers to emerging markets like Vietnam, India, and even back to Mexico for many US companies. The pivotal point is that “customers” are moving and not Chinese companies (albeit many Chinese companies are even diversifying their operations to a variety of Asian and foreign countries).

Losing power to the retailer? Chinese suppliers being just another commodity? China, as a country, being another commodity and being replaced by countries like Vietnam, India, and Mexico? What is China to do? What can they do to not be just another low cost country provider?

This article by David Barboza published in the Global Policy Forum in 2005 relays the changes China has embraced to battle these changes. Take a look below.

“The future goal of the company is to make the name Great Wall known across the world,” said Liu Rengang, a spokesman for the state-controlled Great Wall Computer Group. A spokesman for Ningbo Bird, one of China’s biggest cellphone makers, sounded equally ambitious: “Our future goal is to become one of the top three cellphone manufacturers in the world.” China’s Ministry of Commerce reported this month that even though China’s exports are dominated by consumer products, few famous Chinese brands are involved in the export trade. Most goods are being shipped abroad with foreign brand labels.

To rectify the situation, the ministry called on Chinese companies to start exporting their own “famous brands.” Every region was ordered to produce its own famous brands. “We need to cultivate a group of independent famous brands that have international influence,” the report said. “Each industry needs to have its own famous brand for export.” The thinking behind the effort seems simple: imitate the foreigners.

So let’s add some background and analyze some other important elements in the world and about the business of retail and reach – reaching the customer is not easy to say the very least…

Massive Growth in Spending among Emerging Economies – Opportunity for China and Chinese Suppliers?
Massive growth in consumer spending due to emerging growth in the economies of Brazil, Russia, India, China (BRIC countries). This creates demand for products and services to say the least. There will be so many new companies in all these countries expanding into retail…but do they have the savvy to be leaders? Many of these national retail companies will have local expertise, but even that can be overcome for patient and visionary companies. The key aspects here is that many of these countries and the companies to entrepreneurs will come to China to source and buy products to import into their countries. This will be a rising trend even as the China Price is going up.

Massive Changes in Information Technology – is China keeping up? Can Chinese companies compete?
Massive changes in information technology – people have at their fingertips the power to reach beyond their resources. Using the Internet what can you not do? The Internet has made the consumer immensely powerful and the new generations of consumers are possibly the most incredibly informed group of people ever. This means you just can’t sell at any price in a large scale nor can you just setup a store anywhere and think you can get customers to come to your store because you are new or have great service. People have information and in the near future, this will be instantly available on their phone – they will know that your store is not competitive on prices and that your services were not well regarded by 10 customers just yesterday.

Operations, Logistics, Process Excellence – Do Chinese companies have what it takes compete globally?
Operational Excellence – You can’t hide a company’s lack of operational execution savvy with money or people for too long. Sooner or later you get beat by companies that excel in this capacity. Wal-Mart is known for operational excellence. They are known to execute at a degree of effectiveness and efficiency with a cost basis that makes competitors just wonder how they will ever compete.

Understanding Retail – Does China know how to service the final customer?
Retail Excellence – you need to understand your customer, you need to be able to forecast your demand chain, you need to be able to almost predict the future and shape consumer behavior if not cater to it with utmost efficiency and effectiveness. There is possibly, when compared in sheer scale of operations (Google is probably ahead of Wal-Mart in this capacity if not well ahead), no other company in the world that can even compete with Wal-Mart in terms of its depth and breadth of consumer measurement and intelligence. Wal-Mart is like a government of a highly successful country with some key differences being: Wal-Mart collects profit not tax (what is the difference anyway?), Wal-Mart probably measures their customers more than governments track and monitor their people, and Wal-Mart is seeking to extend services in their country (their store) that allows the consumer to spend every bit of all the money in their wallet or purse at the store if not more.

For those of you not in the business of retailing then we can’t even begin to describe how complicated and how complex and how rapidly changing the game of retail is and how the demand chain is not won by money or sheer strength – absolutely not. Now back to China and the challenge of their globally minded suppliers and corporations involved in selling products to the world. So…who has the size, the sheer scale, the infrastructure (global logistics, regional and national distribution centers, fleets of trucks, global telecommunication and network infrastructure, global work force operating under process driven management, global business intelligence network, global relationships, global financial management infrastructure, etc. etc. etc) to be the highway for China’s aspiring companies (Lenovo is already there, Haier is growing, others still struggling) to reach the final customer and reap the promised profits of opportunity? For now, that’s probably only Wal-Mart.

Let’s examine what FRONTLINE reported in 2004 at PBS:

“Wal-Mart has a very close relationship with China,” says Duke University Professor Gary Gereffi. “China is the largest exporter to the U.S. economy in virtually all consumer goods categories. Wal-Mart and China are a joint venture.”

