Hello, this is Jim Tompkins President of Tompkins Associates and Tompkins International. This is the last part of our nine-part series on Replacing China Myths with Facts. Wow, a very interesting series where I have learned a lot and I hope you have as well. If you have missed some of the segments, I recommend you go back and listen as there is some very eye opening information that has been presented. It is very clear to me that China's impact on business will continue to be felt by virtually every business out there.
In this concluding session of this podcast series I'll give you an overview of what we have covered.
In the first part of this series I addressed th five of the most frequently voiced china myths. These being:
Globalism is bad
China labor rates will converge with the US labor rates in a few years
Manufacturing in China is dumping in the US and it is not profitable
China's economy is #1 in the world
China's manufacturing quality is poor
All five of these myths are simply naïve, but nevertheless there are many people in the West who believe these. In fact these five when combined lead to a fear and paranoia of China that is totally misplaced and serve to spawn many other myths.
Just to be clear, we all need to understand three points about these five myths:
Creative destruction of low paying jobs and replacing them with higher paying jobs is good. Globalism drives creative destruction and therefore it is a good thing. Globalism increases the standard of living for all and will continue to increase the quality of life along side that.
High paid and highly productivity jobs are great jobs and they will not return to the US because they never left. What was left for the most part was low paying, low productivity jobs and these being gone is good. We don't want Americans in low paying, low productivity jobs.
Of course China will catch the US economy at some point. There are four times more Chinese people than American's. So in fifteen years when the China economy passes the US, the Chinese standard of living will be ¼ as high as the US.
So what is key is that we remain committed to free trade and against protectionism. If we do this and the US government does not spend more than we make, we will do just fine. But the true threat to America is not China, but rather the American Government spending more money than it makes.
In our second and third podcasts in this series we discussed the evolution of business in China. This was done in five buckets:
First the legal bucket where the evolution has gone from government mandated-joint ventures to significant flexibility in business structure, depending upon your end game and the China strategy being pursued.
The second bucket is Capital where China has evolved from hungry for foreign investment to a much more business oriented environment that's looking at the types of investments being offered and their long term contribution of value. So undesirable businesses from an environmental or quality of work perspective are not welcome, and therefore not moving to China. What are moving are clean, higher tech businesses where China funding is available.
The third bucket questions China copying the West as opposed to being innovative unto themselves. This is really a myth. Yes historically 1970-80's China copied. But today, they are innovative and are educating the innovators of the future.
The forth bucket on China evolution has to do with the Chinese people. The reality is China has invested heavily in developing their people. They sent thousands of people to the West for education and many have now returned, plus multi-nationals who love the pace of China have helped. So putting in place the right team of people is still a challenge in China, but it is now not as much of an issue of the supply of folks, but rather the huge increase in demand.
The last bucket of China evolution has to do with the China Market. Early on you could sell equipment into China or export product from China. Now the consumer market is the fastest growing market in the world. So China for China has become huge. So not elimination of China exports, but added the exports China for China. So this has created a frantic rush to open stores and grow China's infrastructure. This then has lead to the opening of the healthcare field and the continued great expression of business in China.
So a wealth of knowledge from the second and third podcast on the legal, capital, innovation, people and markets of China. A huge evolution that has laid the foundation for the fourth part of this podcast series where China is going and specifically the growth implications for Western firms. To frame this discussion Steve Ganster presented several important principles that have laid the foundation for the path forward:
The pace of change in China is unbelievable. Like dog years, one year in China is like seven in the West
The quality and diversity of growth in China is unlike anything seen in business before. Not only is there growth, but huge growth in the market tiers. Not only mass and premium tiers, but also value and luxury, often three or four tiers.
So yes, lots of growth, but a key is to understand the growth by segment and designing a growth strategy that is consistent with the growth occurring in China. The key is not just market growth, but the growth in your addressable market in the West, and so you very well may need to Chinafy your product offerings in China. The key here of course is to have the correct growth strategy for the China market and then to capture your fair share of this, the fastest growth consumer market in the world. Not as an afterthought here, but possibly a key component of your China strategy is the potential for acquisition. More on this in future podcasts.
