In the rush of the 2000’s to outsource production to Chinese suppliers, many American and European companies have lost some of their core competencies… And they can no longer in-source those activities.
I came across this passage in a book written by the always interesting Clayton Christensen that I reproduced below. It illustrates this risk pretty well.
Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”
The Dell analysts realized that this, too, was a win- win…
That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.
Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.
Sounds familiar? This has played out in many industries. Try to find a factory in Europe that can make plush toys, for example… You’ll have to end up buying them somewhere in Asia, probably in China.
And now millions of entrepreneurs in the West are looking for products to put their brand on and to buy on Amazon… and that supplier that you have trained to make your product will serve them just like they serve you.
Brenton O'Brien says
Yes, I can’t agree more. I have had discussions with my supply partners on this very topic based on the almost exact same passage from Clayton’s book ‘The Innovator’s Solution’. However, what’s the answer? Unlike Dell, we didn’t start out making our products ourselves and then contract it out. We actually started by contracting out to a Chinese factory. How do we “bring it back”?
Renaud Anjoran says
Ha! That’s a pretty different situation. Some companies like you document (usually through improvement sessions) their supplier’s processes, up to the point where they can transfer processes with minimal difficulty. We offer this type of program at China Manufacturing Consultants — as long as it’s not corporate espionage, of course (something many companies are not shy of engaging into, we found…).
I read through your article but, sorry, I could not agree some points/angles you mention here, though I am your blog’s followers:)
Frankly, free trade is based on a simple base where the resources can be utilized at maximum and output can be at maximum, no one can stop this rule in a free-trade world.
Today, a lot of sectors in china are also experiencing the similar “transfer” you mention to lower cost Asian country. Like plush toy sector, the real situation is today no young people want to do this kind of “sewing job” anymore in china, and most of factory boss is not optimistic about its future after his current workers(now aged from 35-45) retire. However, china needs to do something to keep this sector in china? Maybe not, the reason is very simple: The young person always can find more interesting jobs/higher salary jobs, and the boss always can find higher return rate projects, that is okay, if a country can provide these products in a quicker/better price way? Why not? Especially, your people can have more “high-value” sectors to join.
Besides, another example pop-up in my mind: When china one computer company Lenovo purchased “the computer division” of IBM, the whole china cheers to boost we are becoming strong and IBM is becoming weak. However, after some times, we can see that, yes, Lenovo is strong but IBM is also still very strong because it move to more higher value direction (Machine intelligence,…) and it do not consider “the computer assembling and even the computer division” as its core competence and also do not want to keep it, because it does not respect the rule in spirit of “free trade”.
Renaud Anjoran says
Philip, your point is valid. Companies can find it hard to follow the right tradeoff between “focus on activities where we really can add more value than a subcontractor” and “keep in house those activities that will be strategic to our long-term differentiation in the marketplace”.