[Vnbiz] Full Global Integration: Many plan to move to VN

[Tai Phan]

  AMCHAM SHANGHAI LAUNCHES CHINA MANUFACTURING COMPETITIVENESS 2007-2008
STUDY
 Date: March 04, 2008



   *BOOZ ALLEN / AMCHAM SHANGHAI STUDY FINDS COMPANIES ADOPTING CHINA AS
BOTH A GROWTH MARKET AND MANUFACTURING HUB ARE TWO-THIRDS MORE PROFITABLE
THAN OTHERS*

* *

*Full Global Integration of China with Global Supply Chains and *

*Boosting Operational Excellence are Keys to Countering Rise in Currency,
Labor Costs *

* *

*SHANGHAI** / BEIJING / HONG KONG, March 4, 2008** –* The advantage of China
solely as a low-cost, manufacturing-for-export market is diminishing.
Companies that* *integrate China into their global supply chains as a source
of competitive advantage are far more successful than companies that pursue
narrower objectives in China, finds a study jointly conducted by management
consulting firm Booz Allen Hamilton and the American Chamber of Commerce in
 Shanghai (AmCham Shanghai).



More specifically, companies that pursue China as both a growth market and a
market for lower-cost labor and sources, and integrate these operationally,
enjoy significantly higher profits than companies pursuing just one of those
objectives.  *Companies that employ dual sourcing and sales strategies
report an average profitability rate two-thirds higher than those focused on
just one of those objectives (29.6 percent compared with 17.8
percent).*Despite the returns that this approach can generate, only
one out of four
companies is able to combine a strong in-country market growth effort with
their manufacturing and sourcing operations.



The first annual study, titled "China Manufacturing Competitiveness
2007-2008," found that while a stronger Chinese currency and rising wages
were putting pressures on manufacturing margins, failures to deploy
operational best practices and to fully leverage China as both a growth
market and source of labor and products are also limiting profits.



"The manufacturing philosophy employed by many foreign multinationals in
China in recent decades is in need of an overhaul," said Ronald Haddock,
Vice President, Booz Allen. "China's changing cost and currency structure
have shifted, forcing companies to rethink how they structure their Chinese
operations and how they perceive China in their overall global strategy. At
the same time, China is increasingly a major source of product and business
model innovation. We're seeing globalization at work and China's role has
changed."



More than half of the surveyed foreign-owned or foreign-invested companies
manufacturing products in China believe that the country is losing its
competitive edge in manufacturing to other low-cost nations.  As a result,
nearly one in five manufacturers surveyed has concrete plans to relocate or
expand China operations to other countries, with Vietnam and India seen as
the top alternatives to China.



Among the study's key findings:

* *

   - *Operations management is a factor:  *The study found that three out
   of four companies lack fundamental best practices in their China operations,
   including integrating the dual functions of export platforms and domestic
   market penetration. Survey respondents cited a number of best practices that
   have yet to be fully applied in China.  Just 11 percent reported fully
   applying integrated planning systems such as enterprise resource planning
   (ERP) software and material requirement planning (MRP).  Even fewer
   companies – only 7 percent – had fully deployed analytical inventory
   calculation tools and processes, and 4 percent employed best practices
   for supply chain risk management.

* *

   - *Declining competitiveness: * More than half, or 54 percent, of
   companies surveyed believe that China is losing its competitiveness to other
   low-cost countries.  Seven out of 10 respondents cited the rising
   renminbi as a major reason for China's decline, while wage inflation was
   cited by 52 percent of those polled.  Wages for white-collar managers
   and blue-collar workers have jumped 9.1 percent and 7.6 percent,
   respectively.  Staff retention is also a major concern, with 33
   percent of respondents citing it as a reason for lost competiveness.
   **

* *

At the same time that costs are increasing, China is lagging behind global
standards in many operational dimensions, most notably in logistics
infrastructure, trade environment, access to technology, management
capabilities, and protection of intellectual property.*  *

