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

Question 9:
What will be the trend in the future – will there be less suppliers, will you see more competition? Besides cost advantage, what will be the key criterion for Chinese suppliers to continue to survive, to gain more market share in the future?

A majority of suppliers that I interviewed do not see product road map, brand building, research and development, these long term challenges as their number one challenge – so my impression is that they do not have this mindset, rather they are in a fighting fires mindset brought about by cost pressures, competition and human resources turnover. Thus they are focusing a lot on the operational problems, rather than making strategic issues and operational priority. They should be mindful of the strategic issues from day to day. This is the big challenge for Chinese suppliers. Take the example of a supplier which produced LED transformers. It had a 60% profit margin on its sales? How did it do this? “we have the best transformers in the LED segment and we developed our research and development and brand name around this strategy and commanded a higher price.” So there are BYDs out there that can provide a good model for Chinese suppliers to become world class.

Not every supplier will make it along the world class manufacturing road and not every supplier has the dream of making it because they look to make money through sales or if they are lucky, IPO, and then buy their property as their final goal. It’s not about being the best at what they are making – it’s about the money and the property.

Another trend is with the onset of rising costs in China, we see that some firms of moving out of China at least in part. For example, Whirlpool is now assembling kitchen appliances in the USA hiring 25 people on the production line, but they are still sourcing components from China. Maybe that part a VAT or taxation issue, but you would think that labor costs would be an issue, but not any longer with the higher productivity of labor in the USA. So Chinese manufacturers / suppliers have to work out – Are they in the assembly business or are they also in the brand name product component or final product business? What business are they in? Because the ecosystem maybe separated in terms of where the basic components can be made and where assembly can take place.

Outside of the electronics industry, there are pockets of productivity improvement in a lot of countries along the Silk Road. For example, at the annual Asia Sourcing conference held in Hong Kong in May, I was fortunate to hear about some of the developments/issues of running operations outside of China. For example, listening to a representative of a Jeans manufacturer the productivity of workers in Jeans manufacturer in Bangladesh and Mexico is higher than China. And another textile manufacturers experience was that the consistency of quality in workshops in Cambodia was better than in China. So a lot depends on which area products are manufactured, and the sophistication of the product. If the product is complex then the manufacturing has to be located close to the eco system of supply. If the product is simple then manufacturing can move to other countries with less disruption to the supplier chain. Associated with this is the level of product service support in the form of packaging and logistics services, which are still in their infancy in other developing countries.