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Understand-China 2011 Update Complete 7/25/2011

understand-china.com1ChinaBlog is pleased to announce the new and improved Understand-China.com. Through extensive research, the website has been refreshed and updated to provides the most comprehensive and up-to-date information available for businesses and investors looking to do business in the China. Understand-China’s vast network now contains over 250 pages of information with additional features and has taken more than 300 hours and 6 weeks to update.

Understand-China continues to be the only one-stop-shop website providing concise and relevant information for companies looking to do business in China, invest in the Chinese marketplace, set up greenfield operations in one of China’s industrial regions, or understand the Chinese manufacturing industry.  Updates include new data for the 24 top regions including statistics for each of their Foreign Direct Investments (FDI), Gross Domestic Products (GDP), Logistical Data, Real Estate information, Industrial Expenses, Labor Costs and various other categories of data. For several excellent examples of updated data, please view the provincial profiles of Beijing, Shanghai, Shenzhen, Tianjin, Hong Kong. Understand-China also includes twenty other provinces, special economic zones and Chinese special administrative regions.

Please let us know what you think of the update!

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China & US March Manufacturing Rates Rise 4/7/2011

China U.S. manufacturingDespite fears that China’s efforts to decrease inflation would decrease economic growth, the production numbers still indicate a rise in China Manufacturing this March. March’s Purchasing Manager’s Index (PMI) rose from 52.2 in February, to 53.4 in March.

According to economists, China’s central bank will increase interest rates again this quarter to further curb inflation. Some argue that this will eventually hurt China’s overall economy in addition to slowing the growth, but only time can tell.

The manufacturing sector in the United States also grew this past March. It was the 20th consecutive month for manufacturing growth. In fact, it was also the 22nd consecutive month for overall economy growth as well. The PMI for March was 61.4 percent, which is down from February’s 61.4 percent, but any number above 50 indicates growth. The economy also grew by 3.1 percent during the last quarter of 2010.

Source 1

Source 2

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Vietnam & India Sourcing: Advantages and Disadvantages 3/2/2011

China India Flags

So you are already sourcing from China…have you ever thought of sourcing from India? What about Vietnam? Are buyers trending away from China? What are the advantages and disadvantages of sourcing from other developing countries like these? Let’s explore!

A survey was recently released by Global Sources reporting on how China’s increasing labor costs and the fluctuation of the yuan have impacted buyers’ sourcing strategies overseas.

Over 380 buyers were surveyed and more than 50 percent of respondents said they have seen higher prices as a result of the yuan’s appreciation. But are they changing their strategy? The answer is yes… somewhat.  More than 50 percent of buyers say they are planning to step up their sourcing from India and Vietnam sometime in the future. (It did not indicate whether or not they plan to decrease their China sourcing however.)

The truth is: Vietnam and India are becoming increasingly attractive for foreign enterprises due to their low-cost and abundant labor supply.

What does this mean to American companies?

Places like Vietnam and India could be a viable option for your company if you specialize in low-end products. Industries that are labor intensive can also be successful in these countries due to the large labor pool (bigger than China’s) and the low cost of labor. Industries like textiles (clothes, shoes, sheets etc) have been successful at increasing savings by moving production to countries like India where the workforce is robust and there is a large percentage of English speaking workers (20% higher than China’s workforce). Also, India’s income tax will decrease this year in order to be more competitive with China.

Although the numbers do indicate an uptick in sourcing from these developing countries, do be forewarned: This is not the ideal plan for everybody. India and Vietnam are still in their youth, and fall short in a number of critical manufacturing areas in comparison to the United States and China. The traditional means to becoming a manufacturing powerhouse no longer stand alone. Not only will a country need to be strong in labor, energy and materials, but the country will also need to have a strong-willed work force with innovative thinkers.

Another critical aspect that must be taken into consideration is the different countries’ logistics infrastructure.  The logistics infrastructure in China for example is much more developed and sophisticated than in India or Vietnam.  We typically find that sourcing from China is much more efficient because of the hundreds of billions of dollars invested over the last 20 years in roads, highways, ports and airports.  With that being said, if quick turn-around and reliable, timely shipping and receiving are a must for your business, China might be a better choice.