So imagine…if China bought Wal-Mart then what could it do? What would that mean to sourcing direct from China? What would that mean to every company’s product in the world that isn’t in a Wal-Mart anymore because Wal-Mart is selling only Chinese (ok, ok, maybe some local country products as well)? Imagine the power of owning that demand chain…the power of owning the front door to the customer…

Once again and finally to what David Barboza published in the Global Policy Forum in 2005:

Japanese and South Korean companies like Toyota, Sony and Samsung made the moves from national to global brands quite successfully, but it took years. Analysts say Chinese companies do not have that luxury, because the rapid pace of globalization means that markets are now quickly won and lost.

“Chinese companies don’t have that much choice but to acquire overseas companies,” said Joe Chang, a China specialist at McKinsey. “Very few companies can build organically any more. If they wait 10 to 15 years, they could be dead.”

Being the world’s low-cost factory floor is no longer the country’s singular ambition, analysts say. That is perhaps why China Entrepreneur magazine recently devoted a cover story to the question, “Should China Buy Wal-Mart?”

China Buying Wal-Mart? Why not?

May 27, 2008 | Filed Under Sourcing Trends | 2 Comments

Technology in the 21st Century - Your own factory and catalog showroom for almost no money!

Thousands of our readers are buyers who work in large companies to their own retail or wholesale businesses. Many use China and other countries around the world to base their manufacturing, if not sourcing operations. Many also outsource the entire production of their private label products to a host of companies in China that run the gamut of design, develop, manufacture, package and even drop ships the final product to the end customer.

Most however, must to some degree, own the merchandise in some form or pay for its development prior to sales. Recently, with the advent of the Internet and advancements in technology, a whole new market has been created where you really can own your own factory and catalog showroom for almost no money AND get drop shipments. This is definitely not for the big companies but for those owning their own small business to those that setup shop in Ebay to TaoBao and want to create unique products and use the technology of the 21st century, then this company and its business model may be just right for you!

Enter Ponoko – technology in the 21st Century.

Ponoko is the world’s first personal manufacturing platform. It’s the online space for a community of creators and consumers to use a global network of digital manufacturing hardware to co-create, make and trade individualized product ideas on demand.

The ponoko.com marketplace connects creators, consumers, digital manufacturing hardware and service providers to promote, make and trade products on Ponoko and social networking websites.

Here is more information from Trendwatching.com from their 8 important consumer trends for 2008.

New Zealand-based Ponoko (which works like a CafePress for 3D objects) is offering consumers a new way to turn their creative ideas into real-world objects. After uploading their own design to the website (in EPS file format), or choosing a free design, users can choose from a variety of materials. Ponoko then runs the design through a laser cutter. Besides offering access to professional tools to manufacture products, Ponoko also helps users bring their products to market. Once they’re ready to sell, members can add photos of their product to their profile page, together with a description and pricing information. Products can either be delivered to the designer for assembly before being shipped to customers, or self-assembly products can be sent directly to the end-customer. Ponoko currently only offers two-dimensional sheet cutting, which limits designs to flat objects or three-dimensional objects that can be assembled from flat pieces, but plans for 3D printing are in the works.

As well as being a manufacturing platform, Ponoko also serves as a community where fledgling one-off fabricators and designers can exchange ideas and help solve each other’s problems. The larger goal, according to Ponoko, is to be a catalyst that helps bring personal manufacturing of individualized products to the masses.

So when you get to the point where you are doing well with this business model, come back and share your stories and we may conclude with the possibility that by that time, China may be once again the place where you scale your business. So, yes, China is still in the picture and so is good old manufacturing!

April 13, 2008 | Filed Under Sourcing Trends | Leave a Comment

Off-Shoring Chinese Style - The Next Wave

The United States and Europe have been outsourcing and off-shoring manufacturing and services for years… and especially in the manufacturing space, mostly to China! However, a trend is developing where Chinese manufacturers are now off-shoring their own work to other cheaper countries, mostly in southeast Asia.

Dan over at Managing The Dragon has an interesting article Trickling Down - Chinese Off-shoring explaining how this trend is picking up, particularly in the textile industry. Increasing costs in China and duties on textiles in particular are causing Chinese manufacturers to set up shop in countries like Indonesia, Cambodia, Thailand and Bangladesh.

An interesting twist is that unlike in the United States, where outsourcing and off-shoring is clearly seen as a negative, some Chinese companies believe this trend is good for China, freeing them up to focus on higher value added manufacturing and growing their economy stronger. Will Lewis over at Experience Not Logic, in the comments section, questions whether this is just an excuse for Chinese manufacturers to cut costs and wonders if the manufacturing will return once duties are lifted, expected in 2008.

February 25, 2008 | Filed Under Sourcing Trends | 1 Comment

China Got Expensive! Shall We Go to Vietnam?

SourceJuice published an article at the beginning of the year explaining some main reasons why China is becoming more expensive. In the never ending search for low cost (but high quality!) labor, Vietnam keeps popping up as the new ‘go to’ place for manufacturing. So what’s the deal with Vietnam?

