The Advantages of Direct Manufacturing Outsourcing in China

By: John Roker

In today’s global economy, attaining a competitive edge is vital. With many companies competing in crowded marketplaces, having to compete on price alone has become a reality for many companies. Ensuring that you are getting the best price possible for inventory is a vital process that should be equally as important to a company as ensuring quality is consistent and delivered on-time to customers.

With many global brands opting for to directly outsource manufacturing to China, other businesses are attempting to follow by both taking advantage of Asian markets and also ensuring they do not have the profit margins of a broker to contend with as well. Being able to locate and build relationships with direct manufacturers is becoming increasingly difficult with the rise in brokers in the marketplace, however when you do indeed manage to locate one; the advantages of building a partnership with them can be beneficial for both retailers, wholesalers and brand holders.

China versus Other Developing Economies

China has advantages when it comes to manufacturing over other Asian countries. One reason for this is the experience and education the country has in delivering products that adhere to the rigorous standards that are required by both western legislation and consumers. Chinese labor is also significantly cheaper than Indian markets for example, where rapid inflation is making it harder for Indian companies to compete on price alone.

Direct Outsourcing versus Brokers

When it comes to purchasing inventory, there are certainly more brokers in the marketplace than there are manufacturers. Some brokers will effectively manipulate companies into thinking they operate as a manufacturer, where as others will act as a legitimate broker. Either way, they will either choose to mark-up the price or charge a commission rate for the transaction. Contacting the manufacturer directly will cut out the middle man, allowing your company to save money on purchasing inventory.

Outsource versus In-House Manufacturing

In business we are always told that we should focus on our core competencies. What does that mean? You should consider what your business has that is unique over its competitors. Is it an idea for a product, an ability to offer cost-effective solutions or even an intricate understanding of a certain sector? Whatever it is that your business has core competencies in, it is important that your business highlights them in what it does in-house and out-sources the other aspects to companies that have special skills.

For example, if your company has spotted a potential market for a product, then they should take advantage of the opportunity that they have identified. However that does not mean they should manufacturer the product themselves. Ultimately, they should follow the path that will allow them to deliver quality at the best price; allowing them to focus on their core competencies.

Therefore, if you are manufacturing in a western economy then you should ask yourself why. Why are you using an in-house workforce that may be 10 times more costly than what a Chinese company may be able to pay? Why are you focusing on manufacturing when time could be better spent on sales, marketing and business development?

World: Survey Says Asian Countries Most Advanced In 'E-Readiness'

By Jan Jun

An Iranian Internet cafe in Tehran (file photo)

(epa)

LONDON, 30 April 2007 (RFE/RL) -- The annual global survey of "e-readiness," published by London's Economist Intelligence Unit (EIU), shows that the so-called "Asian Tigers" have been the biggest advancers in "e-readiness."

"E-readiness" measures the development of electronic communication capabilities on the Internet.

Russia has actually dropped five places since last year, though, and Central Asian states still remain near the bottom of the table in the latest results. Though the "e-readiness" survey is all about the Internet, it looks at much more than just how governments make the Internet accessible to their people, say the survey's authors.

The Central Asian countries' IT and communications infrastructure is not nearly in as good of shape as in other countries in the survey, but mobile penetration is increasing rapidly in these countries.

Many Factors Considered

It's also about the ability of citizens, organizations, companies, and governments to use the Internet efficiently for economic and social benefit. And all these criteria -- modified to take into account new technological developments -- have helped to pinpoint this year's fastest-advancing countries. Denis McCauley is one of the authors of the survey.

"We have reweighted some of our 'e-readiness' criteria this year to have a sharper focus on the legal environment and government policy and vision," he said. "And several of the Asian countries that have advanced strongly, such as Hong Kong and Singapore, as well as Taiwan and Japan and South Korea, I think have stood out."

McCauley says Hong Kong and Singapore are now in the fourth and sixth places of the ranking, respectively, with 8.60 and 8.72 points on a one-to-10 scale after Denmark, the United States, and Sweden. The second group, South Korea, Taiwan, and Japan, are in the 16th to 18th places and moving up quickly.

Also improving fairly rapidly are the countries of Eastern Europe, all positioned between the 28th and 48th places. The leader of them, Estonia, scores 6.84 points while the last in that group, Bulgaria, notches 5.1 points.

Russia And China Rated Low

McCauley says it is disappointing, however, that Eurasian countries are doing much worse. Russia, for example, fell five places since last year to just one place behind China at 57th place, closely followed by Ukraine in 60th place.

McCauley explains, however, that Russia, China, and Ukraine have much in common and also have some positive things going for them.

"What we would call connectivity, or the level of their technology infrastructure nationwide, is not good," he said. "But it is extremely good or much better at least in the major urban centers. In China in the coastal cities and in Russia, of course Moscow, St. Petersburg, and a few other areas. So, there are some bright spots, even though they do, as a whole, rank down in the bottom part of the table."

McCauley explains that on the negative side "censorship is an issue in China and increasingly also in Russia, perhaps in a different context and perspectives," and this keeps both countries low in the rankings.