China India Vietnam
Total Airports 502 352 44
Major Ports 130 12 14
Railways 77,834 km 64,015 km 2,347 km
Roadways 3,583,715 km 3,320,410 km 171,392 km

It is to be noted however, that although India has the third largest road network in the world, about 2.6 million km or almost 75 percent of their roads are considered rural. Travel by roadway in India is also often times considered dangerous; people do not abide by traffic laws, roads are bumpy and uncared for and traffic is intensely crowded. In fact, the National Highway make up only 2% of the nation’s roadway length, but handles about 40 percent of the roadway traffic.

Beyond logistics, the 2nd most common issue when looking beyond China is your raw material supply chain.  As nearly every major industry’s supply chain has shifted to China over the last 20 years, so have the raw materials companies/suppliers.  When evaluating a move away from China, it’s important to understand whether or not your source of raw material is available in your next destination.  If you don’t, you very well may end up finding out that while you are benefiting from cheaper labor elsewhere, you are offsetting those savings by your increased logistics and duties costs as you ship your raw materials in from China.

China also excels at supporting large-scale investment projects – something that Vietnam and India struggle with due to their infancy in the manufacturing arena as well as the large government bureaucracies that you must deal with.  If a company wanted to expand and build a new facility to ramp up production in China, it could take 6 months, whereas in India it could take 2 to 3 years.

In conclusion, China is still the manufacturing powerhouse for most, and will remain so for quite a few years to come.  However, we are likely to see a shift in the type of manufacturing China is involved in. They are now encouraging investments in high tech industries and research and development enterprises. Their goals is to move towards a more sophisticated manufacturing region that can garner higher wages and eventually propel more and more people into the coveted middle and upper classes.

We would love to hear how your company’s overseas buying strategy has changed (or hasn’t changed)!

Sources:

http://www.globalsources.com
http://www.2point6billion.com/news/2011/02/17/china-india-compared-by-al-jazeera-8606.html
https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
http://online.wsj.com/article/SB10001424052748703800204576159410421853214.htmlhttp://www.business-in-asia.com/ports_in_vietnam.html

http://understand-china.com/?manufacturing=logistics-4

http://indiatoday.intoday.in/site/Story/110495/Cover%20Story/wealth-does-not-create-roads-rather,-roads-create-wealth.html

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Global Trade Resource Predicts Top Holiday Toys 12/8/2010

Panjiva, an online trade platform used by sourcing and supply chain professionals to screen US import data, released their predictions for the top holiday toys of 2010.  Panjiva’s database tracks the overseas shipments of more than 1.5 million companies doing business across borders. Panjiva’s top toy selections are based on the number of toy shipments sent to the United States (the majority of which are coming from China). The graphs below show the top toys for each category. The “rookie toys” versus the “veteran toys.” The “rookies” are the toys released this year versus and the “verteran” toys are toys that existed prior to 2010.

Top Holiday Toy Predictions RookiesTop Holiday Toy Predictions Veterans

As you can see, there is almost a three way tie in the rookie category between the Squinkies, Paper Jamz, and Zoobles. For the Veterans, the victor is much more clear: Toy Story toys have been shipped much more than the second and third place toys, Elmo and Airhog Helicopters.

They also had a great chart indicating the trending of toy shipments over the past three years. According to Panjiva’s database, toy shipments are up 24% from August to October when compared to the same period in 2009.

That said, I am predicting a very merry holiday for lots of children this year!

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Hyundai Expands China Operations 11/29/2010

hyundai china expansionHyundai began building its third manufacturing plant in Beijing today. The two existing Beijing plants could not keep up with the rising demand. As reported in the Xinhua News, the new plant will cost about 6.5 billion RMB (about 1 billion USD) and will be able to produce 400,000 cars each year.

This new factory is expected to bump Hyundai’s production u p to 1 million cars per year in China. The two existing facilities can currently produce around 600,000 cars per year, but orders for 2010 are expected to be upwards of 700,000. This new factory in eastern Beijing will be operational in 2012, reaching full capacity in the years following.

The new factory is said to be the largest and most sophisticated of all of Hyundai’s 27 overseas manufacturing facilities.

Full article

Picture source

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Caterpillar to build new Engine Plant in Tianjin 11/23/2010

China Manufacturing - Caterpillar Buckets

China Manufacturing - Caterpillar Buckets

Caterpillar Inc., one of the leading heavy industrial equipment companies in the world, has recently announced their new plan to further expand their manufacturing operations in China. Set to open in 2013, Cat will build a $300M engine manufacturing plant in Northern China to produce their 3500 series of large engines to be used in their oil-and-gas, marine, and electric power sectors. The Tianjin plant will be Caterpillar’s third manufacturing site for the 3500 series engines.

