Some growing going on in China
07 March 2007
Looking back after ten years of electromechanical outsourcing experience in the Guangdong Province of China, Norman Milner reflects on some significant changes and observations that have been experienced in what is considered the most dynamic, industrial and economic growth region of the past decade, focusing on offshoring and outsourcing Electromechanicals in China’s Guangdong Province
Adjacent to Hong Kong and bordering the Pearl River Delta, with its major cities of Guangzhou (once formally know as Canton), Shenzhen, Dongguan, Huizhou and Zhuhia, the Guangdong Province (roughly the size of England) including the Pearl River Delta, has been China’s fastest growing province, with growth of over 15%, and has accommodated much of the electromechanical global offshoring and outsourcing in the south of China together with other neighbouring provinces of Henan, Hubei, Hunan, Guaanxi and Hainen. These vast areas compete with other even larger Chinese growth regions such as the Yangtze River Delta incorporatating Shanghai, Jiangsu, Fujian, Zhejiang, Jiangxi and Anhui provinces in the South East of China accounting for 22% of the national GDP and 29 percent of the countrys total foreign trade.
Other vast regions made up of provinces in the north, northeast, northwest and southwest of China complete the big picture. China’s enormous growing indigenous consumer market in itself makes up for most of this explosion of new factories, roads, traffic and labour movement.
The UK, surprisingly enough, is still the main overall European investor in China. Whether investing as a Wholly Foreign Owned Enterprise (WOFE) or alternatively as a now less popular Joint Venture (JV) or indeed procurement of products or subassemblies. Many UK companies are still choosing the Southern provinces such as Guangdong to invest. However, disappointingly, not many UK companies are capturing the ever-increasing China business opportunity.
(Ironically, as I write, Chinese television announces that the first Tesco superstore has opened in Beijing)
Despite the measures taken by the authorities to slow down the boom, so far there has been little effect. Vast areas are turned over to industrial parks, so much so that the local road maps, such as they are, remain constantly out of date. I have spent many an hour driving round with a supposedly locally knowledgeable Chinese taxi driver (who can’t speak English) looking for a new factory. Collection from the hotel by the supplier is probably still the best option!
Many of the older factories previously housed in multi floor buildings, with workers dormitories included, are moving from city locations to the outskirts of town and bussing people to work has, in some cases, replaced the pedal power of getting to work.
Don’t be impressed too much with awesome shiny new factory buildings with reception areas that would dwarf your own factory. Most new factories are impressively designed and on one level comparable with a modern structure like Stansted Airport. Adjacent separate dormitories house migrant workers and invariably leisure facilities like badminton, basketball etc are evident, almost like a modern university campus.
However, sometimes, not so shiny people run these types of businesses.
Contract Manufacturing
Accommodating the needs for growth in export, and mainland China business, the capacity of contract manufacturing Turnkey operations for finished product, printed circuit board assembly and metal presswork has kept pace with the growth. Apart from new enterprises whether foreign or Chinese, some older existing companies now have second or third factories. Well know international brands light up factories on the industrial zones, and you don’t have to go far before you see a well know contract assembly logo.
I have always preferred the Guangdong Province for working as it has been most practical to negotiate and get along with Hong Kong, English-speaking management who invariably talk the same style of manufacturing language, have similar qualifications and are familiar with other UK business aspects, e.g. finance, human relations and general terms and conditions. It’s not all mass volume nowadays, and there are businesses who are just as eager for 1000-5000 PCBA batch as opposed to the 5000 plus per day volumes.
Most contract engineering companies offer full turnkey, PCBA, SMT & throughhole, sBoxbuild, Optical inspection, incircuit and fully functional test, etc and its not rare to find full inhouse services for BGA and COB assembly aimed at the OEM.
Most electronic components are imported into China, and it is not always the case they can buy at better prices. Lead free processes are evident everywhere, and investment in the latest high tech chip placement kit is the norm.
IPR
In mainland China, Intellectual Property Rights protection has only marginally improved with improvements to laws spurred by WTO access, the process of ridding corruption, training of the judiciary, cost time and uncertainty of fighting cases still all slowly matures. In many cases its Chinese v Chinese. The message is still Caveat Emptor; your technology is vulnerable.
Hong Kong takes IP seriously and is currently pushing to attract R&D with new science park enterprises in Hong Kong coupled with more collaboration with local legal professions, claim it will be a greater safe haven for leading edge science and technology in the future.
Getting around
I have always favoured Hong Kong as a good base to start visiting Guangdong Province. One quarter of China’s foreign trade passes through Hong Kong therefore you can expect a well developed service sector for logistics and exporting. The days of massive queues and shuffling with your suitcase at the Shenzhen border with Hong Kong have generally improved and are now reasonable apart from the occasional glitch at peak times.
