The decision to operate in China is akin to accidentally leaving your back door wide open. There's a possibility that no untoward person will notice; or they could come in and ransack your home.
Businesses of all shapes and sizes continue to look to China as a way to lower costs, increase production and improve margins. But the decision to operate in China also exposes your business to often-unforeseen risks that can open your entire operation to intruders.
With no national truck carrier, shipping your raw materials, components and finished goods across China is a tremendously fragmented process.
Transformation to a more-efficient method of moving goods is critical to China's modernization. While it's getting better, progress is painfully slow.
The American Chamber of Commerce in Shanghai wrote in 2004 of the possibility of a national licensing system to allow foreign logistics and transportation companies to operate in China, streamlining the movement of goods across territories. However, the issue remains strictly in the discussion phase and could be a long time in coming because of the deep division that exists between the territories.
Warehousing systems barely meet customer needs, with 85-90 percent controlled by state-owned enterprises.
The country has a lot of warehouse space, but not necessarily in the right locations.
Most of the warehousing for bulk cargo is multistory and, combined with off-sized pallets, causes tremendous inefficiency.
Within the past few months, there's been increased attention paid to a labor shortage. Even with 1.3 billion people, Chinese factories are struggling to hire because of rapid development in the manufacturing sector. A healthy farm economy means that today's Chinese workers have choices. Culturally, they don't like to relocate as Americans do.
Employers don't have the luxury they once had because of the booming economy, rising crop prices and the Chinese government's decision to phase out agricultural taxes.
By having your own people on the ground and in factories, you'll be better equipped to understand the labor landscape. China is still at a huge financial advantage. However, you'll have to be more cognizant of potential issues and consider these questions for factory owners:
* How competitive is the pay?
* What's the turnover in the specific factory and in the geographic area?
* Do they have suitable accommodations for workers?
* How are they evolving to meet worker needs?
China is known for widespread infringement on intellectual property rights and this continues to have a broad impact on U.S. and other foreign businesses operating in the country.
The Chinese have put in place a sound legal and regulatory framework, but enforcement is lacking. The best advice is to be very particular about sharing intellectual property that involves any critical step in manufacturing or sourcing.
Protection is the name of the game and the best way to protect your business interests is to retain a reputable lawyer with a strong, demonstrated practice of helping clients protect their intellectual property rights in China.
In the event you feel your rights have been compromised, it's important to have existing relationships with key government people who wield influence within the political structure and who would be willing to help.
The 2004 trade deficit with China was $160 billion and it continues to grow because of how the Chinese peg the yuan or renminbi to the dollar. It could be 10-40 percent undervalued, and that gives the Chinese a tremendous advantage in the export-import market.
The policy means Chinese imports to the United States have not become more expensive as the dollar has fallen.
It has prompted other Asian countries that compete with China and the United States to keep its currencies low.
Almost weekly, ministers from the G7 industrial nations meet to discuss how to put pressure on China to value the dollar more accurately. Even if you take the middle ground of increasing the value by 25 percent, it would have a substantial impact on your business.
Business owners don't have any control over the issue. So it's critical to run various financial scenarios on what it means if the value shifts to one side or the other, and how that affects your business decisions.
Learning to operate within China, developing relationships with key government officials, protecting your intellectual property with experienced legal help and recognizing how modernization will affect worker availability can ensure that your China plan works successfully and profitably.
Machut is co-founder and senior partner of Supply Chain Edge, a Cleveland firm that provides services including supply-chain development; process improvement; human rights audits; testing; certification; and U.S. Customs compliance.