New challenges for Chinese suppliers in the post-financial crisis era

After the financial crisis, the clarion call of Europe and the United States to revitalize the manufacturing industry has sounded. Low-cost countries such as India and Southeast Asia have risen rapidly. The adjustment of China's economy and population structure has led to rising labor and other costs. "Made in China" seems to be in trouble both at home and abroad. middle. However, China's exports are still growing despite the huge volume, and manufacturing companies are also looking for various possible ways to break through.

Neale G.O'Connor, a visiting associate professor from the National University of Singapore and founder of ChinaSupplier1000Project (1000 Chinese Suppliers Research Project), has been paying attention to the survival of Chinese manufacturers. Since 2010, Professor O'Connor's team has interviewed thousands of suppliers from China face to face. These suppliers are mainly concentrated in the electronics industry, mainly engaged in export business, and some enterprises also have domestic trade business. According to Professor O'Connor's introduction, the main topics of the research focus on three points: first, the main challenges faced by suppliers in global competition; second, suppliers' solutions to these challenges; third, how suppliers manage and relationship between customers.

Interactive Topic: What is the biggest challenge your business faces? Cost, talent or something else?

Four major challenges for Chinese suppliers

The survey results show that the top four biggest challenges faced by Chinese suppliers are: Cost Control, Competition ), sales growth (Salesgrowth) and human resource issues (Staffandproductivityissues). To deal with these challenges, the suppliers participating in the survey start from four strategies: Marketing strategies, Economic strategies, Operations management strategies and Relationship strategies. (See figure "Supplier Challenges and Strategies")

Cost Control: It's no surprise that this challenge tops the list. Since 2005, the continuous rise in the cost of labor and raw materials has put China's manufacturing enterprises under increasing cost pressure. According to Prof. O'Connor, suppliers mainly from overseas customers attach more importance to cost control than suppliers whose main market is in China. The export order model dominated by OEM and ODM has led to the lack of pricing power of Chinese suppliers, and price has become the primary way to win orders. At the same time, competition from other low-cost countries has become more and more intense. These factors have led to Chinese export suppliers' increased focus on "cost control". for sensitive.

Faced with the challenge of cost control, the countermeasures given by Chinese suppliers mainly focus on the level of "operation management strategy" and "economic strategy". For example, 15% of suppliers consider reducing costs through automated production lines , 10% will obtain lower-cost raw materials by inquiring from more upstream suppliers. These strategies, in Professor O'Connor's view, are short-term solutions that are easily imitated by competitors.

Competition: This challenge is second in line with the status quo of China's industry. In many industries such as electronics and clothing, Chinese manufacturers have already gained the world's leading market share (for example, the clothing industry accounts for 30% of the global trade share), and it is no longer easy to continue to expand. Still not established, suppliers often compete with each other.

Professor O'Connor found that manufacturers in coastal regions cited the challenge of "competition" more frequently than inland regions. This also reflects that the low-cost advantage of the inland is indeed recognized by many suppliers.

Suppliers are more aggressive when dealing with the challenge of "competition": 13% will choose to do so through research and development, 11% through improving product quality, and 8% through improving production efficiency.

In the face-to-face interview, Prof. O'Connor found that when suppliers implement measures such as R&D and improving production efficiency, they are very eager to get advice from buyers. According to his observations, those suppliers who receive active help from buyers tend to make very rapid progress in these areas.

Sales Growth: This challenge comes after Cost Control and Competition and illustrates that even with continued order growth, suppliers are squeezed by cost and competition, and profit margins tend to decline . Suppliers are responding to this challenge mainly by including promotions (12%), participating in more exhibitions (12%), etc.

Professor O'Connor observed that some buyers are also aware of the anxiety of suppliers in terms of sales growth, in order to help the development of suppliers, buyers will reduce the total number of suppliers and increase long-term cooperation number of suppliers and provide more precise demand forecasts so that suppliers dare to invest in capacity.

Human Resources and Productivity Issues: In Professor O'Connor's view, it is somewhat surprising that this challenge only ranks fourth. Because in today's rising labor costs, suppliers should hedge against rising wages by improving the efficiency of human resources. Accordingly, Professor O'Connor believes that Chinese suppliers have not fully realized the importance of human resource management, which is actually a fundamental solution to the current problems.

Professor O'Connor pointed out that suppliers have a lot of room for improvement in human resources. For example, simply giving employees weekly English skills training is enough to improve employees' English proficiency and increase the number of employees. employee loyalty to the company.

From the above overview of suppliers' challenges and responses, we can find that under the background of the gradual recovery of demand in Europe and the United States, the pressure on Chinese exporters on the demand side has eased. The biggest problem currently facing is the rising cost of manpower, raw materials and other related costs and increasingly fierce internal competition that have evolved from the adjustment of the domestic economy and population structure. At the same time, they have also begun to move from pure low-tech foundry to R&D innovation, but they still have no plans to charge the highest end of the industry chain such as independent brands.

