Made in China: early mover advantage?

Made in China: early mover advantage?

Cellnet’s acquisition of a factory to manufacture mobile phone and Navman accessories in China could well be at the sharp end of a new industry trend. Since acquiring exclusive distribution rights for the Scala brand of mobile, hands-free and navigation accessories for Australia and New Zealand, the company has leased a new warehouse and factory in south China’s Guangzhou. It opened officially last month. Cellnet has a team of around 20 Chinese workers, as well as a Guangzhou-based operations manager and two staff members in Australia responsible for overseeing the operation.

In the first instance Cellnet is using the facility exclusively for the packaging and manufacturing associated with the Scala brand. Eventually it aims to use the factory to manufacture all of the company’s accessories and after-market add-ons; including leather cases, car chargers and AC leads, which can then be imported pre-packaged into Australia and New Zealand.

Stephen Harrison, Cellnet Australia’s managing director, who was instrumental in the acquisition of the company’s Guangzhou factory, has been visiting China for 15 years or so. “We’ve always used factories in China, we’ve just gone through agents and haven’t had our own,” says Harrison. Cellnet projects a cost reduction of 50 percent in packaging costs and reckons other companies can easily save similar amounts through manufacturing in China.

The original factory belonged to Scala. When Cellnet entered into the partnership with the accessories manufacturer a joint decision was made to move to larger premises, as the original lease was about to expire. “We’ve moved into a brand new warehouse, which has been fitted out with racking over the past two or three months.” Harrison says the new factory can accommodate up to 100 workers if required.

What made China so appealing to Cellnet is the capability to save money on the manufacture of packaging. Harrison says labour costs and rents have rendered this uneconomical in Australia and New Zealand. “It makes good sense to have our own facility in China, where we can bring raw product into a facility of our own and quality control it over there.”

The kind of factories that typically offer an ODM (original design manufacturer) arrangement – by which Chinese companies offer to add branding or a logo to an existing product – rarely provide adequate quality control, in Harrison’s experience; especially when the sourcing company doesn’t have its own people in China. Typically in such arrangements, the Kiwi firm does the marketing, sales and promotion and handles warranties. The Chinese manufacturer may offer the New Zealand firm a fixed percentage of free product to cover warranties or the firm holds a pool of stock for replacement with a revolving return cycle. RN understands large national retailers such as The Warehouse, Transonic and Dick Smith have entered into such arrangements.

Instead, Cellnet has opted for what Harrison describes as a “whole service” partnership, allowing it to combine multiple products into packs or different formats.

He says another advantage for Cellnet is the ability to consolidate its freight out of China into Australia and New Zealand. “Whereas before we had different shipments going from different factories or different containers – some by air, some by sea – this way we can consolidate all of our freight and send it at our own priority. The ultimate for us is to consolidate the shipment in China and send it direct to a customer, so it doesn’t even touch our warehouse here.”

Harrison foresees a growing trend in this kind of off-shoring. Companies, he predicts, will be pushed into it merely to survive. “Everybody’s talking about doom and gloom and how bad things are in the economy and everything else, but there are some good things happening. We can buy in local currency or we can buy in US. There’s a lot of pluses and not a lot of minuses.”

He advises companies interested in investigating manufacturing opportunities in China to contact New Zealand Trade and Enterprise (NZTE), but you can’t beat having a contact on the ground. He recommends striking up a partnership with a Chinese business to help with the language problems, interface with the local government and address the leasing challenges.

Jennifer Andrewes, director of communications at NZTE, says its Navigating China website – developed since the signing of New Zealand’s Free Trade Agreement with China – is a good starting point for companies interested in finding out more about leasing properties or plant. “Our trade commissioners and market development managers can help New Zealand companies with the ins and outs of setting up. Companies that are part of our Beachheads programme have an expert advisor, who has lived and worked in that market, and get one-on-one advice from them about growing and building their business.”

China, like every other country, is feeling the effects of the global economic meltdown. Late last month, the Associated Press reported riots breaking out in southern China – an area often described as “the world’s factory” – with plants in Guangzhou and Dongguan closing as bankruptcies and layoffs put thousands out of work with wages owing.

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