CFO Studio Magazine, 1st Quarter 2012

By Michael P. Eldredge, COO & CFO

THE 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 overseas 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 investigate 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.

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