As East West Associates (EWA) has discussed over the past several years in our seminars and quarterly newsletters, the 30-years of dynamic growth in China has been slowing. After years of double-digit growth, the Gross Domestic Product (GDP) was 7.7% in 2012, 7.7% in 2013 and 7.8% in 2014.
While 7%+ growth would be welcomed for more mature Western markets, this GDP growth is causing internal strain for the new Chinese administration led by President Xi Jinping and Premier Li Keqiang.
The Chinese economic model from the early years in the 1980s was based on China providing a large, relatively well-trained and disciplined work force with competitive wages. As a result, many Western companies established Chinese manufacturing facilities to take advantage of the arge workforce to provide products for both the export and domestic Chinese markets.
Given the difficulty of effectively competing in the China market, a number of these companies inevitably focused on their production primarily on export to the North American and European markets because they already had established brands, distribution channels and after-market service. However, other companies aggressively sought market share in China, particularly the automotive companies and Fast Moving Consumer Goods (FMCG) companies.
Chinese GDP slowdown and the government’s reaction to this slowdown have had a significant effect on Western and Chinese companies competing in China. The GDP slowdown has been caused by a number of factors, including a global slowdown since 2008, rising labor costs and the strengthening of the RMB exchange rate which has put pressure on export costing.
To maintain stability, the Chinese government began stimulating the economy with massive infrastructure and real estate projects to keep full employment and these actions have had an inflationary effect, coupled with the government’s mandated across-the-board salary increases to be financed by the global multinational companies.
The Chinese government has sought to stimulate domestic production and in many cases, this stimulation has allowed China to become the largest global market for cell phones, personal computers and automobiles. The issue is China is that domestic consumption has not risen as fast as the loss of export volume and this has the government officials in a juggling act of handling inflation vs. unemployment. This has had a negative effect and been one of the major causes of the reduced GDP the last 4 years or Western companies producing in China solely for export, they have been identifying new lower-cost Chinese suppliers which are usually manufacturing in lower cost regions of China and looking to Vietnam, Indonesia and even Mexico for low cost production.
However, for many Western companies, China represents a significant market and competing in China for the Chinese market is critical to their long-term growth strategy. Given the fact that China now or may soon represent their largest growth opportunity, a new mind set has been adopted.
These companies are adjusting their strategies and business models. They are reevaluating their manufacturing, supply chain, distribution, product offering, etc. as they have many Chinese and foreign competitors competing for the Chinese consumer. The mix between labor and automation has changed and many more companies are putting a greater emphasis on Lean Manufacturing & Performance Improvement and the location of their manufacturing sites and local wage rates. Selling strategies are moving from 1st Cost Driven to Life Cycle Costs, which then involves considerable time spent on customer education and internal sales training. Product design is changing to meet local Chinese requirements and a ‘Good Enough’ strategy pursued.
With these recent events over the last several years, EWA has assisted a large number of companies with Operational and Commercial Assessments, Performance Improvement, Restructuring and Rationalization efforts.
Thus, our Operational support focuses upon:
- Performance Improvement
- Operational and Commercial Assessments
- Interim General Management
- Sales & Marketing Assessments and Execution
- Factory Relocation
- Factory Closures
In order to better explain the Operational challenges of Western companies in China, in this East West Quarterly Newsletter, you will find Case Studies on:
- Commercial and Operational Assessment of Chinese Manufacturing Plant
- Relocation of Chinese Manufacturing Plant
- Closure of Chinese Manufacturing Plant
Additionally, East West will continue to provide in 2Q, 2014 additional data on:
- Performance Improvement
- Sales & Marketing Assessments
About East West Associates
Based in Shanghai and the US, East West Associates (www.eastwestassoc.com) is a full service consultancy business established in 2005, focused on assisting Western companies facing operational challenges in China.
East West Associates provides 4 key services:
- Operational and Business Assessment, Performance Improvement, Rationalization & Restructuring
- Merger and Acquisition Support Services
- Crisis Management
- Operational Benchmarking, Market Research, and Business/Operational Strategy
East West Associates management has over 40 years of combined on the ground P&L, business and operations management experience in China with leading US multinational corporations.
East West Associates is unique in providing operational and project implementation support in addition to assisting clients with business and operational strategy development.