Integrating companies achieve high levels of profitability
According to a recent survey conducted by the American Chamber of Commerce (AmCham) in Shanghai and consultants Booz Allen Hamilton, costs have climbed so dramatically that about 17 percent of multinational manufacturers in China have decided to shift their operations to other low-cost countries.
As China’s operating environment becomes more competitive and costs increase, multinationals need to bring their best operations to China and integrate their export-oriented activities fully for global markets and domestic sales and distribution networks if they want to retain their advantages, according to “China Manufacturing Competitiveness 2007-2008”. Questioning 66 manufacturers who are members of AmCham Shanghai’s Manufacturing Business Council, the survey showed that three in four companies lack fundamental bet practices in their China operations.
Companies integrating their export-oriented activities for global markets with their domestic market operations are achieving high levels of profitability. Compared with 17.8 percent profitability that companies do not integrate their China operations, companies do that integration successfully enjoying profitability of 29.7 percent.
India, Thailand and Vietnam are agreed in the survey to challenge China’s position because wages and other costs are rising and the increasing value of the renminbi is eroding its cost advantage. Already nearly 17 percent of the companies decided to move some China-based operations to other low-cost Asian countries. Fortunately, good news do exist in the survey: 83 percent of respondents said they had no exact plans to move from China because operating in China still have huge advantages, though it is losing some of its edge.
In fact, to access to the Chinese market is the key reason why many companies remain in China. They are also reluctant to invest in some new supply chains in other countries. They still want China to be their export platform.
Regarding the executives who believe China is losing some of its competitive edge, the appreciation of the renminbi and the rising prices of components and materials are the two main factors for their shifts.
White-collar managerial staff is the major source where companies cost pressures are coming from. Respondent said they are paying management staff 9.1 percent more every year and paying white-collar staff 10.3 percent more. In contrast, blue-collar staff costs increased 7.6 percent and raw material cost rose 7.1 percent. Most companies are facing annual cost increases of more than 5 percent in wages and more than 3 percent in materials.
Although there are many aspects scored below standard in China such as logistics infrastructure, trade environment, access to technology, management capabilities and the protection of intellectual property, there were many areas in which China was superior, including the size of the market, availability of a supply base and IT infrastructure.
The survey found none of the best practices are applied by more than 50 percent of the respondents. Obviously, if companies have failed to thrive in China, the competitive environment is not solely to blame.
43 percent of the companies surveyed are consciously pursuing the dual objectives of selling products in China and taking advantages of labor cost which appears to be the path toward greater profitability in China. Actually, companies pursuing dual objectives enjoy profit margins of 29.6 percent while others report only 17.8 percent.
The survey suggested the manufacturing philosophy applied by foreign multinationals in recent decades is in need of an overhaul.
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