May 21 2008
SMEs suffering through china investments due to US economy
Last week, Bill Dodson posted “ Strategic Tectonics in China Investment” at This is China! (a clever wordplay on the earthquake I bet), and I thought portions were worth sharing. So before you march into China thinking that there is money to be made as an expat, or before you think sourcing in a major city will save you some money, this is worth reading:
The meltdown of the economy in the United States has been reflecting itself here in China in odd sorts of ways. The downward pressure on the value of the dollar; the housing loan crisis, even who will be the next President of the United States, has been compounded by rising costs of doing business in China – especially for exporters. All this has been forcing American companies to re-think their positions in the China. The big multinationals like an IBM, an Intel or a Chevron are simply heading to the second- and third-tier cities. They have the deep pockets to overcome many of the obstacles to investing in China’s interior that smaller companies cannot afford.
For Small and Medium Sized enterprises (SMEs) matters have been a bit more complicated: many SMEs have substantial investments in China supply chains while others have invested in factories in the Mainland. Overwhelmingly, the investors came to China with the plan of exporting most of their product to the States and then selling more product domestically as they learned the ropes of doing business in the country and as the domestic economy matured. However, the same forces that are buffeting multinationals are downright punishing many SMEs.
As a small to medium sized enterprise, I would urge some caution and detailed planning before jumping into the China market too deeply. The weaker dollar and rising costs (inflation) in China are going to cut your profit margins awfully thin. So think twice and make sure you know what you are getting yourself into for the long haul. In other words, have a good business plan with a few contingencies and an exit plan.
And for all you expat job seekers who are looking to China in a crummy U.S. job market, you might be surprised:
Outside of the Shanghai municipality, Suzhou has the most American investment in manufacturing in China. What my friends who are General Managers (GMs), Production Managers, New Product Development managers and other leadership positions have been experiencing is nothing less than dramatic – if not a bit traumatic.
A friend that had been hired late in 2007 to be Vice President of New Product Development for an American company that had been sourcing components in China for more than five years was suddenly fired a couple months ago. The company had originally considered setting up its own operation in China. After its China-based trading partner increased prices 20% on all components, the executives State-side decided it wasn’t a good time to venture further into China: domestically their market had sickened its worst in some twenty-five years.
A British expat that works for an American company put it to me this way: many of the companies that are invested in the region are pretty settled now. Many have been able to find Chinese talent – even if imported from other countries – to manage many of the operations. Expats are expensive, he said. Add to that the uncertainties back in the States, and “some of us who have made our lives here may not be around in a couple years.”
I thought this would be a helpful word of caution. That is, after all, what lawyers are best at.
