Sarah Longstaff, International Business Development Director, IoSCM
I first stepped foot in China in 2009 and since then I have lived and worked in Beijing, Shanghai, Guangzhou and Taipei; most recently in 2012 I held the position of Trade Services Manager for the China Britain Business Council in Shanghai. I am fluent in Mandarin Chinese, having studied for my Masters in Chinese at the University of Leeds in 2011. In my current role of International Business Development Director at the Institute of Supply Chain Management I use my knowledge of the market to work to create and develop partnerships in China, and through these relationships I have developed an in-depth understanding of supply chain strategies in relation to exporting to the Chinese market.
Why export to China?
For those new to the China market, supply chain strategy when exporting can be a daunting prospect as it can seem a complex business environment from a Western perspective. However, the emergence of the Chinese economy, which averages 8% growth each year (compare this to roughly 0.2% growth of the UK), is an opportunity not to be missed by any UK business. China’s capacity for manufacturing and exporting is staggering, and UK companies are already making significant progress in this market – for example, Jaguar (based in the Midlands) now exports more to China than to any other country.
When the challenges are actively identified and managed, the benefits are great. Moving some manufacturing operations to China often leads to reduced costs of manufacture, driven by lower labour costs and ease of production. These benefits need to be carefully weighed against considerations such as transport costs and a more extended supply chain, but nevertheless the case for Chinese manufacturing operations was, and still is, compelling.
Creating a supply chain to export
Before exporting your goods into China or choosing a Chinese partner, it is advised for you to conduct thorough market research and due diligence. Companies should be mindful of possible problems in export rights, regulations and intellectual property. If the company decides to distribute the goods directly, then it will have to be aware of the distribution rights and understand the licensing process in China. Mainly there are 3 ways whereby one can export goods in China:
- Distribute your goods directly – this is time consuming and complicated, and the risk of failure is high as you may not understand China’s business environment and government regulations.
- Establish a joint venture – this is advantageous as you can utilise the partner’s knowledge, however you may occur issues when transferring funds out of China.
- Find a qualified agent or distributor with a vast sales network – this is the most recommended option for SME’s as the agent will have a vast sales network and be located regionally. The chance for success will therefore be higher.
The most important step that one must take before exporting products into China is to have a thorough understanding of China’s customs, regulations and controls towards imported goods. A sound market entry strategy is necessary in order to penetrate the market; therefore an assessment of your goods’ strengths, weakness, opportunities and threats can allow you to understand the profitability and marketability of your products for more targeted promotion. Exporting your goods to China – Issues in 2013 Businesses wanting to capitalize on moving manufacturing operations to China are right in seizing a slice of the action; however must carefully consider and address operational and legislative risks to have the best chance at success. Over the years things have evolved and changed, but the driving issues have remained the same, although with new features resulting from developments within the sector.
- Costs – The most significant change in the sector is cost. Labour and other manufacturing costs have increased to the point where China is not always the lowest cost choice, especially for soft goods
- Language issues – only 1% of UK business owners can speak Chinese, according to a recent British Chamber of Commerce survey, and the importance of being able to speak the official language of China cannot be underestimated, despite the fact that people in China can speak English to varying degrees. It’s worth remembering that taking the time to learn even key phrases can go a long way in building relationships in China. The UKTI are offering Chinese workshops in the North East of England at present so it’s worth taking advantage of these.
- Re-shoring – so many UK companies have moved operations back to the UK due to increasing wages and shipping costs, for example the pot noodle manufacturer Symington’s recently moved their factory back from Guangzhou to Leeds.
- Products – Chinese manufacturers are growing increasingly sophisticated, and are taking on an expanded role in the design and development of products.
- High profile events – a series of high profile events have put increased pressure on quality control and cost containment.
Managing cultural differences to develop longer term strategies
Whilst issues relating to product quality or supplier reliability may seem as the obvious cause of operational issues externally, cultural differences may be the root cause internally, and continue to thwart improvements in Chinese companies. Fu Jia and Christine Rutherford from Cranfield University recently published an interesting article on mitigation of supply chain relational risk caused by cultural differences between China and the West. They claim that the extent of cultural adaptation between supplier and buyer is what makes or breaks global partnerships that are culturally different. For example, the importance of guanxi ????is often overlooked for Westerners. It is a complicated term to explain, but refers to the system of social networks founded on mutual exchanges, and is the most important informal institution in Chinese speaking countries. Where we in the West rely on contracts and regulations, networks have far more weighting in China. Once business relationships have been established, they still require maintenance. To maximise success when exporting to China, it is crucial to consider cultural differences and how you can adapt the way you operate.
Considering strategic risks and opportunities
- Intellectual Property – Product design, development and ownership
- Product safety and Quality – Quality, responsibility, control and verification
- Cost Containment – Manufacturing, productivity, efficiency, contracts
- Legislative Considerations and Developments – Compliance issues and practices
- Political Concerns – External risk and political tensions
Conclusion
To summarise, China is a key market to export, and UK businesses are in a great position to capitalise on the benefits. Companies must identify and manage the supply chain challenges mentioned, including those arising from the shifting roles in their supply chain, in order to maximise chances of success, but don’t be off put by the obstacles as great gains are to be made. Alex Probyn, founder of Kent business Blends for Friends, has seized the opportunity and exports are now at 10% of turnover, he expects them to grow to 30% in two years. His six-year-old business is benefiting from the growing Chinese middle class seeking the quintessential English experience.
“You can need 10 different bits of paper signed by ten different people for one shipment. On a product like tea there is a lot of protection. One shipment took us eight months. Every time, it wasn’t quite right…The company now has a local shipping broker, which has made exporting to China “easier but still not easy”.
If this company recently featured in the Telegraph can sell tea to China, surely anyone can export! Source: http://www.telegraph.co.uk/finance/yourbusiness/10090208/Export-Champions-How-I-sell-tea-to-China.html
I am always delighted to talk about China and supply chain strategy, so feel free to send me an email to sarah@ioscm.com, invite me on LinkedIn and join our groups, and also follow us on Twitter for the latest updates and industry news @IoSCM.