Strategy is key as far as China is concerned says Richard May, Head of the Manufacturing Sector, DLA Piper.
China has, since 2011, been the world’s largest manufacturer, but growth is slowing. Wages have risen to match higher living standards, and employees are better educated and more demanding.
China still suffers from intellectual property (IP) abuses and political problems that deter investors, and is losing some new factory investments to lower cost locations, such as Vietnam.
Manufacturers need to stop relying on low wages and fast economic growth for their China strategy and instead need to enhance their productivity, their methods of product-development, and above all their supply chains – including more supervision and more simplicity.
Manufacturers need to engage with China’s legal system. IP protection; employee stability; anti-corruption, and dispute resolution are all vital for success.
Some of the major issues to consider within your China strategy:
If you make labour-intensive products you are probably already hedging between China and other countries to reduce cost. In China, costs have increased due to the higher cost of the labour market and the increase in value of the local currency. Manufacturers that invest in understanding the labour market save as many costs as those who seek to keep wages low.
For many types of products, e.g., high-tech devices, China’s consumers are more discerning than their Western counterparts and their tastes exceed the ability of local producers to satisfy them: leading to far more litigation against manufacturers. Understanding the local regulatory standards is therefore vital.
Supply chain and distribution network
Beijing and Shanghai are the obvious places to seek purchasers for international products, but there are also many other cities stepping up as their consumers become affluent and demanding.
Most of the growth in demand comes from these cities, so distribution networks become more difficult to supervise bringing with it business risk. To mitigate this risk, manufacturers should try to hedge against this in their contracts to shift the burden of risk onto their materials suppliers or product buyers. Many manufacturers do not apply their domestic standards in China, believing that China is a special case where local standards should apply.
Fear of IP theft often results in R&D strategy being removed from the local team in China or refusal to engage with China at all. The belief is that this will reduce its IP risk profile. This approach is often wrong as the technology might be copied anyway.
Businesses can usually strengthen their IP position or decrease the risk by fine-tuning their IP/ patent protection strategy. This could involve: a combination of patents and trade secrets and an aggressive patent filing/prosecution strategy.
From a commercial perspective, an international entity could consider partnering with a major Chinese player to better exploit the market. This will also put the company in a better position when enforcing IP/patent rights in China in the future.
Rapid change, and Free Trade Zones
It’s important to maintain an accurate understanding of the various developments taking place in the foreign investment sphere in China, because many of these developments can be beneficial to manufacturers.
For example, the Shanghai Free Trade Zone is the first Hong Kong-style free trade area in mainland China. Imports of necessary goods for manufacturing will all be exempt from duty tax.
Other changes include a gradual shift towards the ability of foreign investors to establish companies without approvals and a new dispute resolution procedure using Hong Kong courts for disputes anywhere in the mainland.
In summary manufacturing in China can still be the right choice. If done properly manufacturers can not only make use of the resources, talent and market that China has to offer, but can add cost and product benefits to their global business activities.
DLA Piper has a strong manufacturing team in China across its offices in Hong Kong, Beijing and Shanghai led by partner Nicolas Groffman.