I own a factory and work with Chinese factory owners and their staff everyday. Every business owner I know, is actively involved in cost cutting.
Every factory doesn't produce every component that goes into a product e.g. a hair clip factory would buy the plastic from one company and the spring from another and assemble it together. If it were with an emblem, they would buy that from a third company and stick it on. So an assembly company = factory.
Infrastructure - In China, almost every product is produced in a region where their suppliers are all nearby. e.g. electronics in Shenzhen, tiles in Foshan, furniture in Shunde, etc. Having suppliers nearby saves time and cost.
Specialization - Since each company makes only their range of products, e.g. a spring manufacturer just makes springs, they focus on more volume for that product, which gives them leverage to bargain on raw material costs.
Volumes - The more the volume, the better prices you can negotiate. Also, your machines work more efficiently, the process of work is smoother, all these factors bring down the costs.
Quality - Good or bad, many companies are willing to drop the quality or replace components with the cheaper alternative to save on costs. If you compare prices, you should also compare quality. It’s often that samples are good and production is made a little cheaper.
Margins - In this cut throat economy, margins are small. Many companies are willing to sell at low / no margins or even at a loss to get a new customer on board or to stay alive and try to see it to the next phase by losing a little but retaining the workers and factory space etc.
Logistics - China has developed their logistics in a very efficient manner. You can get things cross country in a couple of days or across the city in a couple of hours. Less downtime, higher efficiency = lower costs.
Automation - In many industries, manual labor is being replaced with automation as salaries have risen a lot.
Flexibility - Owners are willing to relocate, change suppliers, hire / fire workers and do what it takes to reduce costs. Most are very hardworking and quite involved in their daily business.
Export rebate - Government support promotes exports and gives export companies a rebate on the value exported. Many companies rely solely on this rebate as their profit margin.
It has taken China years to set up such an infrastructure and so it is not easy to replace them by moving to other countries where labor costs are lower as that is only one component of the cost.
Article from Quora by Harry Daswani, works at Macro Plus
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