The fourth segment by Steve Ganster then took us to a discussion of the supply chain in China, where for the next four podcasts we covered:
Sourcing
Logistics Service Providers
Distribution
Big picture of supply chain
In the fifth part of this podcast series Michael Zakkour presented the reality of China Sourcing 2.0 as opposed to low margin/low cost manufacturing of Sourcing 1.0. As Sourcing 1.0 is relegated to Western China and other Southeast Asia countries as we see Creative Destruction of low paid jobs in Eastern China on the move. Our approach to Sourcing 2.0 is a four step process of:
Sourcing 360
Factory services
Vendor portal
Logistics
The Sourcing 360 is a look at the market for both export and China for China and a true understanding of the competitive landscape, the potential suppliers and potential M&A. Armed with this knowledge we move beyond the big picture and get down into the factory in our second step, factory services. Here is where we check the resources and capabilities to really partner over the long haul. These same factory service resources are our on-the-floor resources throughout the relationship with the China manufacturers. Our third process in Sourcing 2.0 is the ongoing communications between you and the Asian Supply Base, the Vendor Portal. We partner here with Arigo for:
Global Sourcing and Procurement
Supplier Relationship
Quality Assurance, Compliance and Risk Management
Global Logistics
Total Cost Management
This is a key process in making your China Sourcing work as it is all about communications. Then lastly, the process of logistics to export product out of China and/or to move product from manufacturing to domestic distribution in China. This logistics component is covered in the next two segments of this series. First, in the sixth segment if you outsource this function to logistics service providers and in the seventh segment of you perform this logistics function yourself.
In the sixth segment I was joined by our Global Logistics Service Providers expert, Valerie Bonebrake. Valerie did a great job of covering the wide range of China LSP's, the wide range of service offerings, the diversity of available services by region and by vertical. The fragmentation of the market creates major challenges for Western companies trying to maneuver their way through the China LSP jungle. This especially is a challenge as the market continues to evolve at a rapid pace. And by his I mean both the LSP market and the rapid growth of the evolution of China for China. It is very , very clear that a well planned strategy for selecting and managing service providers in China is key to not only handle the China component of your supply chain, but also to integrate your overall supply chain into a global platform for success.
In the seventh segment I was joined by Denny McKnight as he had just returned from an eighteen month assignment in China leading the evolution of the Tompkins supply chain practice in China. Segment seven focuses on the distribution challenges in China. Denny helps us understand that distribution in China today is in its infancy, with pockets of advanced technologies in specific industries. With the exception of pharmaceutical and tobacco industries, warehouses are very basic in terms of material handling and storage. In pharma and tobacco you do see automated storage retrieval systems, sortation systems and advanced order fulfillment processes. In addition, retail appeal and fashion DC's are starting to grasp the value of automation. Another area where demand for advanced solutions in DC's is being embraced is in e-commerce.
But, a lot of work needs to be done here just as we saw in the eighth segment in this podcast series where we looked at the broader issue of supply chain capabilities in China. John Spain who has now taken over for Denny in China says that one of the biggest problems in China on supply chain is that often the China management does not even know what they do not know. John makes the point that this lack of true supply chain appreciation is consistent across all of the supply chain mega processes of PLAN-BUY-MAKE-MOVE-STORE-SELL. The opportunities for improvement are huge and just now starting to be understood. The same for the IT supporting the supply chain mega-processes. In fact the supply chain in China today is just about where supply chain was in the West 20-25 years ago. But as we have pointed out in this whole podcast series the evolution in China is beginning and they are evolving quickly.
So, that is where we have been. I guess if I needed to place one word as a keynote of this series, I would use the word Opportunity. The opportunity of:
Putting globalism on steroids
Opportunity of the evolution of China for China market
Opportunity of the diversity of growth in China and the need for strategy before structure
The opportunity for a more sophisticated export model for China
The opportunity of the rapidly changing and evolving LSP, Distribution and supply chain landscape in China
I think it is clear that any fear of China is misplaced. China is a very happening place and the home of opportunity moving forward. I strongly encourage you to establish your strategy for taking hold of these many Chinese opportunities. The potential is great, but you must first put forth a China strategy and then jump on it with three feet.
This concludes our series of myths and challenges of doing business in China. A lot of valuable content. I hope you enjoyed. I very much look forward to speaking again with you soon as we being our next podcast series on The Demand Driven Supply Chain. I certainly look forward to speaking to you all real soon.
