Opinion: The grass isn't always greener

Francois-Xavier Terny: Why the charms of China as a manufacturing and consumer dream may not stand up to close scrutiny.

As many western companies currently look to dramatically increase purchases from low-cost countries as a way to quickly regain lost cost competitiveness, China appears to many to offer the dream solution.

In Shanghai, for example, salaries are very low, while employees work 300 days per year and for ten hours a day. As labour costs for a Western manufacturer represent around a third of their total costs, under this scenario, 30 per cent savings should be achieved immediately, at least on paper.

Furthermore, manufacturers can sell goods to China as well as produce them in the country. Some 1.3 billion consumers make it a world market and several sectors have seen growth rates in excess of 20 per cent. China is often the place where investments are proving most profitable today.

But before you rush to the airport to catch the next flight east, it’s worth taking a closer look. There are problems. The workforce is generally not well qualified and lacks training. There is a high turnover rate with 50 per cent of employees leaving their company within a year of joining. And, for various reasons, the promised 30 per cent cost savings are more likely to hit 15 per cent after two years of tremendous effort.

On the buying side, only around five per cent of the Chinese population of 65 million have more than a basic monthly income and so can be considered potential consumers.

There are also safety, corruption and counterfeiting issues, which are strong impediments to the smooth running and development of a company. It’s important to remember that of the foreign companies who have ventured into China, more than half have failed.

All this suggests that we should look again at our faithful near neighbours – North Africa and Eastern Europe. To consider these regions as already tapped potential, with modest and fragmented markets, is shortsighted and belies their undeniable advantages.

Looking at three factors in their favour, the first would be geographical proximity. These countries involve a two or three-hour flight in the same time zone, compared with a ten-hour haul and seven hours time difference between Europe and China.

There are no language barriers. English is readily understood and a second European language is often spoken as well.

And, lastly, there is a similar culture of free market economies and trade agreements with countries in the European Union, compared with China’s state-run and communist economy.

In this region, approximately ten countries represent a 250 million-strong consumer market with good purchasing power. They enjoy a GDP per inhabitant of between US $4,000 and $15,000 as opposed to US $1,000 in China. These countries represent a true alternative to the dangers or wishful hopes of investing too strongly in China.

Offshore purchasing nearby or at a distance presents advantages and disadvantages, so the best solution may be to adopt a smart portfolio strategy. This consists of taking advantage of each region’s competencies and assets by seeking an optimised equilibrium in terms of localisation and economic and time constraints.

You might, for example, pick India for its English-speaking call centres, while looking to China for its manufacturing, and Eastern European countries for standard IT services.

But "emotional" services such as telesales or car insurance may appear to be more profitable if relocated just a few kilometres down the road and within the same country.

It seems that staying close to home may be the real answer to sourcing problems. For example, two large French consultancies have recently relocated to Clermont Ferrand which can be found right in the middle of France. One specialises in maintenance and development, with a staff of 120 consultants, the other benefits from a hefty incentive from the local government of the region.

So no need to go to the other side of the world and follow a potentially dangerous fashion when the solution is probably right under your nose.

Francois-Xavier Terny is the co-founder of Masai, a consultancy specialising in cost optimisation