I had an interesting discussion today about the new developments in the exports sector in China. Some purchasers are surprised by a change of attitude of some fairly large Chinese suppliers. They used to be hungry for new business, and suddenly they do not accept any order involving new developments, preferring instead to go on with repeated products.
I have no definitive answer for this new attitude, but here are my guesses:
1. Fewer workers means less capacity
Many factories do not produce at full capacity. Wages–which are usually well above the legal minimum–have gone up because of market forces. Instead of increasing salaries across the board to attract new hires, some factory owners prefer to keep paying the operators at a level that they think is reasonable.
2. Focusing on low-risk orders
Repeat orders are always a godsend for a factory. They have already noticed the sensitive issues of the product, the workers are immediately operational, and above all there is little confusion on the factory floor. It means the real production costs are much lower.
On the other hand, new developments take more time both from managers and from the prototyping team. Operators often have to be shown how to do their job, and there is usually some rework at one point or another. But the worst is that big mistakes are much more frequent–sometimes a whole order has to be sold at a hefty discount because the original buyer has refused it.
3. The sub-suppliers have the same problems
As overseas orders pick up, some components suppliers of exporting factories have problems delivering in time. In this case, recurrent and “easy” products are also given priority.
4. A general uncertainty about what the future is made of
The increases in minimum wages and the RMB appreciation signal a clear change in Beijing’s priorities, from sustaining the export sector to boosting domestic consumption. Add to this the ever-increasing competition on prices and all the talk about other Asian countries, and factory owners are no longer certain to make profits in the coming years.
On the other hand, real estate and the stock market are pretty tempting. Should they keep investing to grow a business that might have no future, or should they buy more tangible assets?
I would guess there’s no ONE answer. One cause may also be related to capacity constraints in times of peak demand, causing a gap in the available labor vs. the labor immediately required to get out orders on time. These factories may be willing to pay the prevailing labor rate , but by the time they get the workers in and trained up, the they may be facing the other side of the peak.
Hi David, thanks for the comment. Of course there is no one answer, and what I wrote above points to several factors that might act in combination.
Peak demand is seldom a problem for most Chinese factories (who routinely subcontract)… But I agree with you that they are all afraid of paying idle workers in the low season.
Renaud, Great post.
Yeah, lot’s of ideas here. We are actually working on a new product for a customer at the moment. It is a lot of problem solving, discussing, remaking prototypes, and overall headaches. But the one thing that keeps us all focused on solving the problems is that it could be a very high volume product with a good margin.
When good margins and great volumes are involved (And are highly likely) it trumps all the other reasons.
Of course, this is not usually the case. The number of times people have asked us to develop new things, and the potential quantity is measured in hundreds….well, that just makes me roll my eyes and ask if they would like to just stick to our tried and true products that we’ve repeated year after year.
Hi Danny, yes I guess some people ask you to develop custom-made products for their 3 boutiques, and the PO quantity is only 20% of the MOQ…
Sometimes it is difficult to assess the order potential, and that’s one more potential reason that I did not mention explicitly. Thanks!
you know what, we put all money into the stock market and financial products.