China’s “Made in China 25” plan continues to direct national policies on future internal investments. In May, the national government announced three more plans to pump up its manufacturing sector, including increased encouragement of technological innovations, policy revisions for shipbuilding and general aviation, and ten major building projects. The news is encouraging for off-shore manufacturers and producers who access China’s behemoth manufacturing sector and who will benefit from anticipated improvements inside their supply chains.
For 35 years, the Chinese industrial sector has been the backbone of the global manufacturing industry, offering well-priced supply chain options, a vast labour market, and seemingly unlimited capacity. In recent years, however, competition from other South East Asian countries has eroded China’s lock on low-priced labour, and its citizens are now seeking the high standard of living that their efforts have provided for the rest of the world. In response to these challenges, China’s leader Xi Jinping is building better international relations to encourage foreign investment in the country, while at the same time, his “Made in China 25” plan is underpinning its internal overhaul as well.
For off-shore entities, China’s activities are sparking renewed interest in increasing investments and beefing up existing contracts and agreements. China’s domestic markets are immense and international corporations that are already at work within them have the advantage of those existing relationships. Agreements such as the China-Australia Free Trade Agreement (ChAFTA) are beacons for Australian companies not yet operating within the country, but who now want to take advantage of the exclusiveness promised by that contract. Xi’s plans offer both groups exciting opportunities to develop new business ventures within the world’s largest economy.
Risks are Present and Evolving
Accessing China’s markets poses risks for every international producer, however, and these newly emerging opportunities may carry bigger risks than established markets. China’s complex social and political climate is distinctly different from any other society on earth. Successfully doing business there is often the result of careful planning, policy and protocol development and adherence, and a trusted set of eyes always on watch at the local level.
After 15+ years working with China, I’ve created a process that gives structure to a risk management strategy (you can read about it in my book, “Red Flag,” available here), and which incorporates each separate aspect of establishing a business there, from determining the context of the particular factory or producer, to evaluating the success of the implemented protocols.
Seven Elements of Risk Assessment
I expand on each of these elements in my book.
Context sets the framework for where and how you operate. It includes the standards that are expected within your organization as well as the details of the suppliers in the supply chain. For example, some businesses will accept environmental challenges if the financial rewards are sufficient; while other businesses will not accept those type of arrangements. Context is established by clarifying the risks that exist at each supplier and the elements that play into that supplier.
Risk Identification and Analysis
The two primary risks for every international manufacturer are quality related or reputational. High-quality goods produced in a factory that uses child labour may suffer reputational damage when those circumstances are revealed. Factories that comply with safety and labour standards may cut quality to increase revenues. Off-shore producers who aren’t able to verify the competence of their chosen factory risk damage from either type of malpractise.
Risk is inevitable in every contract. Companies seeking factories in China need to quantify how mush risk they are willing to accept to achieve a contract on favourable terms. Some risks may be acceptable; others may be deal-breakers.
Once the risks are identified and quantified, establishing related policies and practices is critical to managing them over time. For the best effect, these policies will be incorporated into all contracts and implemented in all relevant contract sites.
Tools and Systems
Managing the risks includes not just the establishment of initial practices, but also establishing systems to monitor practices over time. Formal and regular review of the systems will ensure that appropriate follow-through occurs and quality doesn’t suffer in subsequent product runs.
A comprehensive risk mitigation strategy is an all-encompassing endeavour; every aspect of the factory, supply chain, and logistics system should be included in the plan, and personnel at each level should receive training on it.
Most importantly, is the plan working? Are the factories producing high-quality goods according to contract terms and without alterations? Are production standards within plan parameters? Given the complexity of China’s industrial sector, it is likely that there will be flaws observed in aspects of the risk mitigation strategy that will need addressing, which is exactly why you need the strategy in the first place.
China’s recent announcements offer global businesses even more reasons to enter into its lucrative manufacturing sector. Prudent contractors will make a thorough risk assessment and craft a comprehensive risk management strategy to ensure their contracts are profitable at the start and throughout the life of the contract relationship.
I can help you assess your best Chinese factory options and secure and maintain your best Chinese partners. For more information about how to implement risk mitigation strategies in China, see my blog here, and read my book here.