Questions & Answers Section Given in HKICPA Seminar on 23 Jun 2012

Question 1:
So you mention that cost control is the number one challenge of many of your suppliers. So what can suppliers do to manage these cost control challenges?

As I mentioned earlier, 25% of the suppliers are in the automating investing in research and development or productivity improvements to deal with their cost control challenges.

Was talking to one supplier in a CWINE expo in SZ about six weeks ago. And that's supplier was working on acquiring property and extending the building, so they could have a single straight production line in order to improve the production time and reduce the set up time and the moving time in the production process. So I think Chinese suppliers understand how to go ahead with simple productivity improvements. But they may not always have the land and buildings to suit the changes that are needed.

What should Chinese suppliers be doing more? They need to have a clear focused strategy that drives these initiatives. Because many suppliers do not have a dominant strategy, such as wanting to be number one in a particular product area. So there is this sense that suppliers are doing this for the margin. And as soon as the margin goes away, we will do something else. More of them should be focusing on thinking about how to develop a brand name that supports excellence in particular dimension of their product or the product field they are in. So where having a look at a second or third stage generational development of a product that they are currently making.

So what is the other 75% doing? They are looking to see if they can get more quotations or to develop their relationships with their suppliers. In other words, they are trying to go outside their own problems in order to try and solve the cost pressures that they are under. Some of the suppliers are taught to say no, we are making no money, but we just got a keep the operations going, keep people employed.

Other suppliers express surprise at the notion that you should buy insurance. So there is one supplier that makes part of the electroplating that goes into the PCB that goes into the dashboard of a major car brand. And when the car had to be re-called the car manufacturer traced the problem back to the PCB and suit/find the PCB manufacturer and the supplier, a quarter of US$1 million. This is for an eight US dollar component that goes into the PCB board. On the suggestion that the supplier by product liability insurance, the supplier said wow that's a great idea. So there are these risk issues that suppliers face as specially if I a supply components that go into expensive products and where warranty claims, such as car recalls can total into the millions of dollars if traced back to a particular component. So I don't think Chinese suppliers are aware of these risk issues.