* *

   - *Companies eyeing Vietnam and India: * Nearly one in five companies
   surveyed (17 percent) say they have concrete plans to relocate at least some
   of their China-based operations to other countries. Although 88 percent of
   these corporations say that they originally chose China for its lower labor
   costs, they are finding that cheaper labor and tax benefits have made
   alternative locations more attractive. Among these corporations, Vietnam is
   the top alternative to China, according to 63 percent of this group, while
   37 percent say India is their first choice.  **

* *

Among all respondents, when asked to compare China to alternate countries,
they cited lower labor costs in those other countries as the largest
differentiator, at 3.7 out of a scale of 5, indicating that China's
reputation as a source of cheap manufacturing labor is diminishing.  However,
the alternative countries lag China in market potential and infrastructure.
**

* *

   - *Majority staying in China:  *Despite the rising costs of
   manufacturing in China, 83 percent of manufacturers said they will maintain
   their operations in the country.  China's vast domestic market was
   cited by 78 percent of respondents as the reason to maintain the status quo,
   while 39 percent were unwilling to establish a new supply chain, motivating
   them to remain in China. **

*"China's phenomenal economic growth and market reform story, together with
a dynamic and challenging business environment, will continue to put
pressure on manufacturing companies," said Brenda Foster, President, AmCham
Shanghai. "They will have to focus on continually improving their
competitiveness and devoting more resources to innovation as they pursue
their strategies and plans in China."*



**

*Study Methodology *

Booz Allen and the American Chamber of Commerce in Shanghai surveyed
66 foreign-owned
or foreign-invested manufacturers in China, representing more than 10
percent of the 600 Manufacturers' Business Council members in Shanghai
(including some of the largest foreign-owned or foreign-invested
manufacturers).  Online survey questions, on-site visitations, and in-depth
interview methods were all deployed.*  *Of the companies surveyed, 81
percent were wholly owned by foreigners, 10 percent were joint ventures
between multinationals and Chinese partners, and 9 percent were categorized
as "other."



The manufacturers' industries included consumer, industrial, healthcare, and
materials. The study was conducted between September and November of 2007.
The countries of origin of these manufacturers included the United States and
several in Western Europe.  Approximately 30 percent of the respondents have
an additional major presence in China beyond their manufacturing footprints,
including representative offices, regional or global headquarters, regional
or global procurement centers, and regional or global R&D centers. **



*About Booz Allen Hamilton*

Booz Allen Hamilton has been at the forefront of management consulting for
businesses and governments for more than 90 years. Providing consulting
services in strategy, operations, organization and change, and information
technology, Booz Allen is the one firm that helps clients solve their
toughest problems, working by their side to help them achieve their
missions. Booz Allen is committed to delivering results that endure.



With 19,000 employees on six continents, the firm generates annual sales of
$4 billion. Booz Allen has been recognized as a consultant and an employer
of choice. In 2008, for the fourth consecutive year, *Fortune* magazine
named Booz Allen one of "The 100 Best Companies to Work For," and for the
past nine years, *Working Mother* has ranked the firm among its "100 Best
Companies for Working Mothers."



To learn more about the firm in Greater China, visit the Booz Allen Greater
China Web site at *www.boozallen.com**.cn*. To learn more about the best
ideas in business, visit www.strategy-business.com, the Web site for *
strategy+business*, a quarterly journal sponsored by Booz Allen.

*About AmCham Shanghai: The Voice of American Business in China*

AmCham Shanghai is the largest and fastest growing American Chamber in the
Asia-Pacific region with more than 3,700 members, including 1,700 corporate
members. The Chamber hosts more than 250 events each year and has 22 active
industry committees. AmCham Shanghai's mission is to create a better
business environment for U.S. companies and to help foster China's overall
economic development. For more information on AmCham Shanghai, please visit
www.amcham-shanghai.org.



For media enquiries, please contact:

Tina Yung                                                      Lisa
Wright


Booz Allen Hamilton                                    AmCham Shanghai

Tel: (852) 3579-8227                                     Tel: (8621) 6279
8066
Email: yung_tina at bah.com                          Email:
lisa.wright at amcham-shanghai.org

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