Despite being low in the table, McCauley stresses that Russia, with 4.27 points, China with 4.43 points, and Ukraine with 4.02 points are developing specialist niches. And they are already able to use technology for economic benefit, particularly in the outsourcing sector and especially in information technology (IT) outsourcing.

Outsourcing Centers

Russia and Ukraine have a large pool of highly skilled software developers with companies that are increasingly able to win business from U.S., European, and Asian firms. China has a large outsourcing business in terms of telecommunications equipment and is increasingly becoming a software-outsourcing center, McCauley said.

As for Central Asia, McCauley says it has not fared as well in "e-readiness" as a region so far, though there are some exceptions.

"There has been progress in Kazakhstan," he added. "You see that its score from last year's 3.22 has increased to 3.78 this year. That's not a bad increase in score; as well as Azerbaijan. Perhaps not [increasing] by as much as some of the others, but part of this has to do with the improvement of their infrastructure."

McCauley says that the Central Asian countries' IT and communications infrastructure is not nearly in as good of shape as in other countries in the survey, but mobile penetration is increasing rapidly in these countries. He said it's becoming a substitute for the lack of fixed-telephone networks and it is having a growing economic impact.

Susanne Dirks is the leader at the Institute for Business Value in Dublin, Ireland, which forms part of IBM's network and has helped the EIU to gather much of the data used for the survey. She stresses that Kazakhstan, Azerbaijan, and Iran -- which is near the bottom of the table, having fallen five places since last year -- can be evaluated in similar terms.

Poor Infrastructure In Central Asia

"If I look at connectivity and technology infrastructure, which is about broadband affordability, broadband penetration, PC ownership, digital signature, and things like that," she said. "I can immediately see that those three countries are very low on the connectivity grip criterion, and they really stand out as being low."

Dirk explains that the social impact of the "e-readiness" level achieved in those three countries is also very low. However, while Iran has fallen in the rankings from 3.15 to 3.08 since last year, Azerbaijan has risen significantly -- going from 2.92 to 3.26 -- and that could mark the beginning of the country's faster economic development.

McCauley concludes that what has made Iran drop in the rankings has not so much to do with a lack of technological progress, but mainly with more general criteria, such as the country's pro-business attitude and whether or not an appropriate legal framework has been created by the government.

"We believe these [issues] are an integral part of 'e-readiness,' even though it's not strictly technology we're talking about," he said. "And Iran has fallen back, for example, in the Economist Intelligence Unit's assessment of its overall business environment."

The truth about China

China is looking to be more than just a strategic solution for low-cost labor arbitrage

Way back in the day, the term "old China hand" referred to a diplomat or journalist who had spent years stationed in China and, as a result, understood Chinese culture, politics, and ways of doing business.

This week I spoke with two of what I would call "new China hands," Matthew Growney and James Popkin. Growney is executive vice president and chief strategy officer of DarwinSuzsoft, a staffing company that merged U.S.-based Darwin Partners with China-based Suzsoft and has headquarters in both countries. Popkin is group vice president and research fellow emeritus at Gartner. He co-authored IT and the East with Partha Iyengar, also a Gartner vice president.

Growney and Popkin offer different but complementary views of China. Growney has a feet-on-the-street perspective, while Popkin takes a high-level view of Chinese business. Together they help give a more complete picture of what is happening in China and how it will affect IT in the States.

DarwinSuzsoft has six offices in China, each with its own domain expertise and access to a different labor pool. The office in Suzhou province, for example, employs about 800 people and has access to 150,000 computer science graduates annually in Suzhou province alone. To get a feel for the scope of how big China is, the government recently completed a two-year project that built a million housing units. These units are located in what Growney calls an office park where DarwinSuzsoft is also located. The government pays the mortgage for workers, giving them a 70- or 99-year lease, and pays for their commute to and from work as well.

Now, if the wage rate for a standard software developer in India is a fourth of what it is in the States, a Chinese developer gets about an eighth. So, if the U.S. rate is $100 per hour, it is $25 per hour in India and $11 per hour in China. For a Java developer in China, the hourly rate is $7 to $9. For BPO (business process outsourcing), where a minimal level of education is required and the job is basically data capture and data entry, the rate is $2 to $3 per hour.

While China's outsourcing capabilities are increasing, the Indian market is decelerating, Growney says. The turnover rate is as high as 30 percent to 50 percent at some Indian outsourcing companies, and wages are spiraling upward.

"You have so much wage creep and turnover it is killing them," says Growney. In fact, Indian companies have started to call DarwinSuzsoft asking if they can outsource to it.

With that kind of marketplace available to enterprise companies, I asked Popkin, should current U.S. IT professionals throw in the towel? Should U.S. college students avoid becoming computer science majors?

In answer, Popkin notes that the U.S. economy has survived at least three waves of globalization so far. First we saw semiconductors go to Taiwan, then automotive and electronics to Japan, and then manufacturing to China. We're now experiencing a fourth wave, with IT services and app development moving to India and China.

