Stop moving from low- to lower-cost locations, says China trade advisor

Is your company constantly playing catch-up by moving from low-cost to lower-cost production hubs? If the answer is yes, you probably need to rethink your sourcing strategies.
In an interview with Global Sources, Kristina Koehler, China Director of the Klako Group says the country with the lowest labor costs may not be the best choice. Importers need to assess a range of other factors such as the cost of transportation and electricity, supply chain risk, workforce skills, and tax incentives before choosing a location.
She also elaborates on the importance of signing contracts when doing business in China, and gives advice on how importers can protect their IP in the country.
Kristina has been working in China’s legal and accounting industry since 2003 advising foreign clients on tax, accounting and trade-related issues. She has worked on numerous complex transactions including foreign direct investment and M&A deals.
Global Sources: What do you think are the top 3 trends impacting the manufacturing and exporting industry in China today?
Kristina Koehler: Cheap, plentiful labor used to be China’s biggest advantage, but that benefit is shrinking. Foreign companies and fast-growing local businesses are searching for qualified employees — especially workers with skills such as fluency in English — making it harder for businesses to attract and retain top talent.
In addition, wage inflation in the prime business locations, particularly along the eastern seaboard, has remained in the double digits for roughly a decade, with some decrease in the last year.
Depending on the industry, China may no longer be the cheapest place for foreign companies to do business. Real estate costs have risen. Electricity rates are also rising. Corporate income tax rates for most foreign companies have increased from 15 percent to 25 percent, while tax-related incentives are disappearing or becoming increasingly difficult to obtain.
That is why a growing number of companies are shifting production to near shore or domestic locations, reducing supply chain costs and risk and making the business easier to manage.
GS: What strategic changes would importers sourcing in China have to make given that the country is losing its low-cost advantage?
KK: Start by getting clarity about your organization’s strategic goals and objectives. Do you intend to reduce costs? Serve a new market? Expedite response times? Diversify risk?
Because costs likely rise more quickly in less-established countries, some organizations find themselves consistently playing catch-up as they seek to move from low- to lower-cost locations.
An effective assessment of potential manufacturing locations requires the involvement of a broad range of functions such as HR, supply chain, legal and tax. Getting those functions engaged before choosing a location can help avoid unpleasant surprises down the road.
The location with the lowest labor costs may not actually be the preferred one — or even the most cost-effective place to do business. To make the right choice, consider a wide range of factors, including everything from the cost of transportation and electricity to supply chain risk, workforce skills, and tax incentives.
Identify and prioritize all the needs of your business, and then see how each location stacks up against your specific requirements.
Manufacturers seeking a presence in Asia may steer toward China, especially if the domestic market potential is an important consideration. Meanwhile, those that already have a deep China presence may see risk diversification as a driver, and be more apt to move existing production from China — or divert the next manufacturing investment — to another country.
For companies deploying cost-sensitive, export-oriented manufacturing in the Asia-Pacific region, a handful of countries most commonly emerge as alternatives to China. Each has its own set of advantages and disadvantages.
GS: How do you think importers can ensure their China suppliers are really meeting basic social corporate responsibility standards?
KK: The importance of setting CSR standards by importers and retailers is to make sure that they maintain their brand images globally. If the workplace health, safety and environmental regulatory framework of their sourcing market is less stringent than in their home country, find suppliers that are prepared to accept the home country’s requirements as their standard.
That means buyers need to undertake thorough due diligence to identify and qualify partners in the supply chain — and this cannot just be done once. It has to be done on a regular basis.
Buyers should be prepared to pay a premium to ensure partners can meet the standards demanded by customers back home (it may make producing overseas more expensive but their reputation will remain intact).
GS: As a legal and accounting expert, what is your advice for foreign importers with regard to commercial contracts they sign with China suppliers?
KK: Some companies doing business in China do not believe that there is a need for contracts with their counterparts. Some will say that the Chinese will not follow the contract terms anyway, while others insist it would be futile to try and enforce them in Chinese courts.
However, it is important to draw up contracts with those you are doing business in China for a number of reasons.
Firstly, doing business in China can be a difficult task. Clarity is required with every business deal and transaction. The language barrier is a constant struggle. The Chinese see business differently than most western countries so problems can arise with misunderstandings in management, supply, manufacturing and other areas if strict guidelines are not applied.
A contract provides clarity on what it is exactly that you want accomplished. It is especially beneficial to have penalty clauses listed should various goals not be met. Add such issues in your contract as shipment dates, quality expectations, and other important items that want fulfilled.
A contract also provides very straightforward guidelines as to what is expected.
The contract should be written in Chinese and English to ensure there is complete understanding on everyone’s part.
A contract also provides the power of enforcement. Although there is a common belief that contracts for doing business in China cannot be enforced in the country, the truth is that China is ranked 16th out of 183 countries for successfully enforcing them. That is a good track record of enforcement.
Preparation, negotiation and even enforcement of contracts will save buyers a great deal of time, money and headaches that are more likely to surface without them.
GS: What should buyers sourcing in China, and companies selling into the country, do to protect their intellectual property rights?
KK: Similar to contract formulation, some companies doing business in China do not believe that there is a need for registering their IP. Some will insist it would be futile to try and enforce IPR in Chinese courts.
According to the Regulations of the People’s Republic of China Regarding Customs Protection of Intellectual Property Rights, “The People’s Republic of China prohibits from import or export goods which infringe the intellectual property rights.” This article alone highlights the importance of registering trademarks or patents in China even if businesses are just sub-contracting the production in the country.
China is a first-to-file country and as such many third-party manufacturers register the trademarks and patents of their clients’ products in order to be ahead of the game.
GS: What is the business scope of the Klako Group and what services do you offer international volume importers?
KK: Klako Group is an international accounting and management consulting firm established in 1979. We provide a wide range of market entry consulting, incorporation, tax, accounting, human resource and trade services to organizations interested in entering and expanding throughout mainland China, Hong Kong and Singapore.
Our typical clients are multinational corporations as well as small-to-medium sized privately owned companies.
For international importers we can establish their legal entity, open bank accounts, arrange for the necessary licenses, register trademarks, and handle the accounting and financial reporting, tax and legal compliance. Additionally our trade and supply chain team can provide support to any kind of trading business and we are happy to tailor solutions.