Ok. That might be a little far-fetched. But this video depicting the capabilities of robotic technology made me stare in wonder (h/t Marc Andreeson). The technologies coming down the pipeline in industries such as nanotech, biotech, cleantech, robotics, and so on, will eventually filter into the products we use on a daily basis. The world of our grandchildren will surely be a greater departure from our reality than our's was for our grandparents.
So what if you're not the NBA in the Chinese market? (Not that NBA jerseys are flying off the shelves in China anyways)
In southern China earlier this week, I had several conversations with locals about the domestic consumer market. I also thought that several readers of ChinaLawBlog's post on this topic made solid comments worth reading. The general consensus seemed to be that China's domestic consumer market is still nascent.
Before we look to NBA viewership stats and firms selling services through marketing reports, a strong weathervane of the domestic market might indeed be Chinese companies themselves.
A logical key indicator, to me, in determining whether China's domestic markets are indeed on the rise, would be that their domestic companies and manufacturers would be more eager to sell locally rather than export to foreign markets. This doesn't seem to be the case for a few very fundamental reasons.
For these two basic reasons (not including serious challenges of distribution), in my humble opinion, the Chinese market has not arrived and will certainly take quite some time to mature. Yes, there is an upper class in coastal cities that is growing in affluence. This, however, is still very small.
A concise and well-written article, Reality Check, by James Fallows (h/t Chinahearsay) at The Atlantic, brings great clarity to the situation. His anecdotal observations create an image that, to me, is far closer to reality, than so many of the China-sized hype articles out there. I highly recommend the read. I've personally emailed this article to friends because it's important (to me) that America has an accurate perspective of China.
Is the Chinese domestic market arriving? That depends...are you the National Basketball Association? Or, are you another reader of China-sized hype?
ChinaLawBlog recently covered an email/article by Shaun Rein of the China Market Research Group out of Shanghai. The email discussed many points covered in a Business Week article entitled China's Rising Retail Market: Chinese youth intend to spend "considerably more" in 2008 than they did in 2007. Multinationals had better start thinking young,"
The email summary began with:
While retail sales are plummeting in the US, sales in China are continuing to boom, driven by optimistic shoppers largely shielded from the global economic malaise. China as a market to sell into rather than a place to source cheap products from has become a major engine for growth for even the largest companies worldwide.
In another recent report by Booz, Allen, Hamilton and the AmCham Shanghai (h/t AllRoads), the #1 reason US companies would stay in China despite rising costs is access to the domestic market.
What gets these companies salivating over the consumer market in China? Consider the example of a regular season NBA basketball game.
The most televised TV sports event, a regular season NBA basketball game between two average NBA teams, which happened to have two native Chinese basketball players (Yao Ming of the Houston Rockets and Milwaukee's Yi Jianlian), drew an estimated 250 million viewers. This figure that puts any SuperBowl to shame. That's right, a regular season NBA basketball game trumps the Superbowl because of two Chinese guys. That is significant. In advertising, three digit numbers in front of the word "million" causes excitement.
If you're the NBA, you're happy. If you're selling to a very small group of affluent Chinese kids in a handful of coastal cities, you're interested in reading the China Market Research Group's report.
But, unfortunately, NBA + 250 million viewers, does not equal 1.3 billion customers. Not even by a long shot...
Part II is coming...
Well, not really...
I'm currently on another sourcing trip in China. I'm headed to Vietnam in a week. My first week in China has been very busy and has provided a lot of food for thought on the manufacturing shake-up that is taking place in China right now. Is it really a shake-up? Yes and no. It's not as if all hell's breaking loose over here. But, almost every supplier I have met with has groaned about increasing material, energy, and labor costs, as well as the impact of the currency exchange rates. Many of these things are not unique to China. Nevertheless, it's never fun to report increases in costs to your customers--and they certainly don't enjoy it.
One of the tough spots Chinese suppliers find themselves in, is it's not atypical for foreign businesses sourcing in China to consistently apply pressure to lower costs. Hence the erosion of quality in materials and product--or the practice of quality fade by suppliers to preserve their margins. In addition to constant cost pressure from many customers, there is often pressure to improve working conditions for laborers and decrease negative impacts on the environment.