Despite this Popkin is optimistic, as there are a number of factors that have helped the U.S. economy survive these economic tsunamis.

"We go toward the higher value-added," Popkin said. Take steel, for example. China, Korea, and Japan are now major steel producers, but we own the specialty steel market that uses exotic mixtures of metals and chemicals. The U.S. has also pioneered new industries such as biotech and nanotech.

Not only that, but our population keeps growing, creating domestic demand, and we maintain an entrepreneurial spirit, which is in turn financed by venture capitalists.

According to Popkin, the U.S. has the capital markets and infrastructure to remain competitive in IT -- with the infrastructure being the Silicon Valleys that dot the map and become hotbeds for new ideas.

But make no mistake, China and India will be tough competitors, Popkin says, citing another example from the steel industry.

Tyson Krupp, one of the largest steel forgers, looked at China and India as areas for future growth. But instead of finding customers in those markets, it found India and China creating Bharat FAW, which would become Tyson Krupp's largest competitor.

IT will be no different. Indian companies are localizing products and learning to develop into multinationals that offer competing services at lower prices. In China, the story is similar. For example, Huawei, a manufacturer of routers and telecom equipment, owns 1,000 patents, has 8,000 patents pending, and employs 17,000 engineers. In 2005, a state-owned Chinese bank extended a $10 billion line of credit to Huawei. Huawei is on the verge of supplanting Cisco as the lead supplier to China of networking equipment.

In IT software and services, where patent infringement remains an issue, Chinese companies are hoping to allay enterprise fears about IP (intellectual property) protection by bidding on complete IT solutions and services that include the software, the service, and customization and maintenance. This way they can not only provide themselves with a larger revenue stream but they can ensure that parts of their business will remain viable in the event that other parts are found to be using unauthorized technology.

China will not be satisfied at being the strategic solution for low-cost labor arbitrage, Popkin says.

However, it is not all smooth sailing for China.

Government involvement in the economy can be a plus, as in the case of Huawei, but it also creates a critical uncertainty for customers and China's own future growth.

"I'm not simply talking about Communist control, but what we really have to look at is the level of government ownership of private assets. This will have a dampening effect on innovation," Popkin says.

For example, the government of Shanghai owns 700 businesses worth $16 billion. The joint venture between GM and Shanghai Automotive Industry Corp., actually the government of Shanghai, is an example of problematic government involvement. Imagine, says Popkin, a GM competitor wanting to compete in Shanghai and having to go to the city for all of its permits.

But does the rise of China mean the decline of America? I asked. "No," says Popkin.

"Wealth generation is not a zero-sum game," he says. "It is something that can occur across multiple countries. Their gain is not our loss."

Outsourcing and the Strong CIO

pril 30, 2007 (Computerworld) -- To all those who think outsourcing will lead to the marginalization or elimination of CIOs, I have two words: You’re wrong.

The truth is that outsourcing makes strong IT leadership even more critical. Outsourcing success can be elusive. Studies have shown that a low percentage of outsourcing relationships are considered successes, and at least 50% of outsourcing relationships are terminated early.

Here are five ways strong leadership can make a difference:

Blending resources. In an IT organization that consists of both in-house and outsourced personnel, everyone has to look as if they are on the same team. No one outside of IT should know or care which IT team members are in-house employees and which are outsourced. Creating this seamless blend is not easy, but it can be done with strong leadership.

Optimizing performance and customer service. Most outsourcers try to live up to the terms of their agreements, but they do that a lot better when they are held accountable by strong IT leaders. Conversely, some outsourcers will take advantage when strong IT leadership is lacking.

Making IT more agile. By its nature, enterprise IT is not very agile — and outsourcing can make it even less so. It takes strong IT leadership to overcome barriers like cumbersome outsourcing agreements and time-consuming processes.

Quickly addressing and resolving problems. In outsourcing, small problems can quickly grow into big ones. IT leaders always need to act decisively to solve problems, but that’s much tougher with outsourcers than it is with the leader’s own employees. IT leaders have to tap into a broad range of skills — communication, diplomacy and negotiation, for example — to effectively address and resolve problems that cross organizational barriers.

Preparing for insourcing. Isaac Newton observed that what goes up must come down. Having fought the enterprise IT management wars for more than 30 years, I have observed that what gets outsourced usually gets insourced again — about five years later. While outsourcers are doing a better job than they did in the past, I still think we will see a new wave of insourcing in the not-too-distant future.

But, more important, even if an organization never insources any of its outsourced functions, it will benefit by being prepared to insource. Outsourcers know that insourcing is not a realistic option for an organization that lacks IT leadership that’s strong enough to drive an insourcing effort. If you maintain at least the perception that insourcing is an option, you will have extra leverage.

The truth is that any company that thinks the outsourcing of IT is an excuse to marginalize or eliminate the CIO is doomed to an outsourcing failure.

Bruce Skaistis is the founder of eGlobal CIO Advisors, which focuses on helping organizations maximize enterprise IT value, optimize enterprise IT agility and performance, and minimize enterprise IT expenses.