China Briefing News has an excellent article by Chris Devonshire-Ellis titled Corporate America’s China plus one strategy. The gist of the article is that China has what we might call a perfect storm of inflationary issues and that US companies are beginning to have a “China plus one” strategy more so than just a China strategy.

The economics theory behind “China plus one” works like this: as China is getting wealthier, and its population older, it is getting more expensive to manufacture there. Wages are rising and so are the prices of commodities - China is experiencing some worrying inflationary trends right now that are pushing up the prices of everything from a bowl of rice to apartment rentals. Added to that, China unified its corporate income tax system last year, bringing the previous low rates that foreign businesses enjoyed up in some cases from 15 percent to 25 percent. Certain tax incentives also have disappeared, making other Asian destinations now more attractive than the PRC for the receipt of foreign investment. To compound this, the United States has quota systems in place for Chinese textiles, agricultural products and a whole host of other items, meaning once those quotas are used - and the annual quotas have tended to have been reached after just 9 months - there are no more permissible U.S. imports.

While Vietnam may never be the internal market that China is, many multinational corporations (Intel, Dell, etc) are finding Vietnam quite hospitable as investment opporunities and thousands of Taiwanese and Korean small and medium sized businesses have been manufacturing in Vietname for years.

Bill Dodson, founder of Silk Road Advisors, sums up the issue best in his commentary China Plus-One in Vietnam, too?. While Mr. Dodson does not view Vietnam as the be all and end all, his summary is quite right:

Why, after all, would you want to locate a new export manufacturing facility inland in China and away from the increasingly expensive coastal cities of Shanghai and Guangzhou, when you can have exactly the same plant slap bang on the coast in Vietnam or India, with an English speaking workforce and better tax investment incentives? You wouldn’t, and the savvy American boardrooms and entrepreneurs know this.

It would be interesting to hear from our readers whether they are currently sourcing from Vietnam, investigating doing so, not interested right now, and in general your experiences!

February 8, 2008 | Filed Under Sourcing Trends | 4 Comments

Is “Guanxi” still needed in China?

Guanxi in Chinese means “relationships” and most foreigners and Chinese alike will assure you of the need to have good Guanxi to get business done in China. While I doubt anyone who has done business or lived in China will argue that relationships aren’t necessary here, Shawn He Yuxun, from MeetChinaBiz offers some excellent insight in his blog post into the history of this infamous word Guanxi, its place within China historically and what place Guanxi may have in the future.

In his post, Shawn He Yuxun discusses the history of Guanxi as it relates to requiring personal favors to achieve economic means during a time when China’s economy was completely planned.

Prior to the 1980s, every aspect of China’s economic life was planned, controlled, directed and operated by the government. No private ownership of any property or asset, much less profiteering for an individual or group, was allowed. The government would allocate everyone a pre-defined slice of the “big pie“ (incidentally the equivalent terminology in China — where rice rules the dining table — was “Da Guo Fan“ (da-gore-fun), which means “rice in a big wok“). If one wanted any more than what was allocated to him/her, he/she would have to circumvent the system and rely on another individual in charge of a particular function in that “allocation chain” to do him/her a special favor.

As China began opening up in the 70’s, there was no effective system in place to foster individual economic relationships outside of the planned economy and this Guanxi system.

So by and large throughout the 80’s and most of the 90’s, having Guanxi this “ultra-relationship” or “super-connection“ ALONE had proven to be a sufficient, and in many cases also necessary, condition to get something done, regardless of the fundamentals. With Guanxi, a completely unqualified and incompetent person could land a very important job and/or position. Also with Guanxi, a company with no track record whatsoever could be awarded massive contracts. You get the point…

However, Shawn He Yuxun argues that as certain industries become more privatized, and with a history of economic relationships built outside of the Guanxi system, that Guanxi itself is less important. “Business is business” just like in the west.

As the economy becomes more and more marketized / privatized and competitive, the value and effectiveness of the Guanxi system has also greatly deterioriated. In industries that have been substantially deregulated / privatized or where there is much competition, business is business, and Guanxi has been neutralized / marginalized to resemble just what relationships and connections are like in the Western world.

So what do you think? Is Guanxi still required in China? Is the Guanxi of today different from the Guanxi of yesterday? Let’s hear from our readers about your experiences!

January 6, 2008 | Filed Under Negotiating & Strategy, Sourcing Trends | 11 Comments

Trends affecting China sourcing in 2008

The China Sourcing Blog has an interesting post, Reflections on trends affecting China sourcing in 2008.

As Beijing celebrated the start of its ‘Olympic Year’ with a large outdoor music performance on Monday night, we might well look at some of the trends that could impact China sourcing in 2008.

Some feel that a combination of increasing raw material costs, tighter labor laws, and product safety concerns will finally slow the growth of China. Others feel that China will continue to grow quickly in 2008 and beyond.

What do you think?

January 1, 2008 | Filed Under Sourcing Trends | Leave a Comment