What foreign buyers often miss or conveniently ignore, is the fact that improving labor and environmental conditions costs money. The burden of these improvements are typically placed on the supplier. Finally, China has enacted labor laws that should improve the average factory worker's security. Thus, as we are seeing now, costs are beginning to rise, and the most inefficient, energy intensive, high-labor, low value operations are either shutting down or moving elsewhere. This is really neither good or bad. It is good, because, like many have asked for, working conditions will begin to improve in China.
But what will many businesses do? Many will begin to look elsewhere for lower cost labor. Currently, there is no "next-China" on the horizon. Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa. Many of these destinations may make sense currently and will likely become more prominent in the future. But China is far from being dislocated as the epicenter of manufacturing soon. Remember, it's not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination. This will not be easy, as demonstrated by the extreme case of...Madagascar.
The most exotic destination I've heard of a company moving to, to date, is Madagascar. That's right--the exclusive home of the Dwarf Lemur and the Aye-Aye. One of my supplier's other customers has actually set up a source in Madagascar to assemble product. Contrary to intuition regarding a supply chain like this, the company claims they are saving money. While I find it hard to believe, I know very little about their situation. I do know that supply chain flexibility and responsiveness must not be critical to the business model. Keep in mind that Madagascar has little to none in the way of a manufacturing base. This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar. They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China.
Wonders never cease...
Fast Company's latest issue covered a great perspective on the "world is flat" idea, discussed by Richard Florida (originator and advocate of the "Creative Class"), in his book Who's Your City?. The general premise?
The world is not flat, a notion widely popularized by Thomas Friedman, but rather spiky. Florida proposes that the geographic regions of the world at large, can be classified into four general types or clusters, based on population and socioeconomic circumstances. What are the four clusters?
Four kinds of places make up the landscape of our spiky world: first, the tallest spikes that attract global talent, generate knowledge, and produce the lion's share of global innovation. Second are the emerging peaks that use established ideas, often imported, to produce goods and services. Some of these cities, such as Dublin and Seoul, are transitioning into places that generate innovation, but most, from Guadalajara to Shanghai, function primarily as the manufacturing and service centers of the 21st-century global economy. The two remaining types of places are being left behind: third-world megacities distinguished by large-scale "global slums," with high levels of social and political unrest and little meaningful economic activity; and the huge valleys of the spiky world, rural areas with little concentration of population or economic activity.
A few interesting, additional observations made by Florida are that 1) the world is much more "flat" and connected for those in the "spikes", or areas of innovation and concentrated talent. Thus, those that inhabit and frequently travel between cities like London, Paris, Shanghai, New York, San Francisco, Los Angeles, Chicago, Tokyo, Singapore, etc. are much more likely to be connected in the way that Thomas Friedman alludes to. 2) The divide between these areas and the bottom two areas, the developing world and rural areas, is growing dramatically.
This spikey/cluster concept was first introduced to me a few years ago in a talk by a futurist at the Commonwealth Club. I think Florida's depiction paints a much more accurate portrayal of the world with respect to socioeconomics. I live in and frequently travel in cities that would be considered spikes, but I have also lived in and traveled through places that would be at the bottom of the rungs. From a cultural standpoint, there is a shift in the way someone like myself might connect to people in the rural areas of my own country and people in the spikes of other countries. It largely depends on context. My ability to relate to a farmer in Nebraska might be much stronger in areas of politics, family, and issues that ring home in my American upbringing. However, in certain contexts, my ability to connect with the young, technologically hip, professional in Shanghai is markedly stronger than a farmer in Nebraska. This would be apparent on issues of business, lifestyle, and world affairs, etc...
This also helps to bring a more accurate description to the socioeconomic circumstances of very dynamic, emerging economies like China. Many of the China-hype articles that have been published in top business magazines over the last few years, depict China as a country ready to challenge the world in areas like innovation, design, and other cutting-edge capacities. These articles are most assuredly talking about an extremely small, handful of people and companies in the spikiest of clusters like Shanghai. Articles like this often serve as a reader's only impression of China, if they have never done business there. It's no wonder that hype like this has fostered fear and suspicion of China's imminent challenge to other economies in these areas. In reality, China, in many ways, is still a country of rural peasants. There are world-class talent and capabilities there, but believe you me, it's a relatively small group of people in the spiky clusters.