Opening a plant in Tianjin will allow Caterpillar to be better positioned to compete in the global marketplace as well as support their growing customer base in China and throughout Asia.

This is not Caterpillar’s first endeavor in China however. Earlier this year they announced a new logistics center to improve its regional supply chain, to be built in Suzhou. They also revealed plans to build a plant in Wujiang for hydraulic excavators and another plant for excavator production in Zuzhou.

How will this impact the current production facilities? Caterpillar has said that the new production plants are not expected to impact existing employees (such as those in the Lafayette, Ind. plant) due to the increase in demand from China and the surrounding regions.

Full Article

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China Continues to Grow Beyond Low Cost Labor 11/14/2010

A recent article I found online discusses a very important topic: China moving beyond just a source of cheap goods and low cost labor.  Despite what you may have heard and read, China has become a very advanced economy from what it once was.  Many international firms like GE, Motorola, and General Motors have invested significantly to develop large research and development centers throughout China.  The article discusses a recent survey conducted by KPMG which shows a growing interest among global manufacturers to leverage the large pool of skilled engineers and other highly trained individuals to increase the amount of “value-add” activities that there businesses are conducting in the region.

I’ve inserted a brief form the article below:

“China and India have become more than just centers for low-cost manufacturing for some global companies. The survey showed that a significant percentage of global manufacturers are willing to source research and development and the manufacturing of goods where important intellectual property is involved has increased to 29 and 33 percent, respectively.

‘If you would have looked at the survey three years ago, it would have been zero percent…no one would have ever done product innovation or R&D in India or China. Many really sophisticated companies are saying they’ll make it in China if they’re selling it in China.’”

I actually don’t subscribe to the theory that three years ago none of these global manufacturers were eyeing China as a potential R&D destinations – 5 years ago I was working inside GE’s medical R&D center in Wuxi, just outside of Shanghai on a number of different projects that had been underway for quite some time.  What I do support however, is the notion that most manufacturers are only recently beginning to view China as a potential destination for R&D investment.  Especially as more and more companies are eyeing the Chinese domestic market for their goods.  Local R&D will benefit these companies in many ways, especially when it come to modiyfing existing designs to suit Chinese market demands and applications.

I’d love to hear more of your thoughts on this…please feel free to share!

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How to Source Products from China. Part 1. 11/11/2010

Sourcing from Chinese manufacturers can be a daunting task.  Many companies, both big and small, don’t know how they should go about sourcing products from China.  To help you get started, I’ve compiled a list of tips, cautions, resources and recommendations below.

Starting the China Sourcing Process

The first thing you need to do is figure out which products you want to source and make sure that it makes financial and logistical sense.    Long are the days when you could source just about anything in China and save a significant amount of money.   Rising logistics costs and the valuation of the Chinese RMB have all had an impact on the China Sourcing projects, and you have to make sure that your products are appropriate for sending to overseas manufacturers.  If your products are large in volume for example, you may end up spending every dollar you save on increased logistics costs.  Another thing to take into consideration is lead times.  The average number of days it takes for goods to get from a manufacturer in China to a Customer here in the United States is 28 days, so you have to ask yourself…”will my customers be able to accept this increase in lead times?”

One great way to determine if it makes sense to source from China is to check out what other companies in your industry are doing.  If no one is sourcing in China, there might be a good reason why.  On the other hand, maybe you can be the first one there!

Finding China Suppliers

After you have determined that your products may be a good fit for China sourcing, the next step is to find suppliers.   There are many ways to find suppliers.  Online search engines like Panjiva.com, Alibaba.com, Made-In-China.com, and GlobalSources.com all offer access to hundreds of thousands of Chinese suppliers.  Another way to search for suppliers is by attending trade shows in China that are specific to your industry – this option will give you a much better feel for the types of products in your particular industry that Chinese manufacturers are able to provide, but does require getting on a long haul flight to China and you will need a China Business Visa.  While there are a handful of China Sourcing Trade Shows in the United States every year, you will find trade shows in China to be much larger and will have a significantly larger pool of suppliers to meet with.

