Martens' move poses Chinese puzzle

14 November 2002
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14 November 2002

British footwear maker R Griggs plans to secure its future by moving the firm's manufacturing base to Asia. David Arminas examines the pitfalls it could face

Another renowned British brand is set to move overseas. R Griggs, the maker of the venerable Doc Martens footwear, is eyeing Asia for its new manufacturing base, so it's goodnight UK, good morning Vietnam. Or Cambodia. Or China, depending on which country offers the best deal for the company.

Meanwhile, the British shoe manufacturing supply chain will have to do more soul searching over losing another big client to the lure of cheap foreign labour.

For R Griggs, the key question is whether the move to Asia - China most likely - will secure the long-term health of its UK-based company and maintain the Doc Martens brand.

Many western shoemakers, such as Caterpillar and Timberland, have already made the move to Asia.

The electronics and automotive sectors have also successfully exploited China as a manufacturing base for many years, even though moving production offshore raises many supply chain issues.

Reliability of a manufacturing partner, quality of products and services, and logistics are important issues to be settled.

Generally, car manufacturers have found China to be a good market. However, Peugeot recently complained about poor product quality from the parts makers in China. It also wants to see some government action to merge small suppliers and launch supplier development programmes.

But these are the most obvious issues and ones that purchasers get to grips with as a matter of course.

The thorniest issue is ensuring communication between European and Chinese partners, and that must be solved before other problems are tackled, according to Les Pyle, chief executive of Partnership Sourcing Limited, a joint government and industry body that advises companies on partnering.

Pyle says companies entering the Chinese arena sometimes do so with their eyes shut, "seduced by the opportunities of scale. The key issue is about rules of engagement, about relationship building."

He warns that companies should not jump into China just because they are afraid of being left out. "You should be crystal clear why you are doing it but also be crystal clear why the Chinese company is doing it."

The danger is that purchasers have good answers to the first question, but few have answers to the second. Understanding their partners requires almost a sixth sense, as German car maker Volkswagen found out. What looked like a good deal for Volkswagen was apparently an even better deal for its Chinese joint venture company, Shanghai Automotive Industry Corp (SAIC).

Last summer Volkswagen, a major domestic Chinese player, with about 50 per cent of the market, said it had resolved a dispute with SAIC.

Volkswagen found its own parts on a best-selling Chinese competitor to its Santana, Jetta and Polo models. SAIC acknowledged it had been selling the high-quality VW parts, but it stopped selling them after discussions with VW.

China has a major problem with corruption. Mayors have been implicated in crime syndicates, high-ranking bureaucrats involved in smuggling rings and factory officials tipped off before fraud officials arrive to investigate copyright infringements of western luxury goods.

Corruption is less acute in Chinese companies involved with western ones. But last month, MG Rover said it was further examining the state of Shanghai Shenhua Holdings, its joint venture partner, over allegations of high-level managerial fraud and embezzlement in China.

The country is changing and purchasers will want to know if it is risky to invest with Chinese partners. China watchers believe this month's Communist Party Congress, where a new president is expected to be chosen, could mean more development in non-state and foreign-invested sectors, where many partnering deals with western companies are made.

But they also warn that the internal economy is facing severe problems. The Chinese may not have as much cash to spend on manufactured goods as previously predicted, threatening production runs and schedules.

Despite the warmer welcome being given to western firms, China remains a secretive society. But as it slowly opens up, environmentalists will be increasingly able to put Chinese companies under scrutiny.

Purchasers should ask their potential partners now whether there are any nasty environmental surprises in store. A good deal in 2002 could turn into a publicity nightmare in 2010, and it will be brand value that takes a big hit.

SMnov2002

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