Sunday, October 08, 2006

The Real Peril of Outsourcing to China

Outsourcing to China is not an easy prospect. You must deal with language barriers, time zones, travel, shipping, customs, legal structures, visas, expats, kickbacks, repairs, support, different standards of human interaction, contract commitments, "good faith," trust, quality, legality - it literally never ends These are all immense challenges that often turn out to be more expensive and time consuming than their worst projections, yet these are all just process challenges that will having you watching where you step before you walk into the real elephant in the room.

What we in the United States and the rest of the industrialized world are doing is transferring the rich knowledge of manufacturing, management, and design, that is our competitive advantage, to a country that has no institutional respect for our property, whether intellectual, legal, ethical, or financial. Anyone who thinks they can manufacture something in China without going up against a market filled with look and act alike fakes within 6 months had one too many drinks of the globalization cool-aid. Although the cost of Chinese manufactured goods is perhaps 80% less than those manufactured in the "West," after all the above costs, the savings can go down to 30%. At that point, you are in currency hedge territory, and when you add on the immense distraction of building a global outsourcing operation, the money and time you could have spent out maneuvering your competitors, and the impending competition from Chinese fakes and competing brands making deals with your factory to make similar products, you must ask yourself if it's worth it in the end. In two years when it's 6.5 yuan to the dollar, will it be worth it then?

The answer to that question is certainly not always "No." But the answer should be "No" much more often than it is currently. If you dominate distribution, or have an overpowering brand - e.g. Walmart or Dell - and your production volume is on a truly giant scale, there is no question that Chinese factories can crank out product like no one else. If your company currently lacks the manufacturing expertise, and your product is more brand and aesthetic, or "me too", than it is design and function, you have less to be stolen in China. But if you are creating something of true value, you might want to consider staying the hell away. Go somewhere that is perhaps more expensive up front, but lacks the above-mentioned costs and where your innovations stand a chance of being protected.

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Some more thoughts for another article:

Beyond the question of individual interest, in the meantime, we have stripped the west of the resources to produce the raw materials and manufacture goods critical to our defense. Were World War III to break out, we had better hope China is on our side, because without them we would lack most of the raw materials, let alone factories, to match our World War II effort. I don't have to mention what that does to our hand in the cases of Taiwan, North Korea, Japan, Argentina, and pretty much everyone else whom China has embraced over the last 5 years.

Perhaps the brightest side of all of this is that our entangling economic alliances may weaken our country, but ward off global war by advancing our interdependence. As I heard recently from an unremembered source, only 2% of interaction between nations is through official diplomatic channels - most of the 90+% is through trade. As in all of human relations, interdependence both corrupts principals and averts conflict.