08 January 2009

Viewpoint : Manufacturing

China's marathon

Published:: 30 May 2008
Article Type:: Viewpoint
Byline:: John Lamb

China''s determination that the Olympics should take place under blue skies in August means that the government will close factories and restrict traffic during the month-long sportsfest in a bid to cut the air pollution near Beijing.

The news has alarmed many of the country''s trading partners who fear that orders will go unfilled or that goods will sit in warehouses, unable to make it to the docks.

But the country''s economy continues to grow at a healthy 11 per cent or more per year. And at the same time, China''s manufacturing industry is transforming itself as quickly as possible from being a low-cost maker of toys, jeans and trainers into being a producer of high tech automotive, aerospace and electronic goods.

The race towards offshore manufacturing in China is picking up pace with Motorola, Philips, Toshiba, Procter & Gamble and Whirlpool all reporting expansion plans. And Dell''s recent news that it is to purchase €15bn worth of components from China in 2008 and €19bn next year has given a big boost to the country''s ambitions.

The Chinese government is determined to rein back on what it calls the processing trade - essentially low-margin assembly operations. That involves prohibiting certain types of business while at the same time seeking to bolster employment conditions through improved labour protection and wage regulations.

It may well be that foreign investors in labour-intensive industries are put off but that will suit China which is seeking to reduce its large foreign exchange reserves. China may have become a hub in the global supply chain but that itself has thrown up a range of new difficulties.

''In the high technology space, China is moving from being the equivalent to a start-up company that is growing quickly to one that has reached the more mature IPO stage,'' says Steve Keifer, vice president for industry and product marketing for supply chain services firm GXS.

''In the explosive start-up phase, quick growth has led to pollution, clogged roads and a creaking healthcare system,.'' adds Keifer, who is a regular visitor to China. ''Exports in the past have been low-value commodities but the country is moving towards higher value products.''

For example, GXS is engaged in a major project with Agile Supply Chain to build a healthcare exchange to facilitate the distribution of pharmaceutical products in China. The exchange will allow the state-owned Sinopharm drug company, with annual revenues of €1.2bn, to move purchase orders and bills electronically, cut inventory and reduce counterfeiting.

Despite the rapid change in the country, China''s factories struggle to keep up with changing consumer demands and to overcome the huge distances that goods must be transported. With lengthy supply chains requiring lead times of 60 days or more between placing orders and receiving goods, foreign customers are worried that they may be left with inventory for which there is no market.

Increasingly, trading partners are adopting postponement strategies - shipping partly manufactured goods closer to their intended market and adding the finishing touches there.

Chinese firms are also having to cope with significant financial pressures. Large overseas retailers are reluctant to pay the fees associated Exports in the past have been low-value commodities but the country is moving towards higher value productswith letters of credit that are used by Chinese manufacturers to get loans for production. Without these letters of credit, Chinese firms struggle to get the finance, risking insolvency or turning to unethical business practices.

The shift towards higher value products calls for a similar uplift in China''s skills base.

For all these growing pains, there''s little doubt that China''s long-term prospects are excellent. A recent report from a group of Chinese economists concludes that although the country still faces high inflationary pressure, the current global slowdown will have an insignificant effect on the economy.

Whatever happens during the Olympics, any slowdown in the torrent of exports from China will just be a blip. Blue skies still shine as far as trade is concerned.

John Lamb is a former editor of Computer Weekly, Information Week UK and Information Economics Journal

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