Issues of concern

In several years of research, Professor O'Connor found that some phenomena and problems need special attention, including "sub-supply chain" (Sub -supplychain), corporate competitiveness positioning, buyer-supplier collaboration, corporate vision, etc.

The "secondary supply chain" is one of the serious problems that Professor O'Connor has observed. Due to the pressure of cost control, some suppliers will "opportunistically" purchase cheap raw materials and outsource orders to lower-level small factories. This practice undoubtedly makes the quality of products impossible to guarantee. At the same time, small workshop-style factories often lack a quality control system, and the manufacturing process is not under the control of buyers.

This is a very dangerous chain, and the next-level factories are under greater cost pressure, and it must also convert costs, which may lead to cheaper raw materials and smaller workshops with less quality assurance production line. Ultimately, consumers get products of poor quality, buyers lose their reputations, and relationships with suppliers break down, leaving no one in the long run. Therefore, Professor O'Connor suggested that suppliers should not only sell on price, but buyers should also be aware that "squeezing" suppliers is not good for the long term. This leads to the next question:

Enterprise Competitive Positioning. Professor O'Connor stressed that suppliers should not be greedy for everything, but should look for their own "specific niche". That said, suppliers need to focus. Because when buyers are looking for and selecting suppliers, they start with their own needs and look for the best suppliers that meet their specific requirements. If suppliers try to be comprehensive and cater to different buyers in order to reduce risk, they are very likely to get twice the result with half the effort and fail to outperform dedicated companies on every selling point, resulting in lost orders.

But there is a real risk of "egg in one basket" by focusing too much on a specific area. Professor O'Connor's suggestion is that you still need to have a "niche foundation", and then develop other competencies that can complement the "niche foundation" on this basis to form a combination of depth and breadth. .

"Buyer Supplier Collaboration" is another management practice strongly advocated by O'Connor. Unlike terminal retail, manufacturers mainly focus on large orders, so it is particularly important to form a good cooperative relationship with buyers, especially large buyers, for the sustainable development of the business. The specific cooperation includes regular sharing of the performance of both parties, notification of the expected number of orders and expected production capacity, and cooperation in R&D and design.

Sharing performance with each other provides a better understanding of each other's operations and helps build trust, especially among key partners. In reality, this mechanism has gradually been established between suppliers and major customers. In Professor O'Connor's report "How to Manage Partnerships with the Largest Buyers", we found that 77% of suppliers and large buyers share performance data at least annually, and the level of mutual trust is The rate of "same" or "higher" reached 88%.

The notification of estimated order numbers and estimated production capacity can effectively reduce the problem of delivery delays and excessive factory investment. For example, in the electronics industry, many suppliers can make good product samples, but when buyers need suppliers to supply large quantities in a short period of time to catch up with the rapid replacement of electronic products, suppliers are often difficult to cope with. One reason is that suppliers don't know enough about buyers' demand curves to make forward-looking capacity investments. In O'Connor's report, less than 20% of suppliers intended to make follow-on investments in capacity to meet the needs of large customers. Therefore, in this regard, the communication between the two sides needs to be strengthened.

"Corporate vision" refers to the company's positioning for future development. Professor O'Connor divided Chinese manufacturers' attitudes towards the future into four categories: one is to continue the strategy of winning by price and reduce costs through mass production; the second is to cooperate with multinational buyers and learn from international advanced Technology, design, etc., and then turn to develop the domestic demand market to achieve "export to domestic sales"; the third category is to strive to establish cooperation with leading companies in the industry to become their foundry or upstream and downstream supply chain manufacturers; the fourth category is to strive to expand The value chain has become one of the leaders in the industry by establishing its own brand and creating unique R&D designs.

There is no right or wrong for these four types of enterprise visions, but O'Connor pointed out that the first type of enterprise positioning is to continue the low-cost model since the reform and opening up, and to focus on human resource-intensive industries such as textiles and clothing. Industry, this model has shown a decline, and in the electronics industry and other industries where China's industrial chain support still has an absolute advantage, it is still feasible, but it is necessary to plan ahead. The latter three models all emphasize the importance of R&D technology, which is a more feasible transformation path for Chinese manufacturers.

In the interview, Prof. O'Connor also talked about the many aspects that Chinese manufacturers need to improve in terms of automation, transparent supply chain, human resource optimization and so on. But overall, he is still optimistic. In the process of his contact and observation of China's export manufacturing industry, he believes that from a macro level, China is still far from perfect in terms of infrastructure and supply chain, government's mercantilism, etc. Better than other emerging countries; at the micro level, Chinese suppliers are equally commendable for their aggressiveness and responsiveness. Therefore, Chinese manufacturing still has a bright future.