Made in China

DYNAMIC CONTROLS’ recent decision to shift 200 manufacturing jobs from Christchurch to China was largely a matter of geography, because most of the suppliers and customers for its power wheelchairs and scooters were already in Asia.

Dunedin father-and-daughter team David and Emily Cooper went straight to China when they set up their Silkbody clothing business five years ago because it offered ready supplies of raw silk and the high-tech equipment needed to make specialist wool/silk fabrics.

Inventor Tom Tothill has sold more than a million of his SimmerMat cooking devices worldwide thanks largely to the economics of scale -offered by manufacturing in China.

And China’s lower production costs helped tiny Christchurch company My Little Products get its portable highchair into major babyware chains, and exports to Australia are planned.

Those are just some examples of New Zealand companies that have made the move to China. Without any official statistics it’s hard to say exactly how many Kiwi companies have done so, but the Engineering Printing and Manufacturing Union estimates that since March 2006, about 500 of approximately 3,350 redundancies on its sites were directly attributable to jobs or contracts lost to China or other Asian countries.

China’s attractions are obvious: lower labour costs, closer proximity to raw materials and overseas customers, and the chance to break into its potentially huge domestic market fed by a growing Chinese middle class.

But Pat English, New Zealand Trade and Enterprise’s China market manager and a former trade commissioner in Beijing, says manufacturing in China is a big decision that requires considerable research.

“I know companies who have looked at it and at the end of the day, while they might save a little bit [on wages] the pressure it will put on the management structure is too great, so they decided against it.”
Regulations vary widely between China’s different economic zones and it is important to get good quality advice from consultants working on the ground there. “With regulations in China there’s an old saying that ‘the mountains are high and the emperor is far away’, so an edict from Beijing is not necessarily complied with right the way through [the country] or there are different interpretations of it.”

Indirect costs for foreign firms operating in China are high. Maintaining quality control, for example, may mean having a staff member physically onsite. “You have to constantly monitor what’s being done for you … If you’re talking about something with a safety standard or an ISO requirement then you really have to put the work in to make sure it happens properly.”

Language remains a barrier and some New Zealand companies operating in China are actively recruiting Chinese-born graduates who studied here.

Silkbody owner David Cooper says his two main contacts speak good English but his lack of Mandarin causes difficulties when dealing with highly technical issues, and at one stage he was forced to make a special trip to China to sort things out.

When it came to outsourcing in China, Cooper drew on his experience in Vietnam. Family company Paradox Products has a 12-year relationship with a small Vietnamese business that makes its silk sleeping bag liners and daughter Tamsin Cooper’s own range of embroidered silk accessories and clothing.

Cooper says his research into Asian culture paid off. “It’s very important to go and meet them and take your time. Don’t rush into anything. We go to China once a year. From a practical point of view you can do it all by email, but it’s that relationship thing. We know it’s important.”

Kenneth Leung is a consultant for Euroasia, an Auckland company teaching foreign languages and cultural programmes. He says if Kiwi companies fail in China it is often because they don’t make enough effort to understand the culture, in particular guanxi — the networking that is an integral part of doing business there.

Traditionally, it has been hard to legally enforce contracts in China, so Leung says it makes sense to do business with people you trust, and building up that trust takes time. “Because of that it’s a lot more difficult to get a deal done on the spot with a complete stranger.”

Leung says a lot of wealthy Chinese with strong business connections migrated here for the sake of their children’s education, and local companies wanting to manufacture in China would do well to get them onboard as investors. “They are extremely well connected. These people have such strong guanxi they can make things happen with a snap of their fingers and we’re not using them. They can open up incredible opportunities.”

China’s lack of infrastructure can be a challenge, and while electricity supplies are improving some areas still suffer regular blackouts.

Dynamic Controls acting chief executive Charlotte Walshe says a prospective site for the company’s new factory was ruled out because US parent company Invica had suffered low level ‘brownouts’ there. “We’re running electronics equipment that’s really precision stuff, and blackouts or even brownouts can cause serious damage to the gear.”

Dynamic will retain 130 staff in Christchurch to run its research and development team and contract-manufacturing arm, but by mid-2008 all its mobility products will be manufactured in China.
Materials account for by far the largest portion of production costs, and with 80% of the company’s materials coming from Asia, Walshe says transferring the operation to China made sense.

A small manufacturing cell moved from Christchurch to an Invica plant in China two years ago, but Walshe says setting up a completely new factory is a much bigger deal, and it is shifting production progressively over an 18-month period to ensure continuity of supply for customers. In Christchurch an inhouse project team of 12 people is managing the move with a ‘sister’ team in Suzhou.

Dynamic will likely get full job instructions translated into Mandarin and set up the computer system bilingually to cater for staff who speak little or no English. “Partly because of the language and partly because of the culture, people tend to say ‘yes’ even when they are not sure of something, or when they mean ‘no’ to save face and appear compliant. So that’s something you have to look out for when you’re training someone.”

