Offshoring and increasing labour costs

Every country with cheap labour eventually gets richer - the labour costs increase and alas, we nomadically relocate to another country. Generally, the key benefit of offshoring is lower labour costs. In light of China’s fast-increasing labour prices, companies are faced with a dilemma - to stick to one’s guns and remain in China, potentially losing that attractive profit margin, or to shift one’s industry to another developing market. This article sums up some key stats and argues for staying in China. The key tenet of this proposition is that a Yuan revaluation is inevitable, leading to an appreciation in buying power. The domestic market in China will experience a surge. This, coupled with China’s increasing investment in inbound SMEs and a superb infrastructure are but a few of the pillars of a competitive multinational in China.

The current labour problem

According to the IMF, China’s labour is now the third most expensive in emerging Asia, after Malaysia and Thailand. New labour laws arguably offer more job security to the detriment of employers and transport prices are rising with the cost of oil. All the while, there is the question of a Yuan revaluation and the resulting impact of an appreciation on the export Industry.

Boston Consulting Group listed a number of multinationals, which have already shifted production, including Caterpillar, Ford, Flextronics and toy manufacturers such as Wham-O. These have moved to other cheaper Asian countries or back to their home markets.

In 2009, thermal energy was the country's primary source of electricity production, representing 80% of electricity generation, followed by hydro-power at 16%, nuclear power at 1.8% and other non-hydro renewables at 1.24%.

The 12th 5 year plan is ground-breaking in its emphasis on the importance of sustainable growth and using renewable sources of energy. Water consumption in industrial processes is to be cut by 30%. Non-fossil fuels are to account for 11.4 % of primary energy consumption. GDP CO2 emissions are to be cut by 17%. Forest coverage is to rise by 21.66%. Companies, such as Nalco, which sees the potential in this shift, is adamant to get involved and aims to grow in China by 20% in the next 5 years.

Does the Plan Mark a Transition?

This new 5 year plan is by no means an eco-political tectonic shift. China treads a fine line between slowing growth and inflation. But, this plan marks the realisation that continued reliance upon foreign resources undermines its security. China’s heavy involvement in Africa, Afghanistan, Indonesia and South America belie an insatiable thirst for raw materials, from oil to rare earths, timber through to copper. This reliance upon foreign resources, particularly from areas of unrest, is not ideal. Coupled with the notion of defence is of course the problem of our environment. In a recent RUSI report (Royal United Services Institute), John Mabey remarked:

“Climate impacts will force us into a radical rethink of how we identify and secure our national interests. For example, our energy and climate security will increasingly depend on stronger alliances with other large energy consumers, such as China, to develop and deploy new energy technologies, and less on relations with oil producing states.”

Operational Audits are an increasingly important area. This thread relates to why they exist and how they benefit companies. An Operational Audit is a means of reassessing an existing company with a view to finding its weaknesses and then helping it become more lean, profitable and efficient. If the company is markedly distressed, an Operational Audit is likely to lead to an Operational Turnaround. At this point, interim management may be required (discussed later).

The Painful Truth of Operating in China

Why do Operational Audits exist? Regardless of the format of the company - be it a JV, a WOFE, an FIE or any other blasted acronym - a disproportionate number of companies face problems and resulting profit losses. Many of these problems can be ascribed to a lack of talented employees, but a great deal of problems derive from management issues. However, few entities and their CEOs wish to admit that they might have problems until the last moment when it is too late. When the threat of liquidation appears on the horizon, the first place one finds the manager is most likely in a law firm, attempting to wind up the company.

Operational Audits exist to prevent further losses by targeting a list of factors, from working out whether employees are being paid the right amounts, to supply chain management. They then assess where improvements can be made.

Triggering factors for an Operational Audit - Changes

Leadership Changes in management are arguably one of the best times for an operational audit. An assessment will provide up-to-date and impartial information, thereby helping new management/personnel learn the strengths and weaknesses of the company. But more importantly, an Operational Audit can provide an opportunity for changes in strategy or direction at a critical time.