China remains number one for manufacturers

Materials World magazine
,
2 Oct 2007

Despite facing product safety concerns, rising labour costs and increasing costs for raw materials, China remains the number one destination for manufacturers, according to the 2007 Annual Study – Innovation in Emerging Markets by the Manufacturing Industry Group at global consultancy and financial services firm Deloitte & Touche LLP.

Of the 446 manufacturing executives surveyed, from companies with headquarters in 31 countries, 59% said their companies already had operations in China, while more than one-third had operations in Eastern Europe, Southeast Asia and Latin America. Moreover, 68% envisage that in the next five years they will expand or establish operations in China, while about half said the same about India, Eastern Europe, Latin America and Southeast Asia.

Lucy Findlay, Head of Enterprise at the Confederation of British Industry (CBI), told Materials World, ‘It’s not just a simplistic question of manufacturers offshoring to China, a lot of them are choosing to base their locations there or in the Asia-Pacific rim to serve the local market. I think that point is often forgotten. If we look at the impact of carbon costs, I think we will see more [companies] locating near to the market.’

Jane Lodge, UK Manufacturing Industry Leader at Deloitte, echoes this view, ‘Ten to 15 years ago, companies went to China for cheap products and materials. Now that the Chinese are becoming more affluent, they are a market of their own. Given the sheer size of the Chinese, and Indian, population, the draw of supplying to that market is immense.

‘If you drive around China, as I do, and you look at the cars on the road, they are BMWs and Mercedes. There is a huge demand for Western brands.’

Safety first

Yet the figures from Deloitte have been released following a summer of intense international media coverage surrounding US toymaker Mattel’s recall of a number of its products, manufactured by Chinese vendors, due to ‘impermissible levels of lead’ paint.

‘I think the product safety concerns have been well trailed,’ says Lodge. ‘China has come a long way in a short space of time, so some of the health and safety regimes that we have in the West aren’t applicable. [But] it will come – it’s an evolutionary phase.’

Guy Dru Drury, Chief Representative of the CBI in China, adds ‘The size and speed of China’s rapid development makes the situation particularly acute.’ But he insists that such concerns are not exclusive to China and affect many of the emerging markets.

Yet, according to Deloitte, only 56% of executives said their companies conducted a rigorous risk assessment before entering an emerging market. And less than half of the executives reported a great deal of success in meeting their operational or revenue goals in these regions.

Lodge says, ‘Until now manufacturers have not always reviewed the risks holistically. Success in emerging markets requires an intelligent approach.’

One technique is to complete audits of all suppliers. Lodge says, ‘Major supermarkets do health and safety audits of their suppliers. It’s about putting in place that rigour and ensuring it’s enforced. [Particularly], if there’s huge cultural differences.’

Areas that are especially neglected for risk assessment are high profile threats, such as terrorism and natural disasters. Assumptions that customer and staff needs are similar to those of people in the West were also cited as a problem.

Legalese

Given China’s dominance, Lodge also insists on the need to protect intellectual property (IP). ‘While China has laws in place to protect copyright, Chinese companies are not used to being held to account if they do plagiarise,’ explains Lodge.

‘Some countries are further developed in terms of their legal infrastructure and governance. In India, the strength of the system is well recognised in the West. The legal system [in China] is more difficult to understand. There have not been many cases where a legal challenge by a manufacturer has been successful.’ One market that Lodge says has particularly suffered from plagiarism is the manufacture of high performance wheels for sports cars.

Drury suggests that, given China’s first-to-register system, manufacturers should register their IP immediately rather than wait until they enter the market. Joint-venture partnerships with Chinese companies and locating R&D in developed or heavily protected markets are also options. Deloitte reports that Soitec, a US$500m French manufacturer of semiconductor materials, is building its first production facility outside France in Singapore, partly due to Singapore’s ‘strong IP protection’ laws.

Ultimately, the emerging markets ‘are too large and lucrative to ignore’ concludes Drury, so learning how to manage the risks better is vital.

 

Further information:

Deloitte
CBI