Hello this is Jim Tompkins, CEO and President of Tompkins Associates and Tompkins International. I am pleased to be with you today as we do our fifth of our nine part series on Replacing China Myths with Facts. In the last segment of the podcast, we spoke with Steve Ganster on the overall direction of where China is going and the growth implications on Western firms. Today I would like to switch gears and speak with Michael Zakkour, a Principal with our China-based firm Technomic Asia on Sourcing in China.
First Michael, tell us a little about the past, present and future of sourcing and manufacturing in China.
Michael
China has been the factory to the world for the last 30 years. Multinational corporations, small to medium sized enterprises, start-ups, companies of every size, shape and form; especially over the last 15 years have turned to China for all of their sourcing and manufacturing needs. You do not need to look much further than Wal-Mart where 75% of their non-food items are sourced out of China. This low cost, cheap labor costs commodity manufacturing that built China into what it is today, has really been the story of the last 20 years.
What we are seeing now during the present time is that China is starting to shift away from the low cost commodity, low margin, and value-add manufacturing model and they are looking to steer the company into having higher end, higher value, higher margin manufacturing while also increasing percentage GDP that comes from services and from the higher end stuff. So now is the time, if you are a multinational corporation, sourcing or manufacturing in China or even if you are a smaller company, to consider your sourcing and manufacturing opportunities in China for the future. We are recommending that every company looks at every part of China
With the Go West Movement, you can save about 30% on manufacturing in the Western regions due to lower taxes, lower labor, and lower costs of doing business, but of course there are logistics problems with that. A lot of companies are now looking at Southeast Asian countries to pick up the slack from their China manufacturing. I think what you are seeing more and more is that China will be producing the more high-end goods such as those with higher value. In other words it may have been that for the past 15 years that companies would buy a finished product in China, and it might have been Germany that sold China the machines to make the product, but now what we will be seeing in the next 10 years is that China will be making the machines that make the finished product. So really going up the value chain. The future in China is really about higher value-add manufacturing and the shift as well for China manufacturing for the China market.
Jim
I have heard a lot about the term China Sourcing 2.0, can you tell us a little about what this is?
Michael
China Sourcing 2.0 is the embodiment of this shift that is taking place presently and it is going to manifest itself in the next few years. Whereas China Sourcing and Manufacturing 1.0 was very much about manufacturing low cost commodities. 2.0 is really a combination of sourcing and manufacturing in China for the China market as well as the rest of Asia.
For example, some of the tier one best in class manufacturers in China have very capable and committed resources in research and development. So whereas you needed to give China a finished copy, even five years ago, the China manufacturers can now help you with advanced engineering and advanced products. The Sourcing 2.0 value is really how we take our companies from opportunistic sourcing and manufacturing, to direct and strategic. Where they can capture costs at every level in the manufacturing and sourcing levels, including the supply chain, to increase revenue. That really is what 2.0 is all about, China moving into the future with cleaner, greener, higher value, and higher manufactured products.
Jim
How does it relate to your Wealth through Health view of China's future?
Michael
Wealth through Health is a concept I developed earlier this year when China adopted its twelve-five year plan in January. These are the five year plans that give the direction and the navigation for China's economy, companies, and government are going in the next five years.
We did an in-depth study here and I believe I read the twelve-five year plan somewhere around fifteen times. What I came out of it with was this idea of Wealth through Health. The next five years in China will continue with double-digits or at least high single digit GDP growth and creating twenty-five million jobs a year, still very, very necessary to China's rise. But the Chinese government also realizes that the low cost, dirty, environmentally dangerous manufacturing methods over the last thirty years are not sustainable for the next thirty. They also realize as people are growing more into the middle class, they are expecting more from government in terms of healthcare and social benefits. So if we look at the twelve-five year plan, Wealth through Health simply states that the Chinese government is interested in the health of the people, therefore healthcare, pharma, anything related to healthcare is a huge priority for the government and they are putting a lot of money into that. So any healthcare-related industries have a great shot at doing well in China.
The second thing the government is focused on is the heath of the environment. It is one thing to take care of people when they get sick, it is another thing to try to prevent them from becoming sick and as we know China's rivers, lakes, air, plants are some of the most polluted in the world. It is unsustainable. So any industries that are in green technology or environmental, anything to do with clean manufacturing, and anything along that spectrum, will do very well in aligning themselves with China's goals.
Then there is wealth of the society. One issue that China has been facing over the last few years is the uneven distribution of wealth, jobs, and prosperity across the country. Whereas the Eastern and Southern Coastal areas represent about 400 to 500 million people are relatively wealthym, development and wealth in jobs in the west and rural areas have not kept pace. We are talking about a billion people there. So the government is inducting heavily into moving industries and businesses West, North, and Southwest and they would like to see more equal distribution of development and wealth.
So again, multi-national companies who can align themselves with that philosophy are going to do very well.
What we are really seeing here is that the big opportunities in China have to do with "How do you keep the environment clean and how do you clean it up?' How do you keep people more healthy and how do you treat them?" Then finally the most important one, perhaps of all, is China's move to a healthy economy, (Wealth through Health). This means that, as far as the economy is concerned, a shift away from export driven only revenues to a service economy and a consumer spending economy is best. The government is taking measures to spur consumer spending, provide better social services, all so that people do not have to save all their money for healthcare and schooling. Wealth through Health is really about the Chinese government, taking care of its people, its land, its environment, and its economy to create continued growth and health.
Jim
What are key issues that multinational corporations should be considering?
Michael
All multinational companies should be considering where they can align themselves in China, with the Health through Wealth goals. They should be thinking about where they can align themselves with the shift from Sourcing 1.0 to Sourcing 2.0. The big winners in China, in terms of foreign companies, are companies that really understand the Chinese market. They have to make sure they don't approach it with a foreigner's eye or a foreigner's view. They have to have a China for China point of view. They really need to consider the macro view of the central government and where they want the country to grow.
Anytime you can align your company's interest with the interests of the government, you are going to do very well in China. Multinationals should also be considering the rise of the state-owned enterprise in China. There is Sourcing 2.0, we have an SO 2.0. Increasingly the Chinese government is getting back into the business of business. We are seeing it in a number of industries, in the media, on the internet, oil, gas, rail and transportation. Traditionally these have been state-owned enterprises, but even more common commercial enterprises are appearing. Most multinationals are going to have to think about their strategy of how to compete with and get along with the Chinese government at the same time.
Jim
How do the e-commerce and the growing China consumer market come into play with all this?
Michael
Really the big story in China right now is the growth in the consumer market. China has now become the number one market for automobiles and apparal, and the second largest market for luxury items. The Chinese consumer has money and they are looking to spend it and this is good news for multinationals in the luxury and premium states, especially since the Chinese prefer foreign brands.
All multi-national and small to midsize firms really need to take a strategic approach to selling into a consumer market in China. All they have to do is make sure they have a working understanding of what they can and can't do in there and who they can be partnered with.
It goes without saying with 450 million people online and approximately 200 million shopping online, that e-commerce in China is really on the verge of dwarfing all other markets in the world in terms of total dollars spent. We are thinking that China can easily look just like the U.S. store in the eighties and nineties over the next twenty years from a consumer market point of view. So go to China and sell your product, they want it. The consumer market is there and it aligns with the government's policies. Like we said, make sure you have a really solid understanding and strategy for e-commerce as that is truly the key.
Jim
Michael, thank you so much for being here with us today. A lot of valuable information for our listeners on Sourcing in China. Join me next time as I welcome back Tompkins Associates' own Valerie Bonebrake to discuss Logistics Service Providers in China. Speak to all real soon.
