The pursuit of being the low-cost producer has been and will continue to be the primary focus of all successful businesses. Over the past few decades, companies have targeted low-cost labor areas, with governments that were willing to sacrifice the environment and even the welfare of its people to attract investors. In the 1960s American companies moved from the unionized and high-cost Northeast and
In the 1980s the Chinese government sought to attract multinational companies via the combination of incentives and its huge, low-cost labor force. According to the Financial Times, some 30,000 South Korean companies had taken advantage of
But as in the past, many companies have found that
The cost of doing business in
Accelerating Inflationary Rates. According to the Financial Times, “The (Chinese) February inflation rate of 8.7 percent was the highest in 12 years and is expected to be deeply worrying for a government that has spent a lot of energy recently trying to talk down consumer and business concerns about inflation.”
Taxes, stricter enforcement of environmental standards and overall manufacturing cost increases. Prices for plastics, steel and other materials have climbed 30 percent or more, and electricity rates are surging, too,” reports The International Herald Tribune.
Environmental and Product Standards. We all know about the lead issue in childrens’ toys and problems with drugs being exported from
“Companies operating in
Scarcity of Talent. The International Herald Tribune reports that “despite its huge pool of unskilled rural laborers,
Lack of Security
The cost of doing business in
The music/entertainment/publishing industries have lost billions because their protected materials are stolen and sold at a fraction of the list price, of which they get nothing. In fact, my own last two books were translated and sold illegally in
For example, Cisco Systems filed a suit against Huawei Technology of
The Wall Street Journal summarizes the current situation this way: “Though
What’s more, since foreign companies must train their Chinese managers, professionals and workforce, they are, in essence, developing their own new competition. There have been reports of companies who built factories in
Security issues extend beyond just the loss of intellectual properties. The travel of senior management and professionals as they visit and interact with their employees in
A third layer of costs deals with a company’s ability to hire and fire workers to meet its strategic and financial needs and to make acquisitions or mergers if and when it makes economic sense. Both of these rights are limited in
A new labor law passed by
Some provisions of the new law include:
- Requiring employers to provide written contracts to their workers, restrict the use of temporary laborers and make it difficult to lay off employees.
- Moving China closer to European-style labor regulations that emphasize fixed- and open-term employment contracts enforceable by law, and requiring that employees with short-term contracts become full-time employees with lifetime benefits after a short-term contract is renewed twice.
- Giving the state-run union and other employee representative groups the power to bargain with employers. When more than 50 employees are to be laid off, for example, the company must negotiate an agreement with the labor union or all employees.
Foreign companies are limited in what companies they may acquire. They are able to purchase “small Chinese companies that the central government is not interested in managing; large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company, and non-majority interest in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets,” according to China International Business magazine. Of course, it must also be kept in mind that
Doing business in any foreign nation is complex and
Languages. “There are between six and 12 main regional groups of Chinese languages with 13 sublanguages.
Nationalities and Cultures. The Han Chinese are the largest ethnic group, representing 91 percent of the population, but
Different Accounting and Financial Laws and Regulation.
Each country has its own unique accounting and financial laws and regulations. The Chinese accounting regulations and policies are very different from
The New Frontier?
Because of increasing costs and complexity of doing business in
There are also many examples of companies moving into the U.S. Nissan recently opened a $1.4 billion vehicle assembly plant in Canton, Miss., expected to employ about 5,300 workers. BSH Home Appliance Corp. recently opened two plants in
Stable wages and benefits. Wages and benefits in the
Strong infrastructure. The
Abundant management and productive workforce. The university and professional schools in the
State and local governments competing for jobs and investment. Major locations in the
Stable and consistent financial requirements. The
The Right Strategy
Just because some companies have decided to de-emphasize
If, for example, your company participates in a commodity and highly price-competitive market and industry, clearly you must seek out the lowest-cost areas to produce or outsource your products and services. Therefore, nations eager to provide low-cost labor and ignore the environment are the places to look. This may require moving from the coastal, increasingly expensive areas to the western, rural areas of
Deciding when a business requires adding value and quickly adapting to change will require focusing less on lowest costs and more on the skills and responsiveness of the workforce.
Normally this would mean being close to the customer and being able to respond rapidly. In this case, you want to be near the market you are targeting. So if you are targeting
Finally, technologically innovative companies must protect their patents, copyrights and intellectual properties, now and in the future. They can’t afford to lose their competitive edge and create their own competitors. In this case, I strongly recommend that companies invest first in their own countries and concentrate on their R&D and not fragment or jeopardize their technical skills.
American companies should focus on the
The message is clear. Winners are selective, adaptive and internally, strategically consistent. They have a long-term, balanced view of the world and refuse to just follow the herd, and most of all they protect their “crown jewels.”
Where and How to Invest Globally
Type of Industry/Market
Low Cost Manufacturing/Outsourcing
China, Vietnam, North Korea, Cambodia, India, selective low-cost U.S. states
Value Added/Rapid Response
United States, China, Europe, India
Selectively in other countries, if you can protect innovations
Home country, United States, Europe, China,India
Home country is preferred
William E. Rothschild is author of “The Secret to GE’s Success” and CEO of Rothschild Strategies Unlimited LLC. His blog, strategyleader.com, assesses GE’s performance from time to time. Stephen M. Rothschild is President and CEO of Provox Technologies, in