Partnering seen as key to any China operations launch
By Staff -- Manufacturing Business Technology, 3/1/2006 7:00:00 AM
TSS Technologies, a Cincinnati-based contract manufacturer, learned quickly that launching its first production facility in China could not easily be done by TSS staff alone. Setting up human resources, accounting, and procurement functions without local expertise would have been risky, maintains Rob Smith, regional sales manager and head of operations for the TSS facility that will open in Xiamen in March 2006.
The route TSS took to set up shop leverages a partnership with China Solutions, a Xiamen-based services provider that helps foreign companies launch Chinese operations by handling back-office functions for them. TSS has a two-year contract with China Solutions, after which TSS may take over more functions internally.
"We found this [partnership] to be the easiest and best way to guarantee our success," says Smith. "To go over there and try to set up the entire back office without this type of assistance would have been a real struggle."
TSS's move will not offshore any U.S. jobs, Smith explains. Rather, the move is meant to service OEM customers in medical and capital equipment markets already in China that need the types of services TSS provides—that is, design, build, and inspection. In fact, says Smith, TSS's Ohio operations are flourishing, and will lend engineering support to TSS China, so growth in Xiamen could lead to more engineering jobs in Ohio.
Xiamen is a booming seaport on the Taiwan Strait. TSS will begin operations in 24,000 square feet of leased space within a larger 106,000-square-foot facility to accommodate expansion. Initially, the company is bringing nine pieces of equipment from the U.S.—including seven computer-controlled machining assets. Additional equipment might be sourced from China.
Smith will be the only American employee, with the other employees being Chinese. The bilingual skills of the China Solutions employees, Smith says, will help overcome any language barriers. He adds that for the most part, finding skilled machinists and other plant-floor personnel has not been difficult. "We are finding the skilled workforce to be there; it just takes a bit of time to find the right people," he says.
Smith says full capacity with initial resources will not be reached until May or June, with expansion after that. The reason for the gradual ramp-up, he says, is to ensure the Xiamen operation is able to conduct project management and customer service processes at the same level TSS now does in the U.S.
"If you are accustomed to doing business with TSS in the U.S., we want your customer experience with TSS China to be the same," says Smith.
William J. Best—a VP with A.T. Kearney, a Chicago-based consultancy that offers advisory services to companies looking to expand into China—agrees that partnering can be a wise move. Many U.S.-based manufacturers have set up joint ventures with Chinese organizations to gain a quick foothold in the market. For example, of the first 10 Chinese sites established by Cincinnati-based consumer good giant Proctor & Gamble, eight of them were joint ventures, says Best.
"We always recommend that if a company is going into China, that it partner at first," says Best. "The business issues are so different there that trying to do it on your own the first time out is very, very risky."
Best has heard of Chinese companies that run back-office services for U.S. companies, but aren't joint ventures. While such services might be effective, Best warns they should be reassessed after the site is running to see if they remain cost-effective.
"There are advantages to using that kind of partner, but you also are paying for it," he says. "Depending on the margin charged, it could lead to cost-competitiveness issues."
The first step, claims Best, is to carefully analyze which products can be made more profitably in China, looking closely at factors such as the percentage of direct labor, as well as logistics and material-sourcing constraints. Such analyses might reveal that keeping operations where they are is actually lower in cost, says Best. On the human resources front, he adds, one client found that in just nine months of delay in starting a Chinese operation, the salary it had to pay for mid-level managers such as line supervisors doubled.
Some large U.S. manufacturers are growing their own mid-level managers by bringing Chinese workers to U.S. sites to train for an extended period, then returning them to positions in China. "The problem is, the market is overheated right now," Best says. "A good mid-level manager who knows how to manage in a Western environment is difficult to find."
Why there's no need to fear China
03/01/2005
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