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Reassembling business with China: Complications of business in Far East lead to uncertainty


NEW YORK —Manufacturers are rethinking their relationship with China as the country’s economy evolves and operating becomes more complicated. The cost of low-cost manufacturing may be determined by an increasingly complex formulation that has to factor in more uncertainty in the country.

Yet even disenchanted manufacturers that want to look beyond China find that their options are limited. In some cases, a lack of involvement in China is being touted as a virtue. At the recent Domestics Week in New York, Westpoint Home made a particular point of the textiles plants it operates in Dubai and Pakistan. The showroom included a detailed photographic presentation introducing customers to its Lahore facility, a compound that includes its own housing, water and electrical facilities. Nancy Golden, a Westpoint Home representative, said that one reason the mill mounted the display was to demonstrate that it had solid control of its production and logistics.

Springs Global, of course, has been touting its partnership with Brazilian textile producer Comenitas. The company’s former U.S. bed and bath textile production has been moving to Brazil where it can remain competitive in low cost production, yet not compete for manufacturing resources in other regions, such as East Asia.

Several indigenous factors are having an impact on China as a source of low-cost manufacturing:

The Chinese government, concerned about the development of its domestic economy, is cutting back or eliminating export credits, creating costs that can fall through to manufacturers.

Exchange rates are changing, and not always as determined by the market alone;

The manufacturing sector is consolidating with the result that fewer factories are available and those left are in greater demand, shifting leverage to plant owners;

Management has become more professional with a new generation of often Western-trained executives frequently favoring higher cost, higher margin, lower volume production;

Labor is becoming scarcer as the desire for experienced and skilled factory hands shifts power to trained workers and the demand from the booming construction sector siphons off vast human resources.

A housewares vendor with long experience in China, who asked not to be named, said the situation in the company is more difficult to deal with than ever. “This is not a situation of state run factories anymore where the No. 1 precept is ‘employ people,’” he said. “It’s now capitalism with a capital C. It’s confluence of things. It’s the perfect storm in China right now.”

He said evolution and culture can combine to create tremendous headaches. Many companies have run into trouble around Chinese New Year when factories and docks shut down for three weeks. Once, manufacturers could work their schedules around it, but today, with uncertainty in the market, the holiday looms like a guillotine that can devastate an order that’s coming out late.

Today, Chinese New Year can wipe out whole factories. “There’s a huge problem after Chinese New Year every year now,” the vendor said. “After it’s over, there are large numbers of no-shows at the factory, often people who have been hired away. That’s bad enough on the factory floor, but it could be in the sample department, and that can be devastating. If it’s people from the hand-painted department, their replacements have to be trained. We’ve had factories lose whole departments to other factories and the construction industry.”

Not all the problems regarding China come from internal dynamics. As retailers have become increasingly active in the market, they have, in a way, shut out their suppliers. Retailers, who can better regulate their own supply chain, are contracting for factory and shipping resources, leaving less for vendors who need more production and transportation flexibility.

New forces in the market exacerbate the situation, including resource price volatility and competition from new players. “There is over-demand with the fairly new inclusion of Europe and Mexico,” said the vendor. “A lot of U.S. customers don’t understand the strength of Europe and Mexico.”

The situation is prompting manufacturers to look for alternatives, but those are not necessarily easy to find. Emerging countries such as Vietnam still have relatively primitive transportation systems and less technically adept factories, making shipping and quality control particular challenges. And many established manufacturing nations are now too expensive unless significant commitments are made, such as was the case with Springs. One result of the Springs partnership has been the ceding of overall control to the Brazilian partner.

The photo frame industry is among those that have been hit hard by changes in China, but the effects certainly aren’t dramatically different than the challenges that other suppliers are facing. “We’re all in the same boat whether its picture frames or other lines,” said Mike Kirkland, Burnes Home Accents vp of marketing. “China isn’t quite the value play it used to be. Everyone who is looking long term is looking for secondary sources.”

Fortunately for Burnes, the company has resources in Mexico and has been working out ways to effectively balance its manufacturing activity to maximize the advantages that China offers while dealing with the risks and disruptions that have become part of doing business there.

“We own a factory in Durango and it’s an option in product and in strategy that remains very important for us,” said Rick Erickson, Burnes vp of sales. “We’re going go continue to do things in China, but maybe we’ve done historically all we can in Asia.”

Among the problems Burnes faces is tracking the wood used in its frames. With the environment more of an issue with customers, the company has been trying to establish a system to ensure its raw materials are appropriately harvested, but a lot of wood in China is illegally cut in places like Russia and, in the global economy, that can get a company in trouble back in the United States. “We’re asking for certified raw materials, but it’s more of a challenge in China,” Erickson said.

Archstone Consulting has been trying to help manufacturers cope with change in China and has determined that companies doing business in the country may find that their best alternative is getting more involved, rather than less. Companies producing in China need to enhance their operational expertise and resources there if they are going to effectively use it as an evolving resource, said Todd Lavieri, Archstone president and ceo. Better market research and forecasting, which means improving the visibility of real costs through the supply chain, will be critical for anyone exporting from China.

Technology is one way for companies involved in East Asia to manage at the level necessary today to ensure that low-cost manufacturing in China remains that way through the pipeline. After all, product that’s going to be recalled is going to bear a whole new set of costs.

With toy manufacturers and retailers investing in their own product testing to ensure the safety of toys coming into the United States from overseas, it’s clear that more companies recognize they are going to have to become adept at managing systems in global settings that will become more complex in the future.

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