So many products today are often truly global when considering who and what places are involved in developing, producing, marketing, and buying them. Not only does this process bring together people in different geographic areas, it involves adept management of people across several of the clusters at one time, to capture the benefits and strengths of each in the process.
In 2007, there was increasing chatter in manufacturing, sourcing, purchasing, and related circles regarding various forces in China causing price inflation. The Chinese government's move to discontinue export rebate taxes last summer in certain categories and industries was one of the first signs of the Central government's desire to curb manufacturers' role in the over-heated economy. A weakening dollar and U.S. recession would soon come into play, as well as increasing labor costs and changing labor laws impacting China's eastern manufacturing hubs. There was even talk of many Chinese manufacturers closing up shop after this Chinese New Year holiday and the snow storms preventing mass numbers of workers from coming back to their jobs. The chatter filtered over into blogs, and now I have friends and associates sending me newspaper articles that talk of companies looking to move more deeply into China's interior, or source product from other countries altogether.
Almost a year ago, I did a series of posts entitled Offshore Sourcing: An Ever-Shifting Landscape, in which I discussed U.S. apparel companies who had moved their supply chains into Vietnam from China and got into hot water when threatened by a potential rift in trade regulations between the U.S. and Vietnam. In the world of low-cost chasing companies, there's no doubt that many execs will read stories like this in the SF Chronicle and ring up their purchasing manager immediately and ask what they're doing about getting into Vietnam, India, Bangledesh, etc.
I'd like to offer a few points to consider when thinking about the future of manufacturing in China, building supply chains in emerging low-cost destinations, and moving production from one destination to another:
The bottomline is careful consideration of the circumstances of your company, your supply chain, and industry will be far more important in determining where to source from in the short-term. Understanding these issues will present a far better perspective to make decisions from regarding when and if to expand your supply chain into other countries when the macroeconomic writing is indeed on the wall.
Marketing is about what? Selling your product or service? Yes, that's true. I just checked an MBA Marketing Principles 551 textbook and it told me it was true. Going about that can be so much more of a challenge. Some marketing experts, Seth Godin is one of them (I found this on his blog), believe that creating a product that people want in the first place will take care of quite a bit in the way of marketing. Your sales people will thank you for the fact that they won't have to really go out and sell that piece of .... in the box.
Dare I say, a second goal of marketing a product, is creating a connection with people. Connecting what? Connecting people at the company to the customer? Connecting the people at the company, the customer, and the product all together? Yea... in certain industries, that can be critical. It could be everything. You may not need this extraordinary bond with everyone, but it may be critical to have it with your best customers. Given the 80/20 rule, and your best customers are a small 20% or less of the total that contribute 80% of your business...
I see this tag in a store and I chuckle inside. "Dorks", I remark about the packaging designers at Puma. But I appreciate it. In some ways, I admire it. That's a connection. As they point out, 96% of the people may not even read the tag. But it's the 4% who do, that Puma REALLY wants to make and keep a connection with. If you're product comes from who you are, there may be little ways like this that you can create a connection with people just like you, who will love your product.
In my last post, Fort Payne, Alabama Shows How to "Git 'Er Done" When Challenged by Cheap Imports from Low-Cost, Overseas Labor, I covered a story regarding a U.S. town adapting well to the challenge that global trade and low-cost offshore labor poses to them. I saw this article and I thought it would make a great follow-up, and highlight what's going on while the United States' debates whether freer trade or more trade barriers is the key to maintaining the United States' economic excellence. I say "excellence" in the place of "dominance" because, as this news flash shows, there are two other would-be superpowers that may soon share the limelight with us.
This news came to my attention by way of SpendMatters (Jason Busch, SpendMatters author, cited World Trade Magazine and India's Economic Times). Anil Gupta, of India's Economic Times, writes in his article, The Future of India-China Trade:
First, trade between the two countries has grown very robustly. Each country’s aggregate international trade is expanding by 23-24% annually. In comparison, India-China trade grew at a 50% rate during 2002-2006 and will increase by a further 54% during 2007 to reach $37 billion.
Second, after adjusting for partner GDP (i.e., bilateral trade divided by the trading partner’s GDP), India’s trade with China is greater than that with Japan, the US, or the entire world. After similar adjustments, China’s trade with India is only slightly below that with Japan, the US, or the entire world.
