Case Study 1 - Offshore Manufacturing in China
Company A - Long Term Structural Change

Until the early 1990's, 'Company A' was a traditional UK menswear manufacturer supplying specialist finished garment ranges to major multiple retailers including M&S, Next, Debenhams and Littlewoods.

Although their company was still profitable at that time, the directors of Company A sensed that, sooner or later, their market would become subject to those increasing price pressures that are normally associated with increased levels of import penetration.

During 1994 they therefore took the decision to ensure that, whilst they would do nothing to accelerate the speed at which such import penetration might increase in their sector, they could be sure that their company would be in a position to swim with the tide of penetration if and when it did eventually gather pace.

Based on his knowledge of manufacturing throughout the Asia Pacific region they asked John Mott, the founder of Business Bridge to China, to find a suitable joint venture partner in that part of the world - one that would be capable of manufacturing consistently to the high quality standards that Company A's client base demanded whilst also adhering firmly to agreed delivery schedules. Needless to say, the need for landed costs to generate significant savings relative to comparable UK manufacturing costs was an essential part of Company A's original brief.

The search for a suitable partner was completed by mid 1994 - and the terms of a manufacturing joint venture were finalised during 1995. The new manufacturing facility that resulted from these negotiations became operational in August 1996.

The Chinese partner selected by Company A was itself a joint venture. The two partners in that joint venture were one of the new breed of entrepreneur that was beginning to emerge in response to the efforts of the Chinese government to embrace a market economy and one of the old state trading corporations from Beijing.

As a result of this combination the Chinese company was able to offer Company A the best of both worlds - the drive and vision of a truly dynamic individual plus the comfort of direct links to the political influence and financial muscle provided by the state trading corporation. The Chinese company offered the further advantage that it already had the capability to produce one of the main fabric components from which Company A's products were made - fabric that could be purchased from the new partner at a discount of 30% relative to comparable European prices.

Under the terms of the 10 year joint venture agreement the Chinese partner was required to provide the premises, the fixed capital and the manufacturing labour. Company A was required to provide the working capital, design capability, technical aid (including the specification for the new manufacturing facility), and the export marketing capability.

All export marketing rights were to be vested in Company A.

The partnership certainly lived up to original expectations - and the predictions made by the directors of Company A also proved to be right.

By 2000, the tide of import penetration had turned - and the market sector in which the company operated had experienced significant price deflation as a result.

To combat that trend and maintain its previous gross margins, by 2000 Company A had managed to progressively switch 50% of its manufacturing requirement to the already established manufacturing joint venture with relative ease - reducing significantly its fixed payroll costs in the UK as well as its average unit cost of production.

During the period 2000 - 2003, and in response to further price/margin pressures, Company A was able to switch the remaining 50% of its manufacturing requirement to what was already a well proven and well respected joint venture manufacturing facility.

By that stage Company A was not only able to eliminate all UK payroll costs associated with direct manufacture, it was able to close its UK manufacturing facility completely - thus exporting a significant element of its fixed cost structure and converting much of its previously fixed cost base to one that was truly variable in nature.

As a result sales per employee increased from approx. £30k in 1994 to a forecast figure of £240k in 2004. Fixed costs (and therefore the company's breakeven position) were both reduced dramatically as a consequence.

Although now complete, change was deliberately engineered on a progressive basis in order to minimise any risk of the unknown. During the ten year period described above Company A completely changed its identity and its operating credo from that of a traditional UK manufacturer that of a dynamic sales/design led trading company - one that is light on its feet and well equipped to deal with the increasingly competitive nature of business in the 21st century.

Despite these fundamental changes (or probably because of them), Company A remained No1. supplier in terms of recorded delivery performance and recorded quality performance - both for M&S and for Next.

A real success story achieved by carefully resourced and carefully managed links to China.