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T
HE BIG COMPANIES HAVE DONE IT
,
so why shouldn’t
a smaller U.S. manufacturer take the risk to move or open
operations in China to improve profits? The issue isn’t that a
company shouldn’t, but rather that it should do its homework
before ever committing to the idea. Just because the big boys
have established China facilities does not mean a smaller
business may enjoy the same economical success.
Let’s consider the fact that China labor costs (and employee
benefits) are much cheaper than in the United States. We know
this from many sources, but it is certainly documented in many
U.S. news forums. A U.S. company with manufacturing operations
in China may find labor costs to be inexpensive, but don’t be
fooled by this one aspect of cost. In most cases, the employer
must also must pay for an employee‘s daily meals and living
quarters. Often, the employee‘s housing can be compared to a
rented college dorm room that provides a roof overhead for an
average of six people, with shared bath facilities.
Real estate isn’t cheap in China. In fact, in many of the most
sought-after areas of the country, the cost of renting is not
that much different per square foot than in the United States.
Then there are the utilities and what we call “common area
maintenance fees.” These costs are in China, too. So, does it still
seem that things are significantly cheaper by moving to or setting
up operations in China? Let’s continue our analysis.
Naturally, a manufacturing shop needs supervision. Local
supervisors’ pay is often cheaper than in the United States, but
let’s now consider the cost of placing a U.S. manager at the
facility in the role of general manager (an “expat,” or expatriate
as they are called). Not only will this U.S. manager demand a
higher salary for the overseas assignment, but the manager will
often require a company car and subsidized housing, too. Well,
this isn’t cheap...is it? How about the cost of supporting the
company’s administration traveling to China to check and keep
audits on the facility? How many middlemen are going to be
involved just to land your product into your customers’ hands?
Everyone is looking for his piece of the income stream. Why
build this non-value-added hierarchy?
How does a company protect its business from the well-
known China “copy“ industry? If you can make it, they can copy it
— and sometimes misrepresent the product with a likeness
of your label. Corporate must keep a close eye on this; doing
so costs something, including the cost of lost revenue to these
unscrupulous entrepreneurs. To protect your investment over-
seas does not come without a price.
Smaller companies are more likely to be modestly financed.
As such, it might not be a good idea to leverage resources in
trying to manage an overseas operation. In fact, it might be
better to keep manufacturing in the United States. Our country
can certainly use the jobs, and why share taxable profits with
other countries? Now you ask yourself, “How can this be done?“
I’ll tell you the secret: keep your spending under control, employ
a little frugality, encourage your employees to follow this culture
and build your business with a mind-set for efficiencies.
While my article isn’t written to discourage smaller companies
from seeking out less expensive venues to manufacture, it is
written to share my experiences. What you need to do is investi-
gate your opportunities and clearly do your homework. In doing
so, become aware of the potential added costs and risks of
doing business in China. These might offset your desired savings
or worse yet, even cost you more. Build your products here and
save, while also strengthening the backbone of U.S. employment,
which rests on our small businesses.
v
Michael P. Eldredge is the chairman and CFO of
American Sensor Technologies, Inc., Mount Olive, N.J.
By Michael P. Eldredge, COO & CFO
The Cost of
Conducting
Business in
China
19
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