CHINA: The Lessons Learned From the First Wave of Outsourcing
By Mindy Kroll
Universal Advisor , 2005 Issue No. 3

An Interview With Lou Longo & Jeff Moyer of Plante & Moran Global Services
When China entered the World Trade Organization (WTO) in 2002, many organizations began feverishly formulating China strategies, rushing to take advantage of the perceived opportunities associated with doing business in such a low cost region. Three years later, these organizations have met with varying degrees of success. Plante & Moran’s Lou Longo and Jeff Moyer recently sat down to share their thoughts about this first wave of outsourcing, the lessons learned, and how to make informed decisions about the future of your organization.

When China entered the WTO, it was like a starter’s pistol signaling the beginning of a race. It seemed frenetic.

JM: It was. Otherwise disciplined executives were making knee-jerk, life-or-death decisions without the appropriate analysis and support.

I’ve heard it likened to the Gold Rush.

JM: Absolutely; that’s a common comparison, and I think it’s an appropriate one.

LL: It’s similar to when NAFTA was created. We spent a lot of time in Mexico in the ’90s helping clients assess the business case, understand tax and duty implications, and determining how to get the job done. There was a significant learning curve — the same kind of curve that we’re finding today with China.

JM: Except that the logistics are much more complicated with China. It’s a completely different culture, the time zone difference is at a maximum, the language is very difficult to understand, and the logistics of getting parts and supplies 8,000 miles to and from overseas is very difficult to manage.

And in the rush to compete, people didn’t stop to think things through as well as they should have.

LL: Some people, not all.

So there are some success stories.

LL: Absolutely. Some organizations found good companies, managed things correctly, and found net savings on commodity-type parts that make sense to produce in a low cost region. Others had to invest a lot of time and money to make the situation into what they thought it would be and, recently, have begun to realize some savings. Then there are those that went in blind, without doing the correct business assessment, and ended up spending more money to produce their products in China than to produce them here.

JM: A lot of people didn’t understand the culture or environment they were getting into. They found suppliers quickly, set up agreements and purchase orders and, before you knew it, they were ordering parts. In some cases, they weren’t considering the long-term business effects — how to manage the project in the long term, how to manage communications halfway around the world with a different culture and language, the lag in time from purchase order to product launch. That time frame can be critical if it’s not managed correctly.

What’s your advice to companies who are still in the process of evaluating whether or not to do business in China?

JM: We have a very thorough international strategy development and implementation process (see sidebar). Most people approach this decision emotionally. Some people want to go because everyone else is going. Others feel pressured because critical customers have gone and want them to go as well.

LL: One of the most common reasons we hear is, “I can cut costs by 20 percent by going to China.” Okay. Prove it. Spend the money, do the market research, and obtain the data to make an informed decision. Does China really make good business sense? Maybe not.

So you “international guys” sometimes recommend that clients refrain from going international.

LL: Absolutely! If you look at our process, you’ll see that “evaluate entry options” is step 8 of a 9-step process. There’s so much more to consider. The market. Your products. What are your core competencies? What’s the competition doing? What’s the business case? What are the tax implications? What investment responsibilities will you have? How will you control quality? It goes on and on.

JM: You have to resist an emotional reaction and take a pragmatic approach instead.

Are most of your clients making their first foray into China, or have they gone prior to enlisting your help?

LL: It’s a mixture. One client, a North American Tier 1 stamping company, determined they needed to play in the global marketplace. We helped them set up engineering offices in India as well as an office in China, so they could launch a sales and marketing campaign to position their company to support the domestic China automotive market that’s been growing at 10 to 15 percent per year. Within a short time of opening, they won programs in Korea and China. Now we’re helping them set up their WOFEs (wholly owned foreign enterprises), manufacturing facilities in both locations, and helping to identify and develop their supply base.

JM: Another client, an electronic division of a Tier 1 automotive company, had found a supplier in China. They had an office and staff, and they were incredibly busy — so busy that they needed ancillary support. They contracted us to provide supplier development support to them. They were 10 months behind product launch, which had cost them in the high six figures; one of our staff worked full-time to close out all of their open issues and helped them launch the project within two months. Now they’re doing very well.

Apparently the lesson is don’t go to China without hiring a consultant!

JM: But not just any consultant.

A lot of companies out there are getting into international consulting. Just like the first wave of outsourcing where everyone jumped on board, these companies are scrambling to offer that service. It’s important that companies really challenge their consultants. Do they have on-the-ground experience? Who do they really represent? Are they independent and advocates for their clients, or are they merely brokers selling a one-size-fits-all solution, trying to get paid on a transactional basis?

LL: Because there’s no one-size-fits-all solution. Every client’s needs are unique, and every solution is unique. We’ve learned this time and again. We’ve learned by opening our own office in Shanghai and hiring our own staff, and we’ve learned from walking clients through the right process and helping them become successful, from program management to establishing business ventures. We’ve helped clients do business in many locations. To name just a few: Mexico, Korea, India, China, and Eastern Europe.

JM: We take a very complicated process and break it down into manageable, cost-effective segments; at the end of each segment, our clients have the data to make informed decisions about what their next step should be. The global environment is here; it’s not going away. That doesn’t mean that you have to play in it.

LL: But it does mean you have to understand it.

PMGS's International Strategy Development & Implementation Process