China Sourcing: The Future Ain’t What it Used to Be (Post 3)

Posted At : July 6, 2007 1:03 PM
Related Categories: Spend Management

This afternoon, I'd like to welcome MFG.com's AJ Sweatt to Spend Matters. I've asked AJ to offer his opinion on what's going on in China from a Western supplier perspective.

"I Told You So" Is The Wrong Reaction For North American Manufacturers

Oh sure, it's great news. China reduces or eliminates the rebates for VATs for nearly 3,000 products, and you're all over it. "Tried to tell you," you say. "About time," say the downtrodden.

Now is NOT the time for suppliers of discrete or standard products to dwell on this useful but minor victory. It's time for action. Sure, the bloodletting has been fierce. If you're still standing, you have reason to gloat a little.

But only for a minute.

Once the initial buzz wears off, North American and European suppliers should DO something. While many in manufacturing's hoi polloi will debate the economic, cultural and political ramifications, there's money to be made in them there hills.

The question for North American suppliers is: can we capitalize, and can we regain some ground?

There are opportunities, certainly. And they aren't just hollow ideals from editors looking to fill space on a page. They mean business -- long-term, tangible business. Perception's reality, and when the companies that have substantial investments in China see the costs incurred by the adjusted rebates, they're going to come looking for viable alternatives. To cut costs. To insulate themselves from exposure of further adjustments. Fact is, these volatile times can play into the hands of savvy suppliers.

Here are some inspirational tips for North American manufacturers, to help us focus on righting the ship after 15 years of listing (or sinking):

Be Assertive. Do NOT be timid. Use your Web site to enunciate your strengths and values as a preferred partner. If you're a suppler of high-volume product, focus on the logistical strengths you bring to a partner. If you're higher tolerance, low-volume in your approach, adjust your message to convey competence in the design, project management and participative stages of the sourcing cycle. Now is the time to PROVE you're a good partner, before the buyers begin to research online.
What Are The Costs? A real strategic advantage that North American suppliers have in this scenario is time. But only a little. The products and materials affected by the VAT rebates are confusing at this stage, in that they sometimes name products, and sometimes name materials. Are watches hit by a 2% increase in the VAT, or are watches made from steel hit by 8%? It's going to take a while for buyers to determine the real impact of these adjustments on costs. And that means North American suppliers have time to condition buyers with their message of consistency and dependability.
It's About Competition. If there's a bottom line, it's this: we're not as expensive as we were 2 weeks ago. Not only that, we speak your language, we understand you vernacular, and our shipping costs are less. Everything you say and do from your integrated media (Web site, mailings, e-mails, etc.) should drive that home.
Marketing Judo. Use your opponents weight to your advantage. Of course, your prospect and customers aren't your opponents -- but where do you think they're going to go when they start looking for alternative sourcing solutions? According to MFG.com's latest Buyer Survey, 82% of buyers say a supplier's Web site is important to them when selecting a potential supplier. As these buyers move online in the coming months to examine their sourcing options, North American suppliers need to be there to capitalize on those behaviors. This is the fundamental function of a supplier’s Web site. Distinguish where the buyers go to research online, and make your presence known. “Do the buyers of our services use Thomas? MFG.com?” Then you need to be there, too.
Why Now? Honestly, there are a lot of folks speculating about why this is going down now. It could be that the Chinese government is sincere, and it wants to reduce the impact on its environment and endangered species. It could be a result of international pressures brought on for economic reasons. Maybe China is looking to move its manufacturing base from a low-technology position to a higher technology base, a la Japan in the 1970's.

In the end, it doesn't matter. The opportunities are real, and if North America is serious about reclaiming some of its supremacy as a manufacturing powerhouse, this is the place to start. Forget the government, forget your former customers -- it's in the suppliers' hands now.

AJ Sweatt is Vice President of Knowledge and Content and MFG.com. He can be reached via email: AJ [@] mfg [dot] com.

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China Sourcing: The Future Ain't What it Used to Be (Post 2)

Posted At : July 6, 2007 9:12 AM
Related Categories: Spend Management, World Trade

This morning, I'd like to welcome Aptium Global's Stuart Burns back to Spend Matters. With over twenty years of metals trading and arbitrage experience, Stuart is an expert in global direct materials sourcing, especially in metals categories. In full disclosure, I have an economic interest in his firm through my wife, Lisa Reisman, who is his business partner.

Beyond the Trading Stage: What's Really Going on in China

China's recent reduction in or elimination of vat rebates on the export of some 2831 classifications of products is the latest in a series of steps taken by the authorities ostensibly in the name of reducing the growing trade surplus and cooling the overheated export market. China has taken the opportunity to do this by targeting the industries they most want to constrain, those that are the most polluting, the most energy intensive and those that are seen as exporting the raw materials needed by China's expanding value add industries.

Earlier this year the Ministry of Finance also imposed additional tariffs on the export of certain basic commodities, notably steel products, where the government has been trying to get old excess inefficient capacity closed down. But given the strength of exports, this strategy did not work, and producers still kept plants open. Now, under the guise of redressing trade surpluses, China is using centralized control to focus development and the economy to its desired ends.

The cement market is a case in point. China is already the largest cement market in the world and is projected to grow to more than the next two largest consumers combined -- India and the USA. Restricting exports of a product so desperately needed for domestic growth should been seen less as an attempt to reduce the trade imbalance than a common sense attempt to contain domestic inflation in the construction industry.

This is the fifth change in rebates since 2005 and cumulatively they will have a profound impact on the global supply market for certain commodities. High energy consumers like cement, fertilizers and certain non-ferrous metals have had their support all but withdrawn. The effect will be a rapid shift to other producers in Central & South America and Asia, particularly India.

The supply market for many of the products affected is already tight so lead-times will become more extended and prices will be further strengthened just as consumers were expecting markets to begin to ease on the back of an expected slackening in the US market later this year. But the effects will be felt more extensively than just in these products. As exports are choked off the domestic China price for these raw or basic materials will become depressed. Steel prices are already lower in China than the world market which has the effect of making Chinese consumers of basic commodities more competitive on the world stage in selling their higher value add finished products.

This is where the Chinese have been very clever, they can rightly point to their widespread reduction and in some cases removal of export rebates and the imposition of some export tariffs as evidence that they are responding to western concerns (they would never admit to responding to western pressure!) about the ballooning trade surplus when in fact they are re-positioning themselves to support the higher value add, more sophisticated, products that historically western producers have been more successful at selling.

What's the net, net here? I expect rather than see a decline in China exports we will see a shift to higher value product areas next year. China is not so much reducing its presence as the supplier of first choice rather it is deliberately re-positioning itself towards the higher value add markets where the west had traditionally felt more secure.

Stuart Burns is Managing Director for Aptium Global, Inc. Stuart works with small and middle market manufacturers to reduce direct materials costs and risks. He can be reached at sburns (@) aptiumglobal (dot) com

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