Despite the fact that many manufacturers set up manufacturing facilities in China, housewares manufacturers should carefully study the pros and cons of manufacturing there, says Peter Navarro, a business professor at university of California-Irvine, a regular contributor to CNBC and author of the book, The Coming China Wars. Navarro spoke to housewares executives about the challenges and benefits of manufacturing in China at the International Housewares Association's recent 2008 Chief Housewares Executive Supersession (CHESS), held in September in Chicago.
The meeting was a strategic and networking event, with valuable information on manufacturing in China, housewares design, consumer trends, the current retail environment and factory compliance.
In a keynote address, China's Futures, From El Dorado to Armageddon, Navarro explored possible scenarios in a world increasingly "made in China." He examined several strategic alternatives to be ready for these futures and explored opportunities and dangers inherent in the China business relationship.
He recommended that housewares suppliers do a thorough risk analysis of manufacturing in China. "Is China a cost-effective location for your manufacturing facility?" he asked CHESS attendees. "The answer depends on how the future unfolds. It could be El Dorado or Armageddon."
While the perception of China is that it's so attractive because of the cheap labor, that's not entirely true, Navarro said. "It's a complex equation, and it relates to the China price, to the fact that China can undercut foreign competitors by 50 percent or more," he explained. In addition, China manufacturing includes network clustering, where whole cities produce single products or components, which create tremendous economies of scale.
"This is the genius of China," he said. "Yet the problem for the U.S. is that it's not a transferable lesson. It's like Akron-Detroit-Pittsburgh on steroids."
In addition, Navarro pointed out that the labor force in China is well-educated, well-disciplined and productive, and that makes them outstanding versus just being "cheap."
Navarro also discussed other issues that a U.S. manufacturer should address before establishing manufacturing operations in China, including counterfeiting and piracy, and a lack of health and safety and environmental regulations.
"China is the biggest piracy nation," he said, "and it's not just DVDs, it's everything from A to Z." It provides real production cost advantages, for example, if you are in a research-and-development- intense industry such as automobiles, because you don't have to spend the money on R&D; you can just "steal" a design. "But that will not continue forever," Navarro noted. "Tougher copyright protection will ultimately raise costs. If China ever toughens its copyright protection laws, manufacturing costs in China will go up."
He also told attendees that China is the most polluted country in the world, as 16 percent to 20 percent of the country's rivers and streams are polluted. "This also provides cost advantages, believe it or not," he said, "Yet, long term this may mean significant health risks to your employees, rolling manufacturing shutdowns as conditions worsen, the government adopting more stringent regulations and a loss of water supplies to your factories if the government adopts more stringent regulations. Are you ready for that?
"I painted you a difficult picture of China," he concluded. "I think that they are facing some changes. And I hope that you will look more formally at the risks involved in manufacturing there. Conduct a proper risk assessment before you invest in China and all that is involved, and consider staying home if you are not 100 percent comfortable with going forward."
Session summaries and PowerPoint presentations from CHESS 2008 are available at www.housewares.org/CHESS. CHESS 2009 will be held in the Fall in Chicago.
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