Seeking Manufacturing Market Stability in China and Beyond

Recently I spoke with an entrepreneur in my hometown who is sourcing packaging in China for his startup. This post contains his questions and my answers, together with additional questions from a number of my prior speaking engagements.

What advice do you have regarding dealing with sourcing in China in the current environment?

Recognize Your Bargaining Power

The future will be rough, but that doesn’t mean the opportunities are gone. The law of supply and demand dictates that as demand in China wanes, an overzealous cohort of Chinese manufacturers will be vying for survival. They will be increasingly desperate to more than satisfy current customers and to ink deals with good prospective customers. You need to convince them that you are one of those companies.

These desperate suppliers will agree to contract terms that are more favorable to their customers. And they will be less likely to scuttle deals with even small quantity buyers. This puts the bargaining power regarding quality, delivery, and financing terms more in the hands of overseas buyers. It will feel more like the period immediately after China’s joining the WTO and opening up to the world in the early-mid 2000s. My law firm’s international manufacturing lawyers are already starting to see this with China, with reports that Chinese manufacturers are literally asking some of our clients what they need to do to prevent our clients from moving their manufacturing to some other country.

Reintegrate and Reinvigorate Your Teams

China’s new “dynamic Covid-zero” policy means that buyers will finally be able to send their local teams back to China to assist again with product development, due diligence, and quality control. Those who do not mind the reduced five-day quarantine period are already booking their trips (though we are hearing many reports that many Chinese government officials are still requiring much longer quarantine periods). Others will wait until after the Western holidays to try to squeeze in their visits in the first two or three weeks of January before Chinese New Year commences.

Policy announcements in the past few days coming out of China, and especially Xi Jinping’s charm offensive at the G20 reflects two things: (1) China is desperate to restart business, and (2) Xi Jinping will oversee the details of this measured reopening to the world, with no significant course change expected.

China’s entrepreneurs and labor force continue to be hungry to prove themselves, both within and outside China. They increasingly take pride in their homegrown brands. Smart companies will utilize and harness that good energy, and their Chinese business partners and staff will respond with enthusiasm and determination.

China is and always will be a relationship-first culture. Rebuilding those ties will not be easy, but there will be tangible and intangible rewards for companies that persevere.

China is still the cheapest option. Should I be looking at sourcing closer to home?

Absolutely yes. If you have the willpower and financial resources, you need to capitalize on the good you can find in the China market while diversifying your supply chain to Asia, LatAm, or your home country.

Roughly how many companies that source in China are exploring alternative manufacturing locations?

All of them. Smart companies are looking to develop manufacturing relationships at the locations closest to their raw material inputs. And the really smart companies are developing a 5-, 10-, and 50-year plans based on raw material input requirements at the sweet intersection of projected available energy and favorable demographic trends for both workers and consumers.

What are some of the biggest obstacles for companies that want to develop manufacturing resources outside of China?

China Remains Entrenched in the Global Supply Chain

China has perfected certain processes, including raw material sourcing. Many non-China manufacturers will still be required to source products or components of their products from China, which means that many companies’ supply chains will be beholden to China’s domestic market influence.

Lacking an Exit Plan with a Solid Legal Foundation

Many companies are still operating through purchase orders that at best result in a convoluted and expensive “battle of the forms” exercise when issues arise. Companies without good contracts not only lack concrete options to enforce their rights; they also lack a good foundation from which to understand their legal position in China.

It is not hyperbole when we write that having a substandard contract in China is often worse than having no contract at all. This especially affects companies that have some intellectual property in China. And it is even worse for companies whose Chinese partners have improved upon their intellectual property.

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