The reasons for sourcing in China can be numerous. They can be related to e.g. cheaper material and manufacturing costs, access to new technologies or resources not available in the home country, gaining a presence in the sourcing country. What ever the reasons might be, a careful analysis of the sourcing market is recommendable.
Nassimbeni and Sartor (2006) define four elements that should be considered in analysing the characteristics of the supply market.
- Competitive advantage of the Chinese supply
- Expertise profile of the local manufacturers
- Potential customs barriers and constraints
- Potential infringements of IPR
It is well known that the labour costs as well as in many cases the material costs in China are much less than in Finland. However, the production effectiveness is not as high as in Finland. Yet, higher the quality requirements, higher the production costs. Yet, Chinese manufacturers sometimes tend to increase the prices arbitrarily and appeal for example to ”misunderstanding” during negotiations or some extra costs that just suddenly appeared during the procurement process. The location of the supplier has a great importance on the overall costs. Regional regulations can vary notably. The infrastructure of China is still somewhat under developed and the distances can be really far. The procurement process involves many objects that should be considered in such a complex country as China.
Some fields of industries have nowadays very modern and developed production capacities in China. The whole production network is well structured and effective in manufacturing such products as electronics and telecommunications equipment, textile and sports shoes, and chemical products. However, the variety of suppliers is extensive. Unfortunately, I still hear stories that a Finnish company found a supplier in a trade fair and made an order without checking the company’s background first. General information on the supplier is rather easy to gather. An audit visit to the factory is strongly recommendable before manufacturing the sample of the product. Negotiation process may take some time as the Chinese tend to change the terms during the negotiations. And as I have mentioned in my previous blog writing the contracts are mainly guidelines, not to be strictly followed . Therefore, good personal relationship with the supplier can be a great asset in negotiation table.
Though China entered WTO there still might be protectionism in some industries. China has developed its own technical standards that might cause trade barriers for Finnish companies. China is encouraged to use international open standards, but in some industries they have not been adopted. Taxation policies in China can be a hassle. Sometimes the return of value added tax takes a long time causing a trade barrier to the customer. However, this problem only exists among those companies that have official presence in China. Again, when dealing with government officials, good personal relationships help.
Intellectual property rights or its lack is one of the biggest problems in China. Everything can be copied or at least the looks. The IPR legislation in China has been developed tremendously but its enforcement is still somwhat lazy. The trademarks are easily adapted by the Chinese copycats. Therefore, the international trademarks should be registered in China in case the product might be sold in Chinese market as well. It is also the only protection tool against the IPR violation. I think that in the future, the competitive advantage will be created with other things than patents as new products and features are developed faster and faster.
The Federation of Finnish Technology Industries foresees fast growth of industrial production in China and encourages Finnish companies to gain their share of this growth. For the steel and machinery producers that means increasing manufacturing activities in China market. Logistically it is therefore more beneficial to move the sourcing to China as well. Unit prices in China are remarkably smaller than in Finland, but the better productiveness and quality in Finland diminish the difference in competitiveness. However, I notice that China has improved its production capabilities and more emphasis has put on the quality. To succeed in international market China must follow and adapt best practises and customer expectations.
In summary, I would say that sourcing in China is inevitable. A careful consideration on when, what and with whom the sourcing should be carried out. Sourcing can be beneficial also for smaller companies as the unit prices are significantly lower than in Finland. And as I always say, build and maintain good personal relationships in China and the luck is on your side.
Sources:
Nassimbeni & Sartor (2006) Sourcing in China.
The Federation of Finnish Technology Industries (2007) Successful supplier 2015 (original title: Menestynyt alihankkija 2015)
Really interesting article Johanna. Well balanced, accurate and very appropriate to the market here in Australia as well. We help Australian business just as you do Finnish business. Your commitment to both helping Finnish business, but also you love of China is evident. I can see that in the way you write. Im equally as passionate abotu China, and educating people on how to do it well, rather than try and cut corners, end up loosing money some way and constantly giving China a bad wrap. The cultural barriers are huge, and most of the time it just comes down to sensible due diligence and knowing how to communciate. Ill follow your blog for sure!
Dear Tim,
Nice to receive feedback from a colleague from the other side of the world. Thank you for your valuable comment! I totally agree that the due diligence is one of the major concerns when sorting out the potential collaborators. However, as Finland is known as a country of honesty and incorruption, it unfortunately also means that we Finns may still be somewhat credulous and trusting when doing international business. Cultural barriers are huge, as you mentioned, but they are not impossible to overcome. I love the challenges China provides. It is a place where you get to live with all of your senses open as you never know what to expect behind the next corner. And you can never talk about China without mentioning its delicious food!
I wish you all the best success with your business in Australia!