Don’t Bet the Company on China

Don’t Bet the Company on China

China has become an almost automatic answer for corporate challenges of late. Want lower prices? Outsource your manufacturing there. Need to expand sales? Start addressing the Chinese market. But it’s dangerous to put all of your strategies into one basket. Because as impressive as the country’s growth has been compared to the rest of the world, betting everything on a “sure thing” isn’t the type of risk management that those with a business degree should have learned.

China remains a secretive and controlling society, so it’s not as though you can depend on government reports to give the data a company needs to adequately plan for the future. But there are signs of slowing growth and a few confirming details from the Chinese government. Rather than the bottom line 8 percent economic expansion that it has sought, officials have said that it has scaled back growth to 7.5 percent, which would be the lowest amount in over two decades.

More anecdotally, there seem to be indications of impacts on activity — less building now after a real estate downturn and growing trade deficits, with export growth suddenly less than half of what it was the previous quarter. And factories have significantly slowed their own imports of the materials they need to manufacture and export in turn. Given the shaky state of much of the world’s economy, that shouldn’t be surprising. But it does means that companies have to carefully consider whether the already significant challenges in selling into the Chinese market may have begun to increase in complexity.

But it may be that there’s more at hand than countries reducing their spending. After all, one of the big reasons that companies buy products from China is to reduce price. Maybe consumption is simply slowing. But there are other factors at work, like wage hikes to prevent unrest. In other words, it’s getting more expensive to make product not just in China, but other parts of Asia. At some point, an increase in labor and, therefore, manufacturing costs could change the dynamics of where companies decide to make their goods.

No one suggests that China as a market or a source of outsourcing has come to its natural end. But intelligent business requires having alternate plans. And in the case of China, alternatives would seem to be wise to have in hand.

For example, do a full analysis of the real cost of manufacturing in China, including aditonal logistics expenses, shipping, increased inventory costs for product that takes two months to arrive by ship. Given the full costs and increased labor expenses (if outsourcing factors pass the cost along or swallow it to keep business), would it be more cost effective for your company to run its own factories or outsource locally?

As for expanding markets, instead of relying on new places to sell existing products, consider some of the classic approaches. For example, identify different types of uses for the same items, offer additions for product lines, or develop new items that might appeal to current customers. Having options then allows you to reexamine current plans for business in China and either keep, drop, or modify them as now makes sense.

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