LCCS Low Cost Country Sourcing
"We want to become Number 1 in all sectors, everywhere in the world!" This seems to be the general goal in China today. Starting with raw materials and semi-finished goods, China is now building efficient industrial infrastructures all along the value chain . In many areas, however, the production capacities in place already exceed domestic demand. Many companies that invested in China hoping for a market of more than a billion consumers have had to learn this the hard way.
One strategy a company can use to benefit from China's growth is LCC (low-cost country) sourcing. On average, manufacturing costs in China are 50 percent lower than in Western Europe. (In fact, China is only the most prominent example of a whole series of important low-cost countries, such as Brazil, Russia, India, or Turkey.) However, anyone wanting to enter into serious collaboration with Chinese suppliers needs to achieve the following, some of which will require overcoming a number of barriers:
Be able to offer attractive volumes
Identify interested and qualified suppliers
Identify appropriate price levels
Establish a robust relationship at top-management level
Overcome internal resistance
Manage operations and risks
Overcome cultural barriers
Identifying interested and qualified suppliers in China is challenging. Chinese firms are operating in a domestic market growing at double-digit rates every year and are bombarded day in, day out with inquiries from Europe and the United States. As a result, the Chinese supplier market cannot be conquered with cautious test inquiries—potential European or American customers need to stand out from the crowd and offer genuinely attractive volumes that stoke the imagination of the Chinese entrepreneurs.
A good approach is to make initial contact in writing, in Mandarin, and have a native speaker immediately follow up by telephone.
As soon as offers have been received, a process of intense negotiation takes place. The first offers from China are usually not far below European or American price levels. From the Chinese point of view, the mirror image of LCC sourcing is “selling to Europe at European price levels. "
Once a price level has been found that is acceptable for both sides, the next step is for top management to take a trip to China. Chinese entrepreneurs want to talk with their counterparts face to face. Establishing a robust relationship, based on trust, is the best guarantee for overcoming all subsequent hurdles.
The first obstacle to overcome is an internal one and may require a creative approach—users at the European or American company back home have to be convinced of the validity of the Chinese offer.
For managing operations, there is no practical alternative to establishing a procurement office in China. Someone has to be present on the ground at the Chinese supplier to ensure that quality standards are complied with and (for instance) that worn-out tools are replaced. In the first few months of production startup, an almost daily presence may be required, though this can later be reduced to a once-a-week schedule.
The final hurdles are cultural barriers. Genuinely close collaboration with Chinese suppliers will ultimately result in the European or American company becoming slightly more "Chinese," while the Chinese supplier will adopt some of the culture of its Western customers.