S0 - You want to Outsource to China...Part 1

by: Alexandra Damsker

Costs are high, profits are dropping, and you’re considering outsourcing some or all of your business production to China. Is this a good idea for you? While the outsourcing party used to be more of a free-for-all fête to pare down costs, it’s now more of a selective affair. Trends are changing, particularly with China, though it remains a massive global economic engine, powering the bottom line of companies both in the US and abroad. Labor is cheap, but getting more expensive - the 2008 labor law ending termination “at will” has increased both costs and risk - and product liability risk and quality control have yet to have a fully restored reputation from recent setbacks. Global economics and the value of the dollar have been making the US and other countries, such as India and the Philippines, more viable alternatives. However, costs in China are still comparatively low, and China has a well-established outsourcing system and infrastructure that’s relatively “turn-key” for companies operating with knowledgeable advisors. What’s more, the economy is now opening China up to companies it’s never been open to before, including smaller companies and reduced orders.

So how does this shake out in terms of shipping your goods or services off to China? Well, some industries are growing wary. In BDO Seidman’s excellent 2009 Technology Outlook Survey, for example, 62% of CFOs at leading US technology businesses reported that the US would be their primary outsourcing destination in 2009 (16% reported China as leading destination in 2009, 13% reported India, and 19% reported no interest in additional outsourcing - reflecting a likely decline in international outsourcing). The study also reported that outsourcing to China is down from 46% in 2008 to 19% in 2009. (Get a better look at the survey here: http://www.bdo.com/news/pr/1016.)

However, while technology and IT, including call centers, are coming out of China, industries and company functions with high capital costs are moving to and remaining in China. Examples of both include the pharmaceutical industry and manufacturing functions, both of which are expected to maintain current levels or rise in the upcoming year. In addition, China is rising as the new head of clinical trials in Asia. (Check out this great article on pharmaceutical trending for more information on that topic: http://trendsniff.com/2008/11/06/china-numberone-destination-in-asia-for-pharmaceutical-outsourcing/.)

Our next blog will look at the complicated process of outsourcing, to give you a better idea of what to expect. Our experts at the USA China Law Group are happy to discuss whether outsourcing is a good fit for your company, and if China is a good partner country for you.