Wednesday, 20 February 2008

Micro-Level Trends – Value Chain Management – Sourcing from China

This month sees the London School of Economics host the China debate, presentations and events seeking to address the critical macro-economic and directly relative commercial questions that lie at the heart of increased simpatico in Sino-Western relations.

For the auto-industry at large, CHINA has been writ large for some time, offering what may seem stark worrisome challenges and unsure opportunities relative to each and every company’s own standing. For much of the supply-side of the industry, the hard-earned business and cultural learning that large multinationals such as Chrysler, VW, GM etc have absorbed seems daunting. Of course whilst the VMs are keen to obtain the benefits of lower-cost China sourced components – expecting much of the relative cost saving to be passed on from their suppliers – the supplier-base itself is tasked with the challenge of managing and balancing the risk-reward see-saw. This the case for Original Equipment Manufacture suppliers and their up-stream counterparts the After-Market supply sector.

The optimism and cynicism of western companies can be demonstrated in the long-held, and heavily engrained, quote that “anything is possible, but everything is difficult” The core of this notion derives from the obvious geographical, historical, political and social construct differences that make the melding of such 2 apparently alien cultures hard (but hopefully worthwhile).

The reward aspect of the risk-reward is obvious, we would not be entertaining the issue otherwise, so it is the risk element that grasps management’s attention. In summary, and in no particular order, the prime ‘big-picture’ issues are:

1. Linguistics Barrier
2. Informational Access Barrier & ‘Gaps’
3. Lack of Litigational Recourse
4. Regional Time Difference Barrier
5. Geo-Political Risk
6. Currency Exchange Rate Risks

At the operational level, company concerns are over:

A. Quality Defect Issues
B. Delivery Schedules
C. Payment Terms & Receipts
D. Integrity of the Chinese Sub-Supplier Chain
E. IPR Confidentiality
F. ‘Stolen’ Customer-Base

Each of these problems can be a minefield in its own right, but perhaps the greatest concern for western suppliers of what are increasingly becoming higher-value components with greater design and development investment is the issue of IPR and Design Rights, and the likelihood of the proprietry knowledge being blatently stolen or ‘accidentally’ released to a 3rd party. That has most certainly been the case in the Auto-Industry, not just at component level but at whole car level with what appear to be carbon copies of vehicles such as BMW’s X5 and Daimler’s Smart being created and sold within the price sensitive yet highly aspirant general consumer-base. The truth it seems is that, possibly across the world, ethics and business are not good bedfellows. But the west, if frustrated is tolerant of such behavoir given the supply promise from China.

Undoubtedly trust is key, so firstly trying to establish those Chinese suppliers that are trustworthy, with good track record and reputation, is vital when seeking such a critical new business partner. It is here that the beginnings of the language gap and informational deficit start to show. However, both western and Chinese governments, commercial associations and increasingly cross-border ‘business solutions’ agents, and now supplier information exchanges, have come to the fore, especially in recent years. Thus, whilst the internet search engines (like Google, Yahoo, Baidu etc) appears to be the panacea for general information finding within one’s own culture, it’s usefulness rapidly diminishes across language chasms. But the web is bringing together targeted audiences as and when the mutually beneficial source-customer information is constructed, often by industry associations, trade bodies and increasingly trade press seizing the opportunity given their advertising and subscriptions contacts.

Once a singular, or crop, of potential suppliers have been identified comes the process of identifying operational ‘fit’. This will obviously include:

1. Capacity / Volume Capabilities
2. Quality Assurance
3. Product Range
4. Design Ability
5. Core Competance(s)
6. Beneficial Sister Companies or Sub-Divisions
7. Export & Logistics Ability
8. Their Own Supply Chain Management Systems to ensure future improved
a) Cost
b) Quality
c) Speed
9. A demonstration that they are committed to developing in-house English language skills –
Critical for across the board communication (from PMs to R&D to Legal staff)
10. Willingness to undertake of Non-Disclosure Agreements and Non-Compete Agreements

These basic measures will theoretically assist and help protect the interests of western companies buying-in Chinese sourced items.

However, what can’t be denied is the very real chasm that divides Western and Chinese commercial appreciation and interests, themselves evolved from very different cultures and customs from very different social and ideological constructs. The road to successful business interaction is undoubtedly long and rocky, but a willingness to be open and communicative by both parties is essential to build the trust required to obtain the early days 'quick-wins' that will underpin the ideal long-term gains originally conceived.