Chinese Manufacturing - A Commercial Imperative for Most SME's

UK manufacturers have heard much of the growth of the Asian Tiger economies in recent years. However, there is now one of those Asian economies which has started to tower above all others. The strength of the Chinese economy and the rate at which it is currently growing suggests very clearly that those UK manufacturers that continue to ignore its competitive potential do so at their peril.

Many of the larger companies that used to manufacture in the UK have already taken steps to move large proportions of their manufacturing capacity offshore - an increasing number of them to China. They have realised that it is much better to be working actively with such a huge potential adversary than be forced into the situation of confronting it head on. Fewer SME's have followed suit.

Unless UK SME's are protected by technologies or markets that truly fall under the heading of 'niche', if they don't take action now to follow the example of their larger cousins by establishing effective manufacturing partnerships in China, they are likely to be swept aside as the rising tide of Chinese import penetration accelerates.

For SME's that threat becomes ever more real as more and more of the major blue chip clients that they have traditionally serviced express more vocally their own plans to 'go direct' i.e. to cut the SME's out of the supply chain by adopting a policy of buying direct from major offshore manufacturers.

In assessing the threat posed to SME's (or the opportunity offered) by China just look at some of the key facts:

• China has only been admitted to WTO membership for two years - but already it has established itself as the world's No.4 exporter (displacing the UK to No. 5 spot in the process).
• Throughout the last 5 years there hasn't been a single year in which China's GDP has risen by less than 7% - at a time when most western economies have been patting themselves on the back if they have been achieving anything better than negative growth.
• Because these rates of growth are compound in nature, during this 5 year period China's GDP has risen from 8205 billion rmb to 11669 billion rmb - an increase of 42%.
• China's export performance has been even more remarkable. During this same period average growth in export activity has been 20% per annum - with exports growing from U$ 195 billion in 1999 to U$ 438 billion in 2003 (an increase of 125%).
• This trend towards rapidly increasing exports is accelerating as never before. The official export growth figures for the Chinese economy for the last two years are 22% and 37% respectively.

Impressive? - yes, for sure!! But remember this. These phenomenal rates of growth have been achieved with less than 20% of the Chinese population actually in paid employment. Imagine what will happen to companies competing from within Western economies as the Chinese government continues in its efforts to increase that 20% to 30% (and maybe more).

By that time the economic prizes will certainly almost all be being won by those companies that have found proven ways of working with sensibly chosen Chinese partners - not by those that are trying to emulate the earlier hapless efforts made by King Canute when trying to turn back what was obviously a rising tide of equal inevitability. Easily said - but not so easily done for many SME's.

• The road to China is littered with companies that have tried but got their choice of partner wrong. Many have lost sizeable sums (and a lot of face) as a result.
• Others have failed to understand that buying from China and having controlled access to manufacturing capacity in China are two distinctly different things. Finding a likely looking manufacturer, placing orders and then simply waiting for goods to arrive back at the UK base really is like waiting for an accident to happen.
• Given the huge cultural differences between the two countries, the ongoing differences in business practice/ethics, and the almost total lack of reliable spoken/written English in most Chinese businesses (and vice versa), it is necessary to work on the premise that if something can go wrong with a transaction - then it almost certainly will. The need to plan carefully to avoid every conceivable pitfall is almost self evident - but often not recognised.
• Establishing viable business partnerships in China cannot be hurried. Much store is still placed on the personal trust held by one Principal in another - trust that cannot be developed overnight.
• China is not only geographical huge, it is home to more than 30 distinctly different ethnic groupings - each one of them with their own individual language and culture. When attempted on a national scale, travel can therefore be very time consuming and, in the absence of a universal Chinese language, communication can be much less than straightforward.
• The pressure for cost reduction has slimmed down the management structures of many SME's leaving teams little time to pursue such radically new opportunities without relinquishing the hands-on control that they rightly feel they must exercise over their UK operations.

So if starting business in China is so difficult why bother?

• Whilst there are certainly some unreliable business partners in China (and it's the bad eggs that unfortunately get most of the publicity) there are also some extremely good ones.
• Chinese business has a terrific 'can do' mentality - often allowing seemingly insurmountable obstacles to be overcome at astonishing speed.
• Chinese workforces are very flexible - allowing for seasonal peaks in demand to be met much more easily than in the UK.
• Chinese workforces are also extremely reliable - following faithfully any properly presented working methods and quality practices.
• Even after allowing for shipping costs and import duties, lower wage and material costs often allow for significant reductions in product costs.
• Moving production offshore often allows UK companies to also reduce their fixed overhead costs dramatically.

So, how should SME's make the switch?

• Do it on a progressive basis - building on key relationships whilst avoiding any appearance of undue haste.
• Work through advisers that have first hand experience of creating partnerships in China, who have the relevant linguistic abilities, and who understand the culture of business - both in the UK and China.
• Be prepared to invest in the effective management of the ongoing supply chain - the change to sourcing offshore cannot be seen as a single one-off decision!

It may seemingly take a little longer and cost a little more this way but it avoids most of the risks associated with those that have tried the short cuts - and failed.

This article was published in the July/August 2004 Edition of ‘Business Money’ magazine.