China4B2B Blog

The last few years have been tumultuous for American companies because of the China threat and the so called China price. Competing against the Chinese has become the target of many strategic plans. It has involved matters of survival, deploying operations into China, closing operations in the USA, moving parts of the chain to East Asia, cutting costs, redefining the business or simply giving up and leaves the territory to the Chinese.
Chinese industries have been going through a familiar pattern of evolution. This has been seen before in the USA (late 1800s, early and mid 1900s), in Japan (late 40s to the 70s); in Korea (70s to 80s), in Taiwan (80s) and now we see it again in China.
Chinese have at first targeted countries not in the radar of most American and European companies. Countries located in north Africa, the middle East and South America. They started with small capacity, very low labor costs and producing with used equipment. Then moved to copy and improve the equipment in use, made locally at low cost with subsidized raw materials (like steel).
In the third phase they began to ramp up production and forming cooperatives among various manufacturers. In this way they could offer a wider product scope without incurring in higher production complexity costs. Once cash flow began to cumulate they began buying first class equipment and machinery and bringing Japanese and Korean engineers to develop robots and self contained work stations, eliminating labor, scrap while improving quality.
Their total cost structure (I call the tower of costs) has remained low relative to their counterparts in the USA and Europe for many years. However in the last four years, increases in energy costs, labor, and the removal of subsidies and low interest loans have caused an increase in their total costs. Nonetheless, their total costs are still lower than most of their counterparts in the developed countries.
Last year (2008) has been reported by the press that more than 10,000 factories closed in China due to their inability neither to sustain a profit nor to generate cash. Their razor thin profits have disappeared due to these country structural changes. In fact it was reported than more than 600 American businesses closed their China factories and returned to the USA (some to Mexico).
Just a few days ago, our China team and I attended the Shanghai 2009 Auto show. Once more it was an eye opener to see how not only Chinese car manufacturers have improved the quality of their car assembly, but also the fast strides they have made in design and engineering. When we thought the circle was being closed they have upped the ante again and pose a new threat at a new competitive level.
The pressure to develop new, different strategic thinking is even more imperative now for those in the manufacturing environment. The strides made by China in design and engineering also pose a threat to the knowledge industries in the developed countries.
We have people on the ground in Shanghai and Shenzhen alert to changes, improvements, inflection points in their knowhow and their manufacturing capabilities to maintain a fresh look at the competitive level of the Chinese (and now the Indian industry too) to foresee and assess what works competitive moves for US manufacturers.

We encourage all our readers to comment on their China experience and how they have successfully survived or positioned against the Chinese competition.