Yesterday I told you about the panel discussion on Onshoring: Domestic Manufacturing as a Competitive Advantage that I moderated at Kellogg’s Manufacturing Business Conference. Immediately following my panel was a different panel discussion on The Challenges of Outsourcing Manufacturing to China. My panel did a pretty good job of setting them up, and they even apologized for being "the bad guys."
The China panel was made up of very senior executives from some very large companies… Motorola, Emerson, Eaton, and the like. Unfortunately some of them didn’t sign their media waivers, therefore Kellogg asked me (apparently as part of "the media") to not attribute quotes directly to specific panelists. I wonder why…? I won’t speculate, but you can. After listening to them trying to defend their Chinese operations but also telling us about the "challenges," I was left asking why I should even think about outsourcing to China.
So let’s review some of the more notable quotes, perhaps paraphrased a bit due to my furious notetaking that resulted in rather poor penmanship, and not attributing them to any specific panelist.
China is littered with the carcasses of companies that offshored for the wrong reasons.
Almost to a one, all of the panelists said they moved to China to capitalize on the emerging Chinese market, not for low cost labor. But yet these companies believe they are justified in moving to China for reasons besides the "huge market."
China has a unique ability to adapt to different business models.
China has a well-developed supply base, unlike eastern Europe or Latin America.
And what is their due diligence process or perspective when evaluating moving to China?
Instead of trying to justify outsourcing, we force our division managers to justify why they should not be outsourcing to China.
Wow, nice skewing of the decisionmaking process. Companies that move to China simply for labor saving are kidding themselves, because…
China is experiencing double digit wage inflation, particularly among white collar jobs.
Rapid growth is creating a severe labor shortage in some geographical and skills areas.
The biggest challenge is keeping the labor pool "refreshed." Workers are jumping around to learn new skills, not necessarily for more pay.
Boy that sounds like a fun management "challenge." The training costs must be huge, and I’m not really in the business of training the workforce of other companies. Social issues are creating some interesting risk dynamics.
The gap between the poor and rich is widening, and the Chinese government has implicitly promised income "harmonization" in the near future. The people are expecting that to occur.
If something isn’t done about income inequality, there is a large risk of political instability.
Many are expecting a major disruptive social event after the Olympics.
The Olympics mark a "point in time" in China, socially and politically, and many outside of China are severely underestimating the potential significance of that milestone.
Yes, that sounds like a place I’d want to put a multi-billion dollar investment. I was completely unaware of the significance of the Olympics to the Chinese people, but these executives were quite apprehensive of what might happen right afterwards. But as one executive said,
We don’t worry about catastrophic events; I guess out of sight, out of mind.
Yes, from an executive of a multi-billion dollar division. But in all fairness, others had a different take.
I can’t imagine a large company corporate board that doesn’t demand a risk and contingency analysis on major operations.
I wonder what that analysis showed, and what the contingency plan is. It probably involves some globetrotting. But as if social and political risk wasn’t enough, there’s the business itself.
Relationships are more important than the rule of law.
We are willing to take the risk of stolen intellectual property in order to be fast to market.
Companies that set up joint ventures are likely to find that their partner soon becomes their competitor. Joint ventures are seen as short-term learning and knowledge transfer opportunities by the Chinese.
That’s a helluva risk. So basically multinational companies are investing in China, helping them build infrastructure and transfering knowledge, and saying they are "capitalizing on the huge Chinese market." But the Chinese are taking that knowledge and their new riches, creating companies that are rapidly turning into competitors in that same Chinese market, and then expanding internationally.
In 20 years 50% of the Fortune 1000 will be home-grown Chinese companies, competitors to those companies that originally moved to China to capitalize on the huge emerging Chinese market.
Tell me again why I should even think about outsourcing to China?