Is China the most cost-effective option for NZ companies?
Businesses are returning from China to benefit local manufacturers.
You may have seen Fero hitting the news recently, with articles published in The Herald, The Sunday Star Times, NZ Manufacturing and most recently on Radio New Zealand. As you probably realise, we’re passionate about NZ manufacturing and are excited to see businesses actually coming back from China, wanting to place their business locally. So, we’ve been shouting from the roof tops over the last 3 months, explaining how sourcing products in China isn’t necessarily the cheapest option in the long-run.
“It is easy to be beguiled by what on the surface appears to be a low price, but buying at the cheapest price always comes at a cost”
You get what you pay for in China so if the price too good to be true, then it is. Many Chinese manufacturers reduce costs by compromising the quality of the raw materials in their product. For example, copper wire costs are reduced by using recycled copper, which does not perform to specified standards. This can result in quality problems and high mitigation costs once the component is in use.
It’s a very different way of doing business to New Zealand, so it is easy for local manufacturers to get stung. That is why it is important to shift one’s thinking from unit-based to taking into account the overall cost of doing business.
Although its manufacturing is still cheap by New Zealand standards, rising labour and other costs are seeing China become more expensive to do business with. Its manufacturers are off-setting these costs through economies of scale. As a result, minimum run sizes are increasing beyond the reach of many New Zealand manufacturers.
“Even large manufacturers by New Zealand standards can be shocked to find that an order they consider huge by local standards is only a fraction of the Chinese manufacturer’s minimum”
Sourcing resource materials in China is also harder than most Kiwi businesses anticipate because Chinese regulations make it surprisingly difficult to access many manufacturing materials from within that country. Export and manufacturing licence constraints mean Chinese manufacturers are often unable to source raw materials that are readily available in other parts of the world. This causes problems for New Zealand businesses that specify product materials that their Chinese manufacturer is not able to purchase, even though the material may be made literally down the road. The New Zealand business then has to go to the hassle and expense of specifying and validating alternative parts.
Fero gets around this issue by importing the required resources itself, then re-exporting to its manufacturers in China. It has set up a dual New Zealand / China manufacturing option so that it can deliver what its customers need – no matter what the timeframe, quantity or specification. By integrating Chinese supply with local manufacturing, its able to provide a stronger supply chain and a more comprehensive service.
“We have been doing business in China for the past 12 years and have learnt what works. Rather than using an agent, we have Chinese employees here in New Zealand, who are invaluable for helping us to manage the relationship with manufacturers in China”
This business model means that Fero uses its Chinese partners for its New Zealand manufacturer customers who need high volume, high labour input looms and harnesses. Alternatively, Fero manufactures at its Auckland facilities – often at a very competitive price, and a cheaper overall cost, than could be done in China. Where possible it has automated its operations, enabling it to keep labour costs down.
Providing a local manufacturing option is proving to be increasingly popular with New Zealand manufacturers because it enables them to be more responsive and turn changes around far faster.
“Long lead times and distance mean that specification changes to Chinese-manufactured goods can take many months to flow through the supply chain. This makes it difficult for the manufacturer to respond quickly to their own customers’ needs”
For example, if an appliance manufacturer wants to change a function such as adding a button to turn off the timer alarm, then the wiring loom will need to be updated. It can take five or six months from the time that change is notified, until the new stock arrives in New Zealand and then subsequently replaces the old stock ahead of it in the supply chain.
Although there remain many advantages to getting goods manufactured in China, it is vital to do a lot of due diligence and spend a lot of time building relationships and understanding Chinese business culture before embarking on a business arrangement.
It’s a high-risk game and there are no shortcuts. Many New Zealand companies are finding out the hard way just how difficult it is to resolve issues from the other side of the world, and how hard it is to prevent intellectual property and other rip-offs. This presents a lot of opportunities for Fero and other local businesses because we manage the difficulties and navigate the minefields of doing business with China, enabling our customers to benefit from the best of both worlds.
“Anyone trying to do this themselves without prior experience is essentially playing Russian roulette with their business”