Destination China

 

Irish companies have been decamping to China for years, so what are the challenges and opportunities of outsourcing? CLIFFORD COONANreports from Beijing

FOR THREE DECADES now, China has been the global saviour for the small factory owner, providing cheap labour and attractive terms for everyone from widget makers to toy manufacturers. The recent decline in the euro has certainly made China a less attractive place for manufacturers, as the European currency buys a lot less than it did six months ago, but long-term China remains an appealing place to do business, especially as it moves up the value chain and quality and standards improve.

However, China is still no cakewalk for a small company wishing to place its manufacturing in the country, and there are several risks that need to be taken into account.

There are currency fluctuations, logistical issues and possible problems with quality fade. Relocating your manufacturing from a centre like Ireland, where the quality reputation is high, to a country like China where there are regular issues with maintaining quality, can cause issues with customers. Also, a major risk is protecting your intellectual property rights (IPR).

“China challenges us, but also provides us with opportunities,” said Brendan Waldron, managing director of New Tigers Consulting and chairman of the Ireland China Association.

Waldron is keen to emphasise the cost advantage of cheaper manufacturing and the supply of cheap labour, as well as the possibilities of a new market potential as the consumer market expands rapidly.

“Disadvantages involve not only the financial aspect of the move, but also client loyalty, loyal employees and labour costs. Costs in general are increasing dangerously as the Chinese economy grows from strength to strength. This must also challenge companies to look carefully at their long term strategy before moving,” he says.

Then there is the “China factor”.

“Things in China don’t get done as in the west: the way to negotiate, contracts, supervision, sales and management. All these challenges and geographical distances; language; management styles and cultural differences between China and Ireland can make a move difficult.”

Deirdre Walsh, founder of the consultancy company ChinaGreen, says China is a good site for manufacturing but might not make sense for every Irish company. “For small companies, perhaps owner-operated, management needs to be prepared to transform their working times, approach and practices. They’ll need to invest more time in day-to-day management of quality and schedules and get used to more trips to China, doing more of this management over the phone, via Skype and e-mail.”

Many small company owner-managers are used to a very hands-on and direct approach to the management of their manufacturing and getting used to a more removed and unfamiliar management style is something that requires a leap.

Walsh believes companies seeking to reduce costs need to think carefully about the total cost and total benefit, incorporating the cost of establishing and operating the new manufacturing regime and the impact on their business model before changing the model. The scale required to justify these establishment costs has to be achievable in a realistic timeline.

Niall O’Reilly is managing director of Accurate Group Limited, and he has 22 years of experience of working in China. “China’s rapid growth since its 1978 opening to the world has not meant greater transparency,” he says.

“The size of the opportunity is matched by the difficulty in weighing up the risk and the biggest culpable factor behind risk in China is in making sense of the information available. For small-sized Irish businesses considering a manufacturing presence, China is perplexing at best,” he says. The big Irish companies working in China, such as Glen Dimplex, CRH and Kerry Group, have greater ability to deal with setbacks such as currency fluctuations, but small companies face a more challenging environment. “Before setting foot in China small companies, faced with expenditure and expansion constraints, need to secure investor support and financing,” says O’Reilly.

Operational risks tend to be found in poor internal controls, such as lack of segregation of duties and management decisions overriding the internal controls. Sometimes the risks can relate to human resources, which typically play out in terms of China’s unique work ethic. “Concentration risks are well flagged instances of concentrating on one or a few particular suppliers, labour markets and sales markets, as well as heavy reliance on key management individuals.”

Staying on top of ever-changing local regulations on issues such as tax, financial reporting, law and environmental and industrial requirements is a challenge, and companies need to understand how to handle key partner and local government relations.

Methods of overcoming these difficulties include using experienced Irish people on the ground and developing a network of advisers. O’Reilly recommends people be patient, do research – hands-on research rather than government statistics and research – have trust and think “win-win”. And being flexible is always an asset when doing business in China.

“Media stories about companies in China failing to honour contracts are plentiful; highlighting what is often referred to as ‘rule of man’ over the ‘rule of law’. However, in China a signed contract is meaningless if it is not fair. Gaining the trust and respect of local partners and colleagues are necessary first steps to ensuring the success of a China manufacturing venture.

“Yet, it would be a mistake to assume locals think fair. Business is business. Know the bottom line and be prepared to walk away,” says O’Reilly.