Third, China already is (or will shortly become) India’s number one trading partner. From China’s side, India already is one of its top ten trading partners. Also, China’s trade with India is growing much faster than with any of the other nine. Thus, India is rapidly becoming an increasingly important trading partner for China.
Fourth, India’s overall international trade is significantly below that of China’s, in terms of both absolute figures (for 2006, $306 billion vs $1,760 billion) as well as relative to GDP (34% of GDP vs. 65% of GDP).
Fifth, even if the growth rate in India-China trade slows down to 25% annually (a conservative projection) from the current rate of over 50%, bilateral trade between them will be almost $75 billion in 2010 and $225 billion in 2015, i.e., as large as China-US trade just three years ago. These are very large numbers. Political and business leaders need to start getting ready now for this radically different world.
There is still a lot left to unfold that could positively or negatively impact trade between these two countries. China and India are dancing around various trading partnership deals (India-China Free Trade Agreement, India granting China Market Economy Status) which could foster increased trade. In contrast, continued growth in trade depends upon these two countries not getting caught up in quibbles over trade issues and protectionist attitudes.
Currently, the United States, at large, seems to be debating clamping down on international trade (demonstrated by those with protectionist attitudes in Congress and certain presidential candidates) and those that promote increased trade between the U.S. and other countries (also demonstrated by certain members of Congress and the current administration). While we think about these issues, we may want to take note of the growth in trade and relationship-building taking place between the two most likely candidates for shared, superpower status in the next 50 years.
For my two cents, (which isn't as valuable in the global currency markets as it was one year ago), perhaps more open attitudes towards trade and more towns adjusting like Fort Payne, Al (e.g. increased focus on innovation, education, and higher-skilled jobs), are our best bet at maintaining the lead we've worked so hard to gain over the last 50 years.
As more low-skilled jobs work their way out of the hands of U.S. workers' and into those of low-cost laborers overseas, many in the U.S. shout "what's in it for us?" Adaptation to circumstances like this has never been easy. But, as anyone who has taken 6th grade biology knows, adaptation is critical to continued evolution and survival, whether you're a salamander, lion, or sock factory worker in Fort Payne, Alabama.
The following example of Fort Payne's sock industry dominance challenged by cheap imports from Honduras, China, and Pakistan, demonstrates that being edged off the factory floor by a low-cost labor force overseas doesn't always have to create a net loss to people in the United States. It can, in fact, result in improved circumstances for our citizens here. Fort Payne, Al, shows us that's not just crazy talk.
I caught wind of this story in a blog post at Marc Andreeson's blog.pmarca.com, and it seems it can be traced back to an NPR story found here. Marc does a great job at putting the pieces together:
The [US government] today announced it has [decided] to... apply a textile safeguard measure [i.e., protectionist tariff] on cotton socks imported into the United States [from Honduras]...
"[The US government] reached this decision after careful consideration of all available information and comments submitted by all interested parties. [What's that smell?] The substantial increases in imports of cotton socks from Honduras found during the investigation have led [us] to move forward with the safeguard [i.e. protectionist tariff] process..." said Deputy Assistant Secretary of Commerce Matt Priest...
[The US government] made a determination that a safeguard measure [i.e. protectionist tariff] is warranted with respect to imports of Honduran origin cotton socks based on the substantial growth in imports from Honduras. Imports of cotton socks from Honduras were 27.3 million dozen pairs through the first eleven months of 2007, an increase of 99% from the same period a year earlier. [The evil brown people are strategically swamping us with cotton socks!]
Based on the substantial level of imports of cotton socks, [the US government] determined that it will not, at this time, make a determination to apply a safeguard measure with respect to wool and man-made fiber socks. [The evil brown people are not yet strategically swamping us with wool and man-made fiber socks!]
Source: US government International Trade Administration.
The situation is grim for Fort Payne, Alabama, the "sock capital of the world", says NPR:
There's no question that globalization has been really bad for the sock industry of Fort Payne, Ala. Just a few years ago, the town called itself the sock capital of the world, and with good reason: Most of the town worked in the sock business.
There were more than 150 sock factories, churning out a big chunk of the socks worn in the U.S. But lately, there has been a flood of cheaper socks coming in from China, Pakistan and Honduras. It has devastated Fort Payne. Two-thirds of the town's sock mills have closed...
Jimmy Durham, the county economic development officer, shows just how grim things have been for the sock business here.
