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Asian Supply Chain Futures - In conversation with Bill Dodson, author of 'China Inside Out'
publication date: Apr 18, 2011
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author/source: By Paul French/Issue: Mar-Apr 2011
 
Paul French talks to Bill Dodson, a Suzhou-based consultant and author of the recently published book China Inside Out: 10 Irreversible Trends Re-Shaping China and its Relationship with World (John Wiley & Sons) offers five key thoughts on the future of supply chains in China
1) Over-capacity will force industry consolidations
I work mostly with suppliers in the renewable energies supply chain, especially wind and solar power. Fundamentally, Chinese suppliers are a me-too crowd, very low on innovation and high on copying what the other guy is doing. So, 2010 saw a doubling of the number of solar photovoltaic (PV) manufacturers from about 250 to about 500. Now the National Development and Reform Commission (NDRC), which directs the implementation of China's economic development, has declared (yet another) overcapacity of solar panels in the marketplace. The survivors will be those with the experience to know what vertical integration is and the deep pockets to make it happen. The other group of survivors will make major investments to upgrade their technologies with the assistance of foreign products and expertise. The rest will move into other markets in which the barriers to entry are lower than in solar power.
2) China has hit an expertise-wall
China's conquest of technology-driven global industrial markets is severely hampered by a lack of technical expertise, international experience and training, especially in energy-related industries. Though the central government's aggressive production goals for energy by 2020 are laudable, the country has already come up against a wall in the implementation of, for instance, wind turbines that suit specific geographies and climates. China’s lack of expertise in constructing its own nuclear facilities - another product it would like to export - is one of the many reasons for the nation's moratorium on regulatory approvals and construction of nuclear plants.
3) China will price itself out of most international markets before it can alter its supply chain model
China's mentality and infrastructure are suitable to a “one-size fits all” approach to manufacturing; however, it is not well adjusted to the higher tolerances and exotic conditions international markets present for sophisticated products. Much of its supply chain prowess is based in the decades old central planning approach to economic development, which cared more for meeting production goals and little for economic rationality. A confluence of events made it viable for China to aim its production efforts into international markets, including technologies (like the Internet) that lowered barriers to entry; Western nations binging on debt- to-buy stuff; and a demographic that was young and hungry enough to work overtime in sometimes frightful factory conditions. The overwhelming majority of Chinese companies - private and State-owned - have no idea of how to rationalise their business practices and to actually build organisations that will be able to compete in international markets once it has lost those advantages. Companies will increasingly turn inward to dump their products on the domestic market, still without sense as to how to optimise their businesses.
4) China already has a brand image, and it is not good
China has been developing its brand image for its companies for decades now. The brand, however, implies production of cheap stuff; a lack of quality of its products; a lack of forthrightness of its vendors; a knock-off environment quietly supported by its government and a lack of product sophistication. China's greatest challenge will be to convince the world its products are as sophisticated and quality-focused as anything the South Koreans or Japanese can produce. And though it is true that once upon a time "Made in Japan" was a joke, I do not prescribe to the notion that China, too, will succeed in convincing the world of its prowess as a production center of high-end, reliable goods. The source of the image problem is as much the central government's fault as it is its supply chains; witness the CEO of Mattel essentially kow-towing to the Chinese leadership in 2008 after Chinese suppliers had allowed all manner of lead and cadmium into its toy products. Chinese regulators did little to penalise the manufacturers, until the same melamine that poisoned pets in America eventually poisoned children in China.
5) The developing countries will provide Chinese supply chains some relief
As the West continues to recover from its credit binge and tries to figure out what to do with all the stuff it bought from China, developing countries like those in Africa, the Middle East, central Asia, southeast Asia and central America will continue to be fresh markets for Chinese goods. India, too, will be a willing consumer of Chinese low-end goods, but only up to a point, as it too is on a mission to modernise its economy and will want its own indigenous producers. The West will also insist on more sophisticated products from vendors, with high quality standards that require expertise and equipment China does not and will not have available. So, while China's days as ‘workshop of the world’ may be numbered, there is still half the world's population that will provide the Chinese supply chain a life line, if only for a few more years. Chinese industry will increasingly disaggregate from the mainland to local, developing markets to take advantage of cheap labor and material inputs, all but eliminating transport costs. The Chinese Diaspora will grow on the back of local supply and distribution chains.
Bill Dodson is the author of China Inside Out: 10 Irreversible Trends Re-shaping China and Its Relationship with the World (2011, John Wiley & Sons). A principal at TrendsAsia Ltd, located in Shanghai, Bill has been writing and advising on China-business and -economics issues, and managing companies in China since 2002. Bill is a columnist for the China Economic Review and a frequent speaker on economics and investment trends in China.
Copyright SC Asia Publications 2011
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