Treasury ManagementSupply Chain Management/TradeRisk Management
Sure there are problems, but not if you stay on top of the risks
By Russ Banham
First, it was poisoned pet food; then, toxic toys. Now, labor and materials costs are rising, thanks to a feeble dollar. The government cut back on lending. It snowed, and the country shut down worse than Washington D.C. right before a Super Bowl. There’s a race on right now as to who is having a worse year China or Roger Clemens. After a year of one supply chain problem after another, the bloom is off the rose in the case of China—or maybe U.S. companies are just beginning to take a more financially mature approach to doing business there. Either way, executives no longer have visions of China expansion dancing in their heads.
For companies with a long-term commitment, the goal has been to develop a rapport with Chinese officials and bankers to interject a capital-markets approach to financial challenges. While most U.S. companies have regarded China as a large outsourcing vendor, the potential of China’s domestic market is awakening. Eventually, the Chinese economy could be as big or bigger than the U.S economy, portending dramatic changes in U.S.-China relations.
In this three-story special report, Treasury & Risk editors look at three critical areas: liquidity management, supply chain risk and foreign exchange. We have entered Phase Two in doing business in China. The ooh-aah is gone, and the hard work has begun.
Many companies rely on China to fulfill some element in their supply chain, but few companies are willing to make the commitment to risk mitigation that Wartsila, a large Finnish maker of power plants and diesel engines for the marine and offshore industries, has pledged. Currently, Wartsila has stationed 40 people from its sourcing department in China to oversee its supply chain operations there, which includes production of everything from the manufacture of single engines to complete power plants. Most of them are engineers, says Yngve Bargard, vice president for corporate supply management, and all of them are “skilled experts in making sure the product quality and delivery are superior.”
This is clearly not an inexpensive approach to the problem, but Wartsila is committed to producing in China. “Our intention is to buy as much as possible from China,” Bargard says. “So far, we have not experienced any quality or delivery issues, but it has taken a bit of effort.”
Risk experts stress that assessing risks in China will be one of the most difficult tasks most companies will wrestle with in the next five years, but one that will be impossible to avoid given the evolution of the global supply chain. “The more that supply markets are distant from the ultimate point of purchase, the more difficult it is to execute a proper supply chain risk management plan,” says Greg Cudahy, global managing partner of supply chain strategy at Accenture.
Over the last year, the risks of doing business in the world’s most populous country have become all too apparent in the wake of last year’s headlines on exploding cell phones, unraveling tires, tainted food and children’s toys decorated with lead paint. Last year, the U.S. Consumer Product Safety Commission traced 60% of all product recalls in the U.S. to quality problems in China.
There have also been financial risks. The dollar was down against a renminbi buoyed by China’s booming economy—exports surged 25.7% to a record $262.2 billion last year. This forced U.S. companies to deal with a weakening exchange rate and the inevitable price inflation.
And then it snowed. In late January, the country endured the heaviest accumulation of snow in more than five decades.
Roads, seaports, airports and trains shut down, and power brownouts affected half the 31 provinces. “Certainly, it has taken some of the gleam off sourcing from China,” Accenture’s Cudahy acknowledges “It no longer seems to be the be-all and end-all.” That said, finance executives whose companies do business in China assert that the country’s virtues far outweigh the pitfalls. One need only look at the labor cost differential—even after inflation. The workforce provides more than a trillion dollars in goods and services each year at an average labor cost of a dollar an hour compared to the $15 to $30 an hour that factory workers receive in the U.S. and Western Europe. Then, of course, there is the always enticing prospect of a market with close to 1.3 billion consumers.