Another option is to find and contact a company that specializes in sourcing products from China.  These companies come in all shapes and sizes ans typically follow one of two business models.  Some will identify a Chinese manufacturer, buy the parts and resell them to you (at a profit of course).  This “middle-man” business model has been the most common, but as China sourcing costs have crept higher in recent years, many  companies have been looking to eliminate the middle men and go directly to the suppliers themselves.  Our company charges a fee to establish a source of supply and you can be sure that you are getting the “true” price.  Firms like ours are fewer and far between compared to the companies that use the “broker” approach, but is a preferred option for some.

CAUTION: Make sure you conduct supplier due diligence.

No matter which method you use to identify your suppliers, be sure to do your homework.  Conducting due diligence on your potential manufacturers in China can save you a lot of money.  I have heard countless horror stories about companies sending payment in advance and never receiving goods, receiving 100% defective parts, etc.  Just as with every other part of your business, you are only as strong as your weakest link.  So be sure to research the suppliers with all the resources available to you.  I recommend always asking for references.  Ask the Chinese supplier for references based in your area or your industry.  Use tools like Panjiva.com to validate the customer base that the suppliers claims to have.  And, if this supplier is critical to your business, its probably worth going to China to meet with management, tour the factory and continue to validate the suppliers claims.  If traveling to China doesn’t seem like your cup of tea or if you are inexperienced conducting factory audits, it might be a good idea to solicit the help of a 3rd party audit firm.  There are many of these firms in China, and you can even find firms with offices in the United States.  Our company recently launched a website – FactoryAudits.com -  while we are certainly not the only provider of such services, taking a look at our site will give you a good idea of pricing for audit services.

Ill continue this post over the next few weeks.  Appreciate all your feedback and comments!

Other posts that might interest you:

6 steps to a successful strategic sourcing program

China Manufacturers:  Factory Inspections

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Representative Office or WFOE in China? 11/8/2010

Most of the links below are to the various resources available from Understand-China.com.

Setting up a Representative Office always sounds like the easiest way to establish a business in China.  Years ago it may very well have been, but these days, largely due to Chinese government crackdown, it may make more sense to set up a WFOE or Wholly Foreign Owned Enterprise – especially if China is part of your company’s long term strategy.  Let me tell you why….

Rep Office Restrictions

Rep Offices in China are intended for the sole purpose of promoting a business in China.  Thats it.  And while the initial investment may be more attractive compared to the registered capital requirements involved with setting up a WFOE, there are still a number of other costs and limitations to consider.

  • You cannot conduct any kind of profit generating activity of any kind.
  • You are not allowed to hire employees directly – the Chinese Government forces you to use approved HR firms.
  • You are required to have a Chief Representative that is responsible for managing the day-to-day operation.
  • An Office is REQUIRED.  (usually you will need to sign a 12 month lease in a Chinese government approved building)
  • You will be subjected to annual audits, which means you will either a) need a bookkeeper, or b) need to hire an accounting firm to reconcile your books.
  • Last but not least – You are required to pay taxes……10% on all expenses.  If your annual operating budget is $200,000 your annual tax bill will be $20,000.

Wholly Foreign Owned Enterprises (WFOE) a.k.a. Foreign Invested Commercial Enterprises (FICE)

WFOE’s allow for maximum flexibility.  When you set up a WFOE in China, you essentially have the same incorporation status as any Chinese domestically owned company.  In addition, as a legal entity, you are permitted to conduct business transactions (as long as it is within the scope of your business license of course), hire employees, etc.  You also have the flexibility to setup your office in the building of your choosing.

See also:  Incorporating a Business in China

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China Manufacturers: Factory Inspections 11/5/2010

Many people and companies choose to source products from Chinese manufacturers that they meet online, and at trade shows.  While sites like Alibaba.com offer quick introductions to thousands of Chinese suppliers, you must make sure that you are aligning yourself with the right Chinese Suppliers that will be able to support your business and meet your customer’s expectations.  Sites like Panjiva.com can be very helpful in conducting preliminary supplier due diligence, but nothing will compare to actually physically visiting and auditing your potential suppliers.  Understanding the inner workings of their operations as well as their strengths and weaknesses will give you the peace of mind you need to move forward with the relationship.

Whether you choose to audit your suppliers or have a 3rd party China auditing company do it on your behalf, the important thing is that its gets done.  Talk to anyone who has been sourcing from China for any length of time and they can tell you a good story about how they have had bad experiences with certain vendors.
To help you get started, I have posted a picture of an example factory audit.  I pulled this one from factoryaudits.com – you can check out their website for more info on how they help companies with China audit requirements.

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