Nowadays, you can get to most of Guangdong’s major cities from Hong Kong by bus, train or ferry. Alternatively, your Hong Kong company may transport you in even more comfort to his Guangdong factory. Bus times, frequency and air-conditioning comfort have all improved and invariably the trip takes no more than 1 – 3 hours between major cities.
Visas are still required to travel from Hong Kong into China and, although better to get these before you travel from the UK, you can obtain your visa in Hong Kong within 24 hours with the hotel’s assistance.
Most Chinese hosts will almost offer their assistance in travel and it’s really best to accept the offer; apart from the courtesy you will have less problems.
One still gets bothered by unsavoury looking Chinese characters wanting or insisting on carrying your bags at the border, and babbling to you in Chinese, so don’t go it alone until you really know the ropes.
Relationships and Guanxi
Having spent much time in the China over the past 10 years I have made many good friends in Hong Kong, Guangdong and Taiwan and to me this has proven to be most rewarding in my business matters as well as my leisure moments . If you subscribe to and understand the true value of business and personal relationships then you will have no problem. Being yourself, treating China the same as anywhere else, offering compliments. Being a little culturally sensitive and yet robust all go towards a better working relationship. The Chinese expression for this is “guanxi” and its worth remembering that they have much more historical experience than we do in this area of relationship development.
I don’t tell many Western style jokes any more or use colloquialisms so much now as it can be tedious and embarrassing to explain the funny side of something. They cannot see the point – and how do you explain something like “raining cats and dogs”. Save this until you really, really know your host.
Small gifts are still a good “bonding” token and whereas you might receive Chinese tea, Chinese wine or pieces of porcelain, or even “moon cakes” in the autumn, I have found a reciprocal gift such as a good red wine, golf shirt, miniature marmalades or Wedgewood goes down well.
Workers and wages
Prices have been mainly affected by material increases such as oil, coal, gas, aluminium, copper and steel in the last 2 – 3 years. Labour rates have increased about 25% in the last ten years , and seem now to average approximately $120-150 US per month for a start-up factory worker with small dormitory accommodation and subsidised canteen provided. The assembly labour force is still made up of mainly migrant workers, mostly girls who may come from as far away as 1000 miles plus. This migrant work duration lasts roughly three to five years average with money being sent home to help support immediate family and grandparents. Recent reports reflect that Chinese labour rates at Euros 5 per hour compared to India 9 Euros and Europe at 45 Euros per hour are still most favourable.
Whereas most supervisory and management posts are still Hong Kong employees usually commuting daily or weekly to factories within the province, there has been a considerable change whereby mainland Chinese who have gained necessary skills and experience are filling these positions. Sheer demand on these positions has also been a contributing factor. Demand and lack of skills has affected specialist areas such as software engineers and it is common to find abilities are sometimes at a lower technician level .
The Chinese are incredibly quick at learning, and with the great desire to do so, we are witnessing more and more educated people coming out of schools and universities both locally and abroad to contribute and join this dynamic Chinese business and commerce revolution .
Getting started and the selection strategy.
In many respects locating a suitable source in China or investigations into a WOFE or JV is now a lot easier e.g. trade shows, trade councils, internet , links have developed remarkable well over the last ten years and whether you are looking for full turnkey box build, pcba, cable assemblies, enclosures, LCD, power supplies, plastics etc, the added problem can lies with short-listing as there are so many companies to consider and the selection process may take many months to conclude ( Specialist Business advisors such as FEBL may be the answer to shorten the timescales as well as providing meaningful advice whilst recommending vetted sources.)
If you are considering your own factory or looking for a joint venture a lot of time should be allocated to the research (WOFEs and JVs can take one to two years to set up and become operational). Getting it wrong and decoupling later can cripple your business.
Having tested our own procedures and techniques for vendor selection, asking much the same questions one would engage with a western source, you have to be patient and determined to get realistic answers. For example their “other” factory may be a joint venture or collaboration arrangement. Don’t expect trading terms and conditions to be evident , most trading is carried out from a quotation simply providing description, price, delivery and terms of payment. Negotiating for special terms and conditions can be arduous, but not impossible.
More and more companies claim ISO accreditation and whereas this is a step in the right direction your own audit and supplier appraisal is a must. The presence and influences of foreign multinationals such as Sony, IBM, Philips filtering throughout the supply chain has lifted standards enormously.
I am biased towards Hong Kong managed businesses in Guangdong simply because of the better communication and language and as I hear so many mistakes being made such as selecting a Chinese mainland company at a Chinese mainland trade show and finding out later only the people on the stand can speak good English.
Communication should remain at the top of your vendor rating appraisal equally language ability, method and desire.
So, in conclusion, there have been enormous strides for the better over the last decade in this region, the internet has been a great benefit not only as an information tool, used properly, but has enhanced the day to day educational and language ability of the Chinese person.
IPR remains one of the most serious concerns that is progressing at the same rate as everything else, so special care should be excercised when deciding the handling of your intellectual property.
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