On street after street, he points to buildings that used to house sock mills, most of which are now gone.
Terrible, right? Well...
With all these businesses shuttered, you might think [county economic development officer] Durham is in despair about the future of Fort Payne. He isn't.
Those closed sock factories are reopening as new businesses.
He points to Steadfast, which makes bridges; Ferguson, a major plumbing supply company; a distribution center for Children's Place; two new metal tube manufacturers; a high-tech label maker. For a town of only 13,000 people, this is a lot of new, good-paying employment. These jobs pay more than sock-making jobs.
In fact, most of 4,000 recently laid-off sock workers quickly found new jobs...
Durham says there has been a high-tech revolution in Alabama. Mercedes-Benz, Toyota and Honda have all opened plants in the state. And that means a huge influx of parts suppliers. BAE Systems, a major U.K. aviation company, opened an engineering office in Alabama.
Durham says there are now more high-paying, high-skill jobs in the state than there are people qualified to take them...
The unemployment rate has stayed the same, even as the population has increased. In other words, the number of jobs has gone up, even as thousands of sock-making jobs have gone away.
So why on Earth would the US government put a protectionist tariff on Honduran socks now -- particularly when Honduras is a fellow participant in CAFTA, the Central American Free Trade Agreement?
There's only one reason: a deal President Bush struck late one night in July 2005.
That July night, Bush met with Fort Payne's congressman, Robert Aderholt, to talk about tariffs and the sock business.
That meeting was, most likely, the moment Aderholt had more power than at any other time in his life. The House was voting on CAFTA, the Central America Free Trade Agreement. The vote was an exact tie. Aderholt was the holdout. And President Bush very much wanted CAFTA to pass. So, Aderholt offered the president a deal: He could get his big free-trade deal only if he rolled back free trade on one industry, the sock industry.
"I told him this was what I needed," Aderholt said. "This was the one thing I had great concerns about."
That night, President Bush agreed to Aderholt's deal. CAFTA passed. And the White House gave itself a self-imposed deadline of Dec.19, 2007, to put back tariffs on sock exports from Honduras [which they missed by about a month].
Globalization can be tough on those in jobs and industries that can be done easily, anywhere. I'm sure if my job or function was outsourced within a year to someone in India or China, it would be a challenge for me to reassess my situation, pick up what I have left, and keep moving forward. But, adaptation is critical to my survival and is an intrinsic element of a globalizing world. If I sit on my haunches, I'm done for.
The bright side is, like many workers in Fort Payne, I may find myself in a better position. Trading out low-skilled/low-paying jobs for higher skilled/higher-paying jobs can be advantageous if tackled head on. I have to extend kudos to an entire town that seems to be on their way to accomplishing this. They're changing with the times and finding a better future for themselves, rather than throwing up their hands and saying "no fair". The Honduran sock makers may have a better claim to "no fair", who are also honest, hard working people who want to provide for their families. They are unable to compete to their full capability, not because of economic forces, but political wheeling and dealing on the part of our politicians. Hopefully, they're just as resourceful as their Fort Payne counterparts.
Getting quality product from offshore manufacturers entails laying out and adhering to a development process. Time to market is important, but delivering poor-quality product is probably worse than delaying your ship date a bit. If I buy a product and it doesn't live up to it's promise (translation: it's a piece of &$#@), you better believe that I'm not going back to that brand.
To build quality INTO your products, consider the steps in the process that may need to take place and the time you may need to accomplish them. Below is an example GANTT chart (you should be able to click on it to open it) for a product development schedule of a consumer electronic product I just came up with (this one is pretty cool and if 1% of the human market buys one, man...)
This is a pretty raw chart, meaning it's not based on a whole lot of information, and activity timelines could lengthen or shorten a bit depending on the issues that arise, the kind of product, etc. This particular product requires complex, high-quality injection molding.
We're at least 6 months out from being production ready. What's taking so long? Well...
I've now hit my bullet point quota for the next year, but there's quite a lot to do here. Going through a process like this, with several tests and verifications along the way, helps to ensure that what a company gets out of the production line on the other end is what they wanted in the beginning. Notice that this doesn't even include incoming QC inspections, production line inspections, and 3rd party inspections before shipment. But if you allow yourself enough time to go through this process correctly and efficiently, you end up keeping your promise to your customers with high-quality products going into their hands. That's so hot.
