Ted Trautman, The New Yorker.

Benefits of Localizing Production in China

Localizing (part of) your production in China provides multiple benefits; lower manufacturing and shipping costs, faster response times and the option to easily adjust your product to fit local market conditions. Localized manufacturing therefore not only enables your company to cut down the overall cost of ownership, it also helps you become more competitive in the Chinese market.

Let’s take a look at some of the core benefits of moving part of your product development process to China.  In this case we will assume you already have some local sales operations (e.g. distribution) and are now considering to also produce in China.

Become more competitive in the local market

The main advantage of localizing part of your manufacturing process is that you will become more competitive in the market. By profiting from Chinese low-cost manufacturing in addition to being exempt from paying import taxes, you will be able to offer more competitive prices to your (potential) clients.

Toy-maker Lego recently decided to setup a new factory near shanghai to reduce manufacturing and distribution costs in order to compete with local companies. They are estimating that local manufacturing could cut Lego’s prices by as much as twenty per cent.

Producing locally will also provide you with the opportunity to adjust your products to the local market. Let’s say you want to produce your line of wheelchairs locally to sell in the CN market, a local engineer could help you find better (more cost-efficient) material alternatives and make some small adjustments to the hight of the chair to adjust to the physiological differences in height and body in China.

Localization is how Volkswagen succeeded in the Chinese market and why Mediamart failed. Volkswagen had a special line of cars specifically engineered to fit the local market (a more basic model of the one they sold in the EU).

Mediamart, on the other hand, employed the same business model in China as in the rest of the world and failed to gain success. Mediamart’s outlets drew in visitors, but they but rarely made any in-store purchases. And the reason is quite obvious to anyone living in China: products (especially electronics) are normally sold with a significant discount online. Hence, consumers would visit the store for a quick look-and-feel and consequently purchase the actual goods online in one of China’s many e-commerce stores.

The South Korean company LG understood the concept of localization very well when they entered the Chinese market and said “We will succeed in China as a Chinese enterprise, not as a foreign enterprise.”

Adjusting to local market conditions is one of the most important aspects of doing business abroad, especially in a market as unique as China. Read more about it in our article about the importance of quality and localization in China.

Lower total cost of ownership

Many foreign companies are losing the battle in China because they simply cannot compete on price with domestic competitors. A significant amount of foreign companies is still importing their products from abroad and are therefore subject to high import taxes, freight costs and a general higher cost of manufacturing.

Although Chinese consumers are willing to pay a premium for foreign products, consumers are increasingly demanding higher quality goods for reasonable prices. Hence, charging a high premium on your products will no longer be accepted in the near future. But in order to offer better prices you will first have to lower your costs per product.

Here are some of the advantages you will have when moving part of your product development process to China.

No import-taxes

By producing locally you will be exempt from paying import-taxes. Import taxes differ per product and industry but can considerably increase the overall price of your product.

Lower manufacturing and assembly costs

Enjoy low-cost manufacturing and assembly in China and decrease your total cost of ownership.

No or little warehousing fees

When you are selling in China but producing abroad, you will likely have to keep some stock in a local warehouse. However, the current average price of warehousing in China is higher than in Western Europe. By producing locally you can keep less stock (because you have the flexibility to rapidly produce more) and most manufacturers offer free temporary warehousing. Thus in the majority of cases your warehousing costs will be considerably lower.    .

Shortened lead times & better customer service

The manufacturing lead time is the time period between the placement of an order and the shipment of the completed order to the customer.

A short manufacturing lead time is a competitive advantage; many customers want the delivery of their products as soon as possible following the placement of the order. Producing locally will shorten your lead times and as a result you will be able to provide better service to your customers.

Additional benefits

Above-mentioned advantages are some of the core advantages of localizing your production, but there are more that are worth mentioning. For example, because of China’s extensive experience in production it is able to offer you a wider variety of manufacturing methods for the development of your products.

Producing locally also provides you with more flexibility and consequently enables you to react more rapidly to market changes.

Another important aspect to keep in mind is that certain key industries require foreign companies to produce up to 60% of the products locally. This is for example the case in some areas of the medical sector.

Conclusion

In the past localized production predominantly offered cost advantages to firms wanting to sell in China. Low-cost manufacturing in China has always been an attractive option, but not a necessary one. Moreover, manufacturing in China was associated with headaches and an often below-average quality product coupled with constant concerns about how to protect the company’s IP rights.

Hence, localizing manufacturing was not regarded as the most attractive option for foreign MNC’s. The few affluent consumers in China at the time were willing to pay high premiums for foreign products and the average consumer’s purchasing power was very low. The market potential was simply too small for many MNC’s to localize their operations.

But China has changed tremendously in the past decades and has transformed from a low-cost manufacturing destination to now being one of the largest consumer markets in the world. In addition, domestic companies are gaining ground on their foreign competitors with cheaper products and products made specifically for the local market.

As a result localization is no longer an option but a necessity to compete in the Chinese market. This does not imply you have to setup your own manufacturing plant right away, but it would be wise to consider moving part of your product development process to China and adapting your product to fit local market conditions.

Duco van Breemen

Duco van Breemen

Duco is project & marketing manager at Launch Factory 88. He has lived in China since 2008 and has worked with both state-owned and private Chinese and foreign enterprises.
Duco van Breemen