Will My Products Go? The Real China Question

There is no doubt that the impact of China’s entry into the World Trade Organization and its growth as “workshop to the world” in global manufacturing has had a dramatic impact on manufacturing in North America and worldwide. Demand for essential raw materials continues to drive up the prices of machining materials to unprecedented
new heights.

The most important impact, however, is the potential impact that the China manufacturing boom could have on the products that we produce in our shops on our machines. Because we are manufacturers of components rather than finished goods, sending our production to China has a different set of issues to be addressed when considering its vulnerability to or the desirability of such a move.

Intellectual Property Rights. Maintaining control of Intellectual Property Rights (IPR) is a significant concern to owners of trademarks, copyrights and software. Finished products are easily cloned, packaging can be copied and counterfeits are legion. However, even for manufacturers at the component part level, there are IPR concerns, although there is a much less
“liquid” market.

While IPR concerns are secondary to quality at the component level, they can still be showstoppers for your business. What if your China partner finds the end user for your parts? Once your partner has stabilized its process and extracted as much knowledge from you, the teacher, as it can, there is nothing to prevent that partner from going directly to your customer with a proposal to further reduce cost by eliminating the middleman—your company.

The enforceability of non-compete clauses in the People’s Republic of China is weak to questionable (and certainly expensive) at best. Perhaps the best approach is two-pronged. First, do not disclose end use/end user information to your China source. Second, negotiate a sole supply agreement with your customer.

Admittedly, these are daunting tasks. However, the cost savings that your customer receives by this arrangement, as well as your reputation for quality and service, will help you make a convincing case. The alternative is lose-lose for everyone involved.

Labor Content. This is the primary determinant of whether or not a product is a candidate to be resourced to an offshore manufacturer. Products with a high component of labor in their manufacture—especially if that labor component is not easily automated—are prime candidates for relocation.

On the PMPA’s study mission to China in 2003, we saw, almost universally, multiple operators per machine and plenty of “indirect labor” in the shops we visited. If your product is capable of being produced with relatively unskilled labor or could be easily transferred to an automated process, your China question becomes “should I take the lead to find the best global price for my product by managing its move?” or, “should I plan on running this until it is strategically resourced overseas by my customer, and then try to find a replacement job?”

Unless your components require both highly skilled labor and some degree of automation to meet mandatory quality levels, they are likely to move to China. The key question remains: “How do you want to manage that risk?”

Demand and Logistics. These are the “make or break” or “showstopper” factors that complicate every move of product to overseas production. If demand for a product is stable and there are few engineering changes, then the part is a potential candidate for a move.

If the part is characterized by frequent and unpredictable demand fluctuations, much of the hoped-for cost savings will be consumed by the costs to maintain just-in-case inventories to meet those unpredictable demands. Frequent design or engineering modifications can also disqualify a part for relocated manufacturing.

Logistics can be an insurmountable obstacle to the relocation of a part’s production. If order sizes or due dates vary frequently, standardized arrangements might not be developable. Small lot sizes could also provide a challenge both in increasing freight costs and in decreasing flexibility to make timely shipping arrangements. In a containerized logistics world, an eighth of a container is not a plan for success.

Unfairly traded currency, materials made to foreign rather than North American standards, and communications and language issues are all likely obstacles to the successful relocation of your products. However, maintaining control of your intellectual property, correctly assessing the amount of labor content in your products, your customer’s demand patterns and lot size, and the effect of those demands on logistics are the real determinants to whether or not the production of your products will be relocating to China any time soon.