Buyers look toward China—but with a degree of caution
One of the hesitancies: the difficulty in calculating the total cost of producing and shipping products to the U.S.
Staff -- Purchasing, 1/13/2005 2:00:00 AM
Purchasing professionals and supply-chain executives are testing such Chinese products as metal parts and assembly components, primarily because of perceived lower costs. But they are so cautious that sourcing is slow-paced: Only 27% of the products bought by original equipment manufacturers surveyed by PURCHASING magazine are being offshored this year in China.
That doesn't surprise Christopher W. Runckel at the Runckel & Associates international business consulting firm in Portland, Ore. "Global sourcing dynamics are always changing and, with so many potential suppliers in one nation, a good source today may not be so good six months from now." China already is a manufacturing powerhouse, but it remains a net importer of many manufactured products because its home market is so huge and its own industrial economy is expanding at a 14% annual rate.
Still, manufacturers of all shapes and sizes of consumer goods—making everything from windshield wipers to washing machines to clothing—are setting up factories in China despite huge cultural and logistical challenges. According to Boston Consulting Group, the average hourly pay (including benefits) of production workers in China is 80¢ versus $21.86 in the U.S. So, given the same equipment, American workers need to be 25 times more productive than their Chinese counterparts to remain competitive (excluding the cost of logistics and overseas supplier management).
But, a big issue is that China's much-publicized manufacturing expansion has been multi-tiered but incomplete—ranging from such basic materials as cement, steel, nonferrous metals and chemicals to such finished goods as consumer electronics, home appliances, televisions and automobiles. What's still missing, the analysts agree, is a real expansion of export-oriented commodity materials, industrial components and manufactured parts.
It is estimated that 75% of the buying groups in Industrial America are offshoring—that is, purchasing products and materials for production outside North America— to some degree. However, many of these manufacturing buying groups are hesitant to extend their industrial supply chains across the Pacific: None of the 573 purchasing personnel polled by PURCHASING magazine are sourcing the majority of raw materials there and only 10% are sourcing the majority of their intermediate parts and components with Chinese suppliers.
One of the hesitancies: difficulty in calculating the total landed cost of a product, that is, what is its true cost when logistics and delivery times are factored into the equation. In addition, they are moving cautiously because of the need to team with supply companies that have people who are fluent in English as the international language of business and who can answer e-mails, understand business principles discussed in such e-mails—and who are Internet savvy and have a professional website.
Still, numerous overseas purchasing offices are being set up in Hong Kong (to concentrate in the consumer products companies in Guangdong Province) or in Shanghai (to mainly cover Jiangsu and Zhejiang provinces with their industrial products manufacturing complexes). Economists and industrial experts say lower-end manufacturers and suppliers affected by cheap labor markets will continue to expand manufacturing in China. But that won't happen much for higher-end manufacturers. The gurus expect that companies in the U.S. will maintain production of high-quality and precision components and parts, along with research and development, in the U.S.
Buyers polled by PURCHASING agree: Only 46% of the purchasing managers who do source in China already say their firms are building manufacturing plants there. Of those queried, 17% aren't offshoring any of their own manufacturing to China, and the remaining 37% are only entering joint ventures in China—and there are as many of those for subassembly of parts as there are for assembly of finished end products. "It is no longer a question of if you are going to work with a manufacturer in China," says Richard Dougherty, an analyst with Envisioneering Group in New York, "Now, it's a matter of when and how much equity and how much co-manufacturing occurs."
China last year shipped goods to the rest of the world worth about $438 billion; the U.S. purchased $152.4 billion, or nearly 40%, of that total. "China is turning into an attractive place for multinational buyers," according to a report by Roland Berger Strategy Consultants that is based on a survey of 32 multinational companies. However, the products highlighted by the study are consumer-oriented: Printers, personal computers, televisions, cellular telephones, microwave ovens, DVD players, and clothes.
Most analysts note that China excels at sourcing components or goods made on templates for items such as furniture, toys, electronic components and consumer electronics, small appliances and telecommunications equipment. This fits with U.S. Census Bureau data that shows that the biggest categories of goods shipped into this country from China are clothing apparel and footwear, followed by household goods, and then toys, shooting and sporting goods, and bicycles.
The fourth-largest category—and the largest manufacturing-bound commodity group—is semiconductors, components and peripherals. The fifth-largest group of products is machinery—17 categories of durables ranging from generators, transformers, pumps, compressors, generators and electric apparatus to oil-field drilling and oil- processing equipment; from mining, excavating, paving, and construction machinery to metalworking machine tools and textile, sewing, leatherworking and food-processing machinery.
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