Getting a Good Night’s Sleep in a Global Economy
By Lou Longo & Jeff Moyer
Global Services
Universal Advisor, 2004 Issue No. 3


Are thoughts of moving your business to China keeping you up at night? If you’re involved with a manufacturing company, or work in a company or industry heavily reliant on the manufacturing industry, chances are the answer is a very sleepy “yes.”

Across America, countless organizations are feverishly formulating China strategies, rushing to take advantage of perceived opportunities 8,000 miles from home and familiar markets. With a level of zeal matched only by the Gold Rush of the 1800s, otherwise disciplined executives are making life-or-death business decisions supported by little analysis and hasty evaluation.

Despite this exuberance, experienced business leaders are often responding to more push than pull.

Clearly, China’s low-cost workforce and enormous emerging market potential hold great promise for all sorts of U.S. companies (the pull). But the decision to head for Shanghai usually is made only after external pressures (the push) come into play in one of three ways:

• A company’s biggest customer delivers an ultimatum to dramatically reduce costs or risk being replaced by another supplier: “We need a five-percent cut for the next five years.”

• A critical customer makes an offer you can’t refuse: “We’re going to China, and we want you to be there with us.”

• A company is caught up in the herd mentality: “Everyone is going, and we can’t be left behind.”

These push factors may seem compelling. But great companies don’t get pushed into anything. They determine their own destiny through careful analysis and sound strategic planning. Before checking the flight schedule to Beijing, consider if China’s siren call is actually masking more fundamental problems or even more attractive opportunities. Do you have the right customers, willing to pay for the value you can deliver? Do you have the right core competencies to compete and thrive in today’s competitive market? Are there better ways to trim costs and other places to find operational savings? Do you need to adjust your strategy?

A structured evaluation process is essential to making the right decision about whether to move your business to China and in securing a successful future for your company. Consider the following case histories.

A $10-million Midwest manufacturer was recently invited by their largest customer to join them in China. This debt-free private company, facing the most difficult decision in its 50-year history, initially saw few options. Careful analysis, however, identified another path. The small company had been producing components for the industrial products division of the international manufacturer — the division that was moving operations to China. But what about the customer’s much larger, potentially more profitable, consumer market business? This small, flexible shop was in a perfect position to provide components for the company’s domestically manufactured products. They had failed to recognize an industry-wide shift to more specialized consumer production and had never considered going after this business. It was determined that investing the capital to appropriately redirect their focus could improve the bottom line and allow them to take the China decision out of the “life or death” category.

Second, a tool and die manufacturer, seeing its customers heading to China, examined its core competencies. The company’s management determined that it could effectively source the most labor-intensive part of its processes to China, while continuing to contribute unique engineering value with its highly trained domestic workforce. Their China sourcing strategy, like many, freed resources for the company domestically, actually allowing more work for their domestic operations.

Another Great Lakes manufacturer, faced with an imperative to cut costs and production time, discovered that it had not even come close to maximizing the benefits of lean. Like far too many companies, they had not embraced the lean manufacturing revolution of the 1990s. Moving operations to China was a poor substitute for simply catching up with proven methods of achieving efficiency. When analyzed against the actual costs and difficulties of doing business 12 hours away, these domestic options were very competitive.

Finally, a $100-million supplier of interior automotive parts got the bad news that its largest customer had decided to resource to a company in China, cutting their volume by 20 percent. What’s worse, they were told that they would not be in the OEM’s long term plans unless costs came down dramatically. A buyer at the OEM — under intense cost-cutting pressure himself — went so far as to recommend a partnership with the Chinese company that had just taken the bite out of their business. Reluctant to allow the buyer to determine its strategic direction, the supplier wisely undertook a thorough evaluation of its business before committing to a presence in China.

For most companies, the best option — after a careful, honest, and thorough analysis — is to make changes to domestic business strategies before taking the leap into a low cost region such as China. However, if through this analysis it appears that a China (or other low cost region) strategy is a go, the next step is to determine the best way to go. Generally, companies pursue one of three strategies:

• Companies source something from China.

• Companies acquire or form joint ventures with Chinese companies.

• Companies create wholly foreign owned enterprises (referred to as WFOEs, pronounced “woofies”).

There are risks and advantages to all three. While it makes sense for some companies to have Chinese companies make something for them, beware that there is a serious risk of losing your proprietary technology, ideas, etc. Acquisitions and joint ventures provide more control, but marriages with organizations that are so different culturally are difficult to say the least. And WFOEs — the “Full Monty” of China strategies — come with the highest costs and the greatest challenges.

It may seem like common sense, but in the rush to China, Thailand, India, or other low cost regions, companies often fail to adequately assess the best location for their operations. Imagine your odds of picking the ideal location in the United States without in-depth knowledge of our states, regions, counties and municipalities. In China, for example, provinces are pitted against one another in a fierce, state-directed campaign for economic growth and development. Taxation policies regarding inter province trade and travel are complex and potentially devastating to the bottom line. It’s essential to get the very best site selection counsel.

So, if you’re tossing and turning all night, it may just be because the path that leads off-shore is not right for your company. Or, you may sense that there are questions to be asked and alternatives to be considered before embarking on what is, for most companies, the most ambitious strategic move they’ve ever made. This is a perfect opportunity to reassess your future. Despite any perceived urgency or customer mandate, a structured analysis process is essential to making the right decision, keeping your company on course, and getting a good night’s sleep. For additional information, please contact Lou Longo at 248.375.7315 or Jeff Moyer at 248.375.7320.