The opportunities that the rising costs to manufacture in China offer manufacturers in mature markets like Europe and the U.S. are real. The low valuation of the dollar, eliminated VAT rebates, and rising labor and fuel costs all are motivating enterprises to look at other countries - many closer to their base - to supply their products.

We'll say it again - this is a perfect time to engage former customers or new prospects to sell the attractiveness and adorability of your business as a viable alternative to China sources. As they explore new options to manage these rising costs, they're more likely to listen to options they wouldn't have thought about 2 years ago.

But it looks like things are getting even more "perfecter."

This past week, a story by David Barboza in the New York Times announced "China Tells Businesses to Unionize." The ramifications for businesses currently embedded in China may be even more dramatic than the rising costs of the past year and a half.

The gist of the article is that the Chinese government is strongly pressuring corporations in China - both foreign owned and domestic - to allow the state-approved unions in their businesses. Some of the largest companies like Wal-Mart and others have until September 30th to accept the union. Mr. Barboza writes:

Lawyers and analysts say that demands of the All China Federation of Trade Unions, the only union the Communist Party allows, could sharply alter business practices of foreign companies in China, including giving lower-level workers the power to bargain over anything from pay raises to whether a Chinese headquarters should be moved elsewhere in the country.
+ "This will dramatically change the landscape here," said Andreas Lauffs, a lawyer at Baker & McKenzie's Shanghai office who is an authority on China's labor laws. "At the very least, company management must now consult, and in many cases bargain, with employees and unions on a wide range of matters, whereas in the past they enjoyed almost unlimited autonomy."+
+ The union push is coming at a time when global corporations are already facing rising labor and commodity costs in China, which is struggling to contain inflation.+

Of course, there are definately direct costs to be concerned with as the union moves into an organization:

Forming unions could be costly, lawyers and labor experts say, because a union could fight for higher wages and benefits and because companies are required to pay 2 percent payroll dues. The dues could amount to millions of dollars in additional costs for big companies. Yum Brands, for instance, has about 160,000 employees in China.
Manufacturers are already coping with soaring labor costs, which have jumped by 30 to 40 percent in some coastal manufacturing zones over the last four years. Also, a new contract labor law and stricter enforcement of older labor rules means some companies can no longer avoid paying overtime costs, which can be substantial because many factories insist that some employees work six days a week.

And in case you think this only impacts the big boys:

Union officials say they are focusing on global companies, but Chinese companies make up the bulk of the manufacturing work force and they are also expected to face audits and pressure to unionize.

But the concern - from Fortune 500 corporations to SMB manufacturers with a Chinese manufacturing presence - should be over the intangibles that come with collective bargaining and a strong union: work stoppages, and leveraging for better pay, benefits and conditions. In other words, it's not the bill on the table, but what comes for desert.

"Some foreign companies in China haven't behaved well in dealing with their workers' interests and rights," Wang Ying, an official at the All China Federation of Trade Unions in Beijing, said in a telephone interview this week. "As the economy and society develops, China needs to improve workers' legal rights and interests, which is a demand of a civilized society."

China's resolve should not be questioned here. Its aggressive approach to reducing pollution and redirecting resources prior to the Olympics should offer all the proof you need. And the natural progression to a modern society has to include an emerging, powerful middle class that wields influence and power. Look at the U.S. 100 years ago for more proof of that.

The costs of progress are always significant. China and its people are beginning to discover its potential and invest to make it reality. But the insertion of the union into Chinese manufacturing will absolutely increase costs and the need to improve margins much more quickly.

Over at All Roads Lead To China, Richard has hit upon something that many bloggists and press pukes overlook with striking regularity: just because China's fortunes as an outsourcing darling are shifting/slipping/adjusting doesn't mean you can paint everything/one with the same brush.

His post titled Is China No Longer Competitive? breaks down the broad view often presented by the Western press: that Chinese products are only of poor quality; that fluctuating currencies, rising fuel and labor costs signal the end of China's dominance as a manufacturing giant; and that these shifts mean the same things to all companies/business models outsourcing to China.

The fact is, as Richard rightly points out, it's much more complicated than that. A macro view doesn't adequately offer the micro solutions that are called for. He asks that companies assess their positions by answering these 6 questions:

1. What is your China platform?
2. Where is your market?
3. Where are your competitors?
4. Where are your suppliers?
5. Is your product high tech, or high labor?
6. Were you previously compliment (with new Chinese labor laws)?

