Bridging the gap

For some years now there has been an ongoing debate within more academically inclined business circles. "Does China's rapidly growing manufacturing capability represent a threat or an opportunity to European manufacturing-based SMEs?"

For most manufacturers harsh reality provides a simple answer: "It's neither - it's a commercial imperative".

To understand this answer one only has to consider three simple things:

• the rate and scope of China's recent economic development
• the size of the latent industrial workforce
• the government's plans for future economic growth

It has taken just 25 years for China to move from being a totally peasant-based economy to being the world's third largest exporter. Annual growth in China's GDP has averaged more than 9% throughout this period and shows no sign of slowing.

Despite this extraordinary period of sustained economic growth, only 20% of China's 1.3bn population have made it into paid employment.

Driven by dramatically increasing living standards there are currently some signs of an upward trend in wage rates. But the huge numbers of people still anxious to leave behind the relative poverty of rural life for the higher living standards enjoyed by workers in the rapidly expanding industrial cities suggests that wage rate inflation will remain modest for many years to come.

Future growth plans
The Chinese government's most recently published plans aim to see GDP quadruple during the first 20 years of the 21^st century. With strong central control over economic activity, Chinese governments rarely miss published targets so it would be a brave decision to bet against this target being achieved. Anyone who thinks/hopes that the Chinese economy will burn itself out any time soon had better think again.

Unless they operate in truly niche market sectors, manufacturing SMEs in most other countries therefore face a stark choice. Do they find good Chinese manufacturing partners to work alongside now so that future growth and prosperity can be shared or wait until Chinese manufacture becomes even more competitive and continue trying to fight that competition head-on. The right policy decision should be both simple and obvious.

Despite their obvious strengths, many Chinese companies still lack at least some of the skills needed to make them truly competitive in overseas markets.

By acting now, while these ‘missing' skills are still of real value to their potential Chinese ‘partners', European companies can use their own relative strengths in these fields to secure stronger bargaining positions within any newly defined co-operative venture.

However, the Chinese are fast learners and the current skills gaps will be quickly remedied. European companies are therefore advised to act quickly. The longer they leave the decision to start manufacturing at least some of their product in China, the weaker their negotiating position will be.

When considering whether or not to move manufacturing activity offshore, companies are quick to spot the advantages offered by the lower unit cost of manufacture.

However, they should not lose sight of a second significant advantage: that of turning many of their traditionally fixed costs into variable costs. Not only can this aid cashflow, it can also allow companies to be significantly more responsive to seasonal variations in demand.

The need for caution
While the case for starting to manufacture in China is compelling, there are also significant risks that can beset the unwary. In particular it is worth remembering that:

• China is geographically huge so finding the most appropriate ‘partner' is a bit like trying to find the proverbial needle in a haystack

• China still has a very different business culture from Europe so finding the right ‘partner' is absolutely vital from the outset.

• There is little published data on the ownership and/or financial status of Chinese companies

• Business in China places heavy reliance on personal relationships. These need to be patiently built over significant periods of time and maintained on a regular basis

• Legal redress is difficult to obtain so relationships need to be strong enough to withstand fairly stern tests in the event that something goes wrong

• Manufacturing/material standards are often not universal

• The approach to sampling and product development is very different and lead times can be long

• Trading terms often require the payment of substantial deposits with order and payment in full prior to shipment of finished product - so quality needs to be assured before goods leave the country

None of these difficulties should deter companies from exploring the option of doing business with China but they probably all point towards one over-riding piece of advice: don't try it alone. Work alongside advisers who know and understand Chinese business well; advisers who can look after their interests in China on an ongoing basis.