If you have been keeping-up with business headlines over the past several months, you may have noticed an emerging trend involving doing business within China that is impacting both large and small manufacturers and services providers. Chinese regulators continue to intensify scrutiny of foreign-based technology, product and service providers and there is no reluctance to take on the highest profile companies. China’s business environment continues to change.
Supply Chain Matters has called attention to previous incidents. Restaurant services providers McDonalds, Burger King and Yum Brands were cited by Chinese regulators for serving expired chicken and beef meat products in restaurants. Within the ocean container shipping industry, the proposed P3 Network alliance was scuttled by Chinese maritime regulators in June after both European Union and U.S. Maritime agencies had given a green light. Previous developments have involved large pharmaceutical producers along with Apple and other consumer electronics companies.
Today’s Wall Street Journal reports that China continues to step-up its antitrust efforts targeted at Western firms. Surprise inspections were made in the offices of Microsoft and Accenture regarding suspected monopolistic practices. The WSJ notes that Windows XP has a nearly 55 percent market share within the country and consumers are angered over Microsoft’s prior decision to suspend support. Another agency is investigating Audi and Fiat Chrysler for alleged monopolistic practices. Previous reported investigations involved Daimler in its pricing of service and repair parts. In the wake of the recent NSA information spying incidents, Apple’s iPhone was recently cited by Chinese regulators for not having proper information security, raising added concerns for China’s telecom and cellular network providers in offering other buyer choices besides the iPhone.
On a previous earnings briefing involving a mid-sized technology company we heard the CEO openly declare that the company’s efforts to actively sell technology within China was being temporarily shelved because of market feedback that China based firms were uncomfortable with evaluating any foreign-based technology options.
It is no secret that many foreign based firms made significant direct and indirect investments in China to gain access to a huge market. Ten years ago, this author can recall hearing companies talk about the vast potential of China’s market, a more open, less regulatory intensive environment that made investments in facilities and infrastructure happen rather quickly. Much lower direct labor costs added the impetus for investing in production, supply chain and distribution facilities. While protection of intellectual and proprietary capital was always the most prominently identified risk factor, many companies made conscious decisions to invest anyway, given the huge potential of China’ markets.
Obviously the situation has significantly changed. China’s leaders continue efforts to moderate overall growth to avoid an economic bubble. Supply chain teams are well aware of the double-digit explosion in direct labor rates that continues to occur. A plundering of resources and energy has led to increased environmental concerns given high levels of pollution and dirty air. And now, China’s regulatory agencies have been given the power to crackdown on abuses.
Recall that after the global financial crisis, manufacturers declared that added investments in U.S. manufacturing and supply chain capability were not attractive because of higher corporate tax rates, overly restrictive regulations and higher labor costs. Similar arguments pursued regarding European Union investments. The discovery of new and cheaper energy sources in North America and global currency shifts have now altered the above noted concerns.
A lot has changed in the global environment, and will continue to change. The realities of doing business internationally have many facets and challenges. Efforts to seek lower costs and less regulation compelled industry supply chains to flock to China. This has now caused China to initiate protections of its economy, labor force and environment.
The takeaway for supply chain leaders is that business decisions reflecting global market penetration and for supply and production sourcing are two different strategies. Obviously there are important dependencies on each strategy but both remain distinct. New market opportunities must always be evaluated and leveraged.
Global sourcing of supply and production is predicated on a number of important and related factors, and cannot be one-dimensional. Ultimately, singularly chasing the next lower-cost production opportunity is a short-term strategy that could end up costing more. Sourcing strategy is far more strategic, that must include balancing of factors that include product innovation, labor, transportation, risk management and other landed cost aspects.
Sourcing and procurement efforts can no longer be made in isolation, nor can they be static. They require continuous cross-functional and cross-business involvement.
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