Boiled down to its most lucid point, Richard's premise is that the complexities of each company's supply chain dictates its vulnerability to fluctuating macro conditions. Reacting to the same conditions in the same ways could spell big trouble for companies that don't plan and navigate their own path through the shifting outsourcing waters.

In a recent survey from Deloitte, U.S. manufacturing executives say they consider North America "the most desirable region for expansion over the next three years."

But before you go out and start pulling out the champagne, you should know - there's a catch.

First, the good news: the confluence of recent financial events is absolutely influencing U.S. businesses and where they choose to expand.

In terms of the executives' agendas for expansion, the survey found that sales and services topped the list with 76 percent planning to expand sales in the United States, 58 percent in Canada and 67 percent in Mexico. Sourcing of raw materials and parts (50 percent in China, 49 percent in the United States, and 43 percent in Mexico) and production (44 percent in the United States, 37 percent in Mexico and 37 percent in China) rounded out the top three priorities.

Overall, the vast majority of respondents said North America will not lose competitive ground in those areas over the next five years. And a significant number said they believe North America will become even more competitive by 2012 in sales and marketing (45 percent), information technology (41 percent), customer service (37 percent), R&D/engineering (36 percent) and finance/accounting (34 percent). A small percentage predicted that North America will be less competitive globally in these areas by 2012, with the balance being neutral.

And good news it is, because these are mostly high paying jobs that require intellectual competence but less direct manufacturing domain expertise.

And that brings us to the less than pleasant news, especially for those closest to the shop floor:

The only dark spot is production capability. Despite plans to expand in North America in the short term, survey respondents painted a gloomy picture of this region's ability to compete over the long run with lower-cost locations for production, especially Asia.

More than half of survey respondents (61 percent) said they expect North America to become even less competitive globally as a site for production by 2012. The key barriers to making production competitive globally were seen as labor cost (cited by 71 percent), tax policy (66 percent), work rules (66 percent), lack of availability of skilled labor (51 percent) and costs of raw materials and energy (56 percent). Not surprisingly, these were the issues most frequently cited by executives surveyed as areas that governments should address as matters of public policy.

Clearly, U.S. manufacturing management intends to continue outsourcing production to low cost countries. But while some companies may test those same regions to host their operations, most seem to be shifting toward North America for those ops - and that's not entirely a bad thing. According to Craig Griffi of Deloitte:

"The simplistic way to view manufacturing is to look only
where production is located. It's clear that a more accurate way to measure
the economic impact of these companies is to look at where all operations
are located, including sourcing, research and development, distribution,
finance, marketing, and all of the other functions necessary for a company
to thrive. In most cases, executives are telling us that North America
provides a competitive business environment for most of these activities."

In the New York Times this past Sunday, I found a book review that struck me as a balanced take on the true role of large companies in the global economy. The review is of a book that strikes me as a balanced take on the true role of large companies in the global economy.

That's right, I'm recommending a book I've yet to read. Get over it - I ordered it from Amazon already.

The article, "The American Multinational, Unbowed, reviews the book titled "Globality: Competing with Everyone from Everywhere for Everything.



What sold me on the book?

While the consensus is that U.S. (and, I believe, any) multinationals are under serious threat from foreign competitors like Tata or Cemex, the facts are that these behemoths are much more competent and capable than their size or age suggest. The book - via the article - is said to point to 5 core strengths that are often overlooked:

• Human Capital - While most of what we hear is that China and India are creating more engineers and technologists than the U.S., those countries face challenges of extremely high turnover rates, language barriers (most are not fluent in English - only marginally competent), most require further training beyond university, and many indigenous companies can't offer career paths that attract and keep talent.


• International Agility - Conglomerates and multinationals are actually more agile and adept in foreign markets than they're given credit for.


• Mergers & Acquisitions - Western companies have the capital and experience to consistently expand themselves or eliminate competition - much more so than their international competitors.


• Technology Innovation - Again, more capital and experience at functioning openly with other cultures give multinationals the edge.


• Brand Strength - Coke. Google. American Express. Enough said.

The authors sure son't seem to be poo-pooing the emerging challenges from other markets and countries. U.S. manufacturers - especially the large ones - have bureaucracies and administrative layers that can certainly block progress. And these emerging markets are growing at incredible rates of scale.

But many conglomerates have overcome these impediments by learning to do business in the very countries that are seen as challengers. For example, the authors point out that General Motors was the number 1 in China car sales in 2007, and it is beating Toyota in other markets (Brazil, India and Russia).

We don't hear much about that in the mainstream media. That's why I'm looking for good things from this book.