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China Losing Manufacturing Luster. I Buy That.

By Dan Harris and Steve Dickinson

I am always saying that my law firm's clients (virtually all of whom are SMEs doing business internationally) are not leaving China because of its new Labor Contract Law, not leaving China because of its increased costs, and not leaving China because Vietnam is better. In fact, I virtually never hear about those things in terms of their China expansions and contractions. There is one thing though that does seem to influence our clients' decisions to leave China or to scale down there: quality. An Business Week article this week, entitled, "China Losing Luster with US Manufacturers," (h/t to China Challenges) discusses a recent survey indicating manufacturers are most concerned with China's lack of quality, followed by its lack of protection for intellectual property. The article rightly notes these views do not bode well for China:

The souring attitude should be disturbing to China's leadership. If the issue were just eroding price advantages, that would be less cause for alarm. Costs could swing back in China's favor, for example, with fluctuations in currency rates, commodity prices, or changes in China's job market. What's more, Chinese manufacturers have a long history of sacrificing profit margins with lowball pricing to win market share. The AMR study suggests, however, that U.S. companies are starting to better appreciate the less-visible costs of producing in China. Quality problems, rampant piracy (BusinessWeek, 10/2/08), allegations of sweatshop abuses, worker protests, and other factors not only drive up costs but also harm the value of brands and corporate reputations. "Companies are realizing that the fully loaded costs of importing from China are a lot higher than they imagined," says O'Marah. Trouble is, China will not be able to improve its quality problem overnight. It will require a long-term transformation of China's regulatory bureaucracy, legal system, and management practices. And Beijing has been promising to control intellectual-property theft for decades, with unimpressive results. If China doesn't start making progress fast, the current slump in export manufacturing (BusinessWeek, 3/27/08) could be the beginning of a longer-term pullback.

In its defense, Western views on intellectual property protection in China lag the improving realities on the ground there, but my sense is that its views on quality pretty much jibe.

Full post as published by China Law Blog on November 30, 2008 (boomark / email).