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.

Tags: SMEs, Domestic demand, Foreign Direct Investment, Private Equity, Silk route, Infrastructure, services industry, yuan revaluation, price increase, labour

Sources of Energy

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.”

Tags: Research & Development, R&D, Over capacity, China IPR, Non compete provisions, UHV, Suntech, China Defence, Infrastructure, 5 year plan, china investment, Wind Energy, Green Energy, Alternative Energy, Solar Energy

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.

Tags: Profit decline, HR Problems, Interim management, Joint Venture, Compliance, Distress, Restructuring, Operational Turnaround

Establishing a manufacturing or assembly plant in China requires thorough consideration of various factors. Perhaps the most important question is whether one sets up in an Industrial Zone, Industrial Park, or Special Economic Zone and which will give you the best returns on your investments in low initiation costs and operational expenses.

However, other factors can be equally important. The region, size of the nearest city and nature of its industries will determine the availability of inputs such as human resources and energy. Furthermore, distances from suppliers, the nearest international port and potential customers are crucial.

Increasingly, the Chinese government is paying more attention to setting up Industrial Zones or Industrial Parks for investors and industries.

In general, there are three kinds of Industrial investment locations, each with their own benefits and disadvantages:

• Special Economic Zones (SEZ)

• Private Industrial Parks

• Industrial Incubators

In this post, a brief clarification and explanation of the similarities and differences between the three options will follow.

Tags: Untagged

In this post, we discuss one of the hottest topics encountered by foreign companies in China: transferring and registering a company’s initial funding. The suggestions that follow are relevant to anyone thinking of establishing a Chinese business, be it a Foreign Investment Enterprise (FIE), a Wholly Foreign Owned Enterprise (WFOE) or a Joint Venture (JV) with a local company. This post covers the solutions for transferring initial funding before establishing a company and to the company bank account after company registration.

Transferring Initial Funding to a Third Party before Establishing the Company

Applying for a business license in China usually takes four to six months. Many companies cannot stand that long in order to use the funding to cover the initial costs of setting up an office, purchasing equipment, etc. They therefore prefer to transfer the initial funding to their local agent or team before they get their business license.

However, once the business license is granted and the company is approved by the government, these funds—used for establishing the company and proving that it is financially viable – are not legally considered to be a part of the company’s registered capital. According to Chinese law, any monetary transfers must be made directly between the foreign investors from a foreign bank account to a Chinese bank account set up under the company’s name for capital deposits, not by using a third party.

In a number of cases, we met investors who had transferred tens of thousands of US Dollars to local suppliers who then found it difficult to explain these transactions in the company’s balance statements, despite the fact that the money was used for rent or for purchasing equipment.  It proved difficult to show the local authorities that these purchases were part of the company’s initial funding.

Tags: Untagged

Every company is unique in the face of crisis and will respond differently depending on the situation at hand. In light of China’s unique business culture, differences in recognizing corporate decline and approaching the associated processes in conducting a turnaround exist between China and the West.  Foreign firms will need to recognize these differences and tailor their actions at different stages of the turnaround process to suit.

Spotting a turnaround situation

Although corporate recovery discussions and articles often focus on the latter stages of the turnaround process such as restructuring, a vital step towards corporate recovery is first recognising and acknowledging signs of crisis and decline, and subsequently deciding to take action and make changes.

Tags: Change Management, recovery, Chinese Business, Corporate Turnaround, Corporate Decline

China's software industry has seen a rapid growth this year. According to figures from January to August 2010 revenue went up by 29,8% to CNY828.6 billion. The growth rate was 8.8 percentage points higher than in the same period last year. The industry will likely to grow much higher coming years and therefore remain a highly interesting industry for foreign companies trying to penetrate into the Chinese market.

Revenue by region and sector

By region, 87.5% of the revenue was earned in the eastern areas of China, among which includes Shanghai, Guangdong and Shenzhen.

The western areas, including Guangxi and Xinjiang, were responsible for 7.7% of China's software revenue and only 4.8% of the revenue was earned in the middle areas of china, including Henan, Hubei and Hunan.

Tags: Industry growth, Software Park, Revenue, China software industry

The Chinese labour market is a paradox of talent. Despite a large workforce there is a shortage of skills. The resulting excess demand for talent has created a seller’s market. Skilled locals have more employments options and are more likely to leave current employers if they feel dissatisfied. These employees seek career advancement, new challenges and opportunities. Employee retention poses a challenge to firms, with high turnover rate of around 20.8% and 21.8% in 2009 according to Hewitt China.

Tags: china, talent, HR management, career opportunities, Attract Employee, Recruitment, HR strategies, Chinese labour

One Man’s Trash:  China’s Growing Waste Problem

No nation has witnessed a growth in waste at the rate that China has seen in the past two decades. Industrialisation and an urban population explosion have propelled China to overtake the USA in waste generation in 2004. Urban areas alone generate 1.5 billion tons annually or 1kg per capita daily.

China’s Waste Management systems have failed to develop to manage the increasing amounts of waste. The domestic industry does not have the necessary infrastructures or expertise in efficient collection, treatment, disposal of waste nor designing and operating facilities.

Tags: Waste Management, china, recycling industry

The task of building a factory becomes more complex in China. It is imperative to have the right skills, knowledge, experience regarding each stage in the process of setting up a new entity in order to obtain the best possible site and agreement.  Undertaking such a task in China requires an in-depth understanding of cultural differences, local regulations, negotiation processes and management strategies in addition to experience and connections in the local markets. The key to success of any industrial construction project lies in proper financial management, which should not be neglected.

Picking the right site for your business

Site location for the new factory is arguably the most important decision. Throughout China, many industrial parks compete for foreign investment.  It is important to locate those with the best reputation and benefits and a need for factories in the specific industry. Choosing to locate factory as close as possible to the potential market may allow secure more favorable shipping terms, whilst allowing the company to provide efficient service at all times.

Tags: Industrial Project Management, Negotiation, Construction, factory, business in china, transport facilities