Bribery is often touted as a problem in China. Walshe says it can take the form of backhanders to suppliers, or staff taking advantage of transaction errors.

She advocates setting up strong systems right from the interview stage to reinforce a culture of integrity and says Dynamic’s parent company made the mistake of treating its China operation like another satellite site in the US. “[They] expected a certain level of integrity and didn’t really drum it home.”

Intellectual property (IP) protection is a big concern and it’s a major reason for Dynamic setting up its own factory rather than outsourcing. “It does create an extra level of security.” Transfer of designs to the China plant will be carefully handled and Walshe says security measures are built into the product. “If someone picks up one of your products and tries to reverse engineer it, you have to have a way of locking your smarts away and we do that.”

Tom Tothill is currently taking action through the Chinese authorities over counterfeit SimmerMats made in China by a European competitor. He rates his chances of success as 50/50. “If they find out where the factory is they can take possession of their tooling so they can’t make any more, and the product they’re going to export will be seized and destroyed.”

Tothill began manufacturing his enameled steel cooking mats in China four years ago, assisted by his brother Compton, an experienced Shanghai business consultant and fluent Mandarin speaker.

“He does our quality control for us and shoots up to the factory when we have orders coming off. They can manufacture 49,000 mats in three weeks, whereas in New Zealand it took us six to eight weeks to do 5,000. The entire manufacturing cost over there was just the cost of the raw steel here.”

Tothill makes further savings by shipping direct to Australia, the UK and Europe from China.

Lower overheads were a big attraction for Julie Narain and Claire Wilkinson of My Little Products, who outsourced production of their Anywhere Chair portable highchair to China when a local manufacturer hiked prices 30% overnight.

With their lack of business experience — Narain had been a sales rep and Wilkinson a preschool teacher — the idea of going offshore was pretty daunting so they approached Macpac, which was already manufacturing in China using similar materials.

Macpac referred them to former employee and Sundance Clothing owner Hamish Robinson who acts as the middleman for up to ten small New Zealand companies, finding suitable Chinese manufacturers, organising samples, managing contracts and handling any problems that crop up.

Narain says using Robinson took the risk out of going to China, and the quality of manufacturing is much more consistent. “Out of a shipment of 2,000 from China we are lucky to find a couple with faults … Locally we sometimes had a 20% return rate.”

Robinson has a small Christchurch factory employing 20 staff but he gets items with a high labour content made in China. He says manufacturing there can at least halve the per-unit price, but those savings are usually achieved by bulk orders, which don’t always suit the small New Zealand market.

“You’re using all your cashflow buying large amounts of stock early in the season. In New Zealand we can regularly manufacture small amounts for our customers and make for them what’s selling. When you’re buying from China you have to take a punt on what’s going to sell, hold stock, and when it runs out you have to order some more, then it can be a three to four month wait [including shipping time]. In New Zealand the turn-around can be as little as one day.”

Robinson stresses the need to obtain exact samples of what you want manufactured in China, and nailing down details of cost and delivery times. “They will try to cut corners if you let them.”

Rectifying problems can be difficult once goods have landed here -especially if there is a dispute over who is at fault for any mistakes. “Even if you come to some agreement, they will generally want to credit it to the next order and they won’t give you cash compensation. You can’t just say, ‘right I’m sending it back to you’. They’re not those sort of people; there’s that whole face-saving thing.”

The factories Robinson has visited in China are modern, clean and equipped with expensive, cutting-edge technology. He did not see any evidence of child workers — like those depicted in the film China Blue about the making of designer jeans — but admits to feeling ambivalent about the Chinese labour scene. “Morally for me it is a bit of a concern because if China had labour unions working there or the labour laws we have here, they wouldn’t be cheaper.”

Although lower wages have lured many members of the New Zealand garment industry to China, outdoor clothing company Earth Sea has resolutely resisted the drift offshore.

Co-owner Jane Ellis says labour costs to make a fleece jacket are $30 in New Zealand as opposed to $3 in China, but the company compensates by accepting lower profit margins, as do stockists.

The advantage of smaller-scale local manufacture is that the company can respond quickly to market demand: last year a review of its top tramping jacket in Wilderness magazine suggested a modification to the pockets, and within two weeks the modified design was in shops.

“We’re absolutely committed to local manufacturing because we believe in exporting our product and not our jobs. We don’t want to be the biggest but we do want to be the best. By manufacturing in New Zealand we achieve both of those.”

And there’s something to be said for operating close to home. Bruce Goldsworthy, manufacturing services manager for the Employers and Manufacturers Association (Northern), says the distance to China is a major disadvantage and a number of Auckland firms who moved their toolmaking there six to eight years ago have returned to using local toolmakers. “Simply because if it’s not right they can go to the guy who made it and get it adapted. They are not sitting thousands of miles away and speaking another language.”

Goldsworthy nevertheless concedes that China remains an attractive option. “People are responding to the pressures of the global market and there’s nothing we can do to stop it. The challenge is to look at how we re-employ those people whose jobs have disappeared with this global movement.”