Blog

A fairly recent article featured in Businessweek online, released by Boston Consulting Group's Jim Hemerling, pointed out the rapid evolution of US companies' sourcing operations in China.  Hemerling notes what he sees to be, three waves of sourcing in China, through which multinational companies are progressing.  I thought to myself, "as mid-size and small businesses follow suit in sourcing globally, what wave are they riding?  Paddling for?  Sitting on the beach watching? 

Wave 1.0, or the first wave, involved the beginning of sourcing in China by western companies' competitive search for low costs.  Hemerling writes:

Numerous U.S., Japanese, and European companies established corporate beachheads in China to implement their low-cost strategies. Stand-alone sourcing offices sprang up in Shenzhen, then Shanghai and other locations, and anyone with even a few years of sourcing experience became a hot commodity. During this initial phase, Western multinationals looking to source from China faced two significant hurdles: a dearth of qualified suppliers and a dearth of qualified sourcing people.

Wave 2.0, involved chinese suppliers' step up the value chain into R&D functions:

As sourcing matured, so did the suppliers. In a wide range of industries, from consumer electronics and IT equipment to automotive manufacturing, many Chinese suppliers moved far beyond being arm's length suppliers. They started to innovate and collaborate with their customers on component and product design, marking the transition to sourcing 2.0. Today, many of these same Chinese suppliers are designing new products for global markets as part of supply chains that are integrated into global procurement processes.

The report notes that, according to the OECD (Organization for Economic Cooperation and Development) China became the second highest investor in R&D in the world at US$ 136 billion (the US is about double this). 

In Wave 3.0, Hemerling cites what he believes to be China becoming a global center for procurement:

Today's China is the center of an economic maelstrom that grows larger and more powerful (and increasingly complex) every day. R&D centers originally set up to support product localization for the Chinese market are now going full force in developing new products for the global market.

These rapid changes, which will continue to accelerate, mean that many Western companies have to rethink their global procurement operations. The announcement that IBM is moving its global procurement headquarters to Shenzhen is the most visible sign that sourcing wave 3.0 is underway—with China becoming the global center for procurement.

Hemerling notes that, although other major multinational companies like GM are relocating procurement offices in China, this is not a move for everyone to follow.  In fact, many companies appear to be still struggling with Wave 2.0. 

Multinational behemoths aside, where do the rest of small to mid-size businesses fall along this range?  I would argue that those with the utmost experience in China are steeped in Wave 2.0. These small and mid-size businesses have discovered the benefits of close partnerships with key Chinese suppliers, through which they foster low level R&D on their projects by outsourcing the lower-end R&D functions to their suppliers.  Many of these companies might still be trying to optimize, or simply contain, their supply chain challenges.  But most are still in Wave 1.0.  Some have begun in China, but are now seeking even lower costs in other countries.  Some have developed a solid supplier base in China and are reaping the benefits of the cost-savings.  Some are still sitting on the fence in terms of whether to go, how to go, or how much to commit. 

Wave 1.0 is now filled with start-ups, entrepreneurs, inventors, and the smallest of businesses.  Global Sourcing Specialists is occasionally contacted by stay-at-home mothers looking to develop products, and these mom-entrepreneurs know that to make the numbers work and have their product compete with larger companies' products on the store shelves, they need to begin overseas.  Venture Capital firms now frequently require the start-ups they fund to have a global operations plan, global market mindset, or overseas sourcing strategy right out of the gate.  China, for good reason, is often the first place many of these companies look.   Does that mean that these small and new businesses will be eventually moving through Waves 2.0 and 3.0?  Yes and no.  It seems to me that the next stages of sourcing are primarily reserved for companies of a certain size, particularly Wave 3.0.  But, if we are working on a new product with a client and our supplier proposes a design change that they have developed to add value, is this not a hint of an innovation or R&D contribution on their part?  I would say so. 

However, for those small companies that stay relatively small, I see them slowly moving on to Wave 2.0, but perhaps not in as grand or focused a fashion.  What I do see happening, is R&D and design services in other Asian countries, other countries in general for that matter, not only becoming accessible to these businesses, but feasible.  I know great product designers in Singapore.  The rapid evolution and impact of technology on communication, and the emergence of increasingly competitive resources in other countries, is only going to flatten and open the playing field more.  I also see multinationals paving the way in other low-cost countries to mitigate their risks and continue to cut costs, and small businesses will eventually have a menu of country options in the next decade in terms of what countries to source from.  These changes will certainly take time, at least a decade or more to transpire.  But as one who has paddled for and ridden many waves in the ocean, I can tell you, if you're not looking out towards the horizon to see what's coming, chances are you'll miss the whole thing, or worse, have something crash down on top of you from behind.