Global companies that move into China are localizing every component of the business that they can especially leadership, the supply chain, and product development and design. In terms of leadership, this means finding local managers to take over the development of strategy and its implementation for operations in Asia. Localizing the supply chain is oriented toward creating efficiencies.
In the past, when companies operating in China would perceive a problem they would throw capital or more personnel at it. Now there is a trend toward streamlining operations. For example, lean manufacturing is becoming a more common practice.
The productivity improvements are driven by the increased cost of labor. Productivity levels are beginning to approach what one would expect in more mature labor markets. There is a war on waste and right now the main battlefield is in manufacturing, logistics, warehousing rates and other basic operations.
Changes in labor laws in 2008 created a category called permanent employees. Every worker must have a labor contract. There is a tenure agreement in the labor contracts that typically span one to three years.
When these agreements expire they may be renewed but once a worker becomes a permanent employee under the law terminating them is extremely difficult. One of the keys to China’s success was liberal policies around labor but these laws have tightened.
Companies are not just selling existing product to China but are designing products tailored for the local market. A glance at many companies’ P&L statements shows that the Chinese market is a large part of their profitability. Firms are now moving to develop an organization in China that is mature enough to build sustainable demand.
This requires a detailed knowledge of the market including why people are buying, what they’re buying and what must be done to develop products that continue to create that demand. Foreign players are not accustomed to the nature and pace of the Chinese marketplace. Products that are not designed for the Chinese market tend to have short product life cycles and fail to garner brand loyalty.
China is becoming more expensive but it is also a very important component of an overall Asia strategy. From a supply perspective, North American companies are tending to move some operations from China to Mexico or back to lower cost areas of the USA.
China is becoming more a center of demand than supply. At the same time, products are being localized in Asia and tailored to the Asian market. A presence in so large a market is indispensable but the quick savings from outsourcing to China is becoming a thing of the past.