Sleeping with the Dragon: The yin and yang of doing business with China

ROBERT EDMUND

The world is becoming “optically flat” as optical design and production continues to expand across the globe, reaching new manufacturing frontiers daily. Much of the news and attention is focused on the “Golden Dragon”—China—and its rapidly growing optics community. You need only study the city map of Shenzhen (near Hong Kong) to find a site for every major German, Japanese, and American optical company. Harder to see are the multitude of Chinese optical companies in this same city, lurking in the shadows of the better-known brand names.

Yet, even after a brief visit to cities such as Shenzhen, it is easy to believe that every optics company should develop an office in China, leveraging the presence of China’s high-volume optics infrastructure to support the company’s own high-precision optics ventures. In my own decades-long experience with China, however, I see many of the initial reasons for pursuing development there becoming offset by the growing risks.

Early in my career, I experienced a similar rapid bloom of optics and optical production capability in post-war Japan, where I learned of the importance of building long-term relationships with the skilled Asian community, the Asian community’s work ethic, and its outstanding passion for precision manufacturing. By the late 1980s, rapid market growth in Japan encouraged my staff to follow Japan’s lead and buy optics directly from China, thus initiating the Edmund Optics (EO) relationship with a variety of small Chinese vendors.

What began as a sourcing opportunity developed rather quickly into a skilled and well staffed regional manufacturing hub for EO. The lure of China as an opportunity to pursue large-volume, commercial manufacturing at lower price points was immediately obvious and by 1994 we had launched our own office in Shanghai. Initially, the staff was tasked to develop and qualify vendors, establish advanced inspection, and expedite customer deliveries and lead times. As we acquired a more experienced staff, we developed a manufacturing unit at EO Shanghai focused on both custom and catalog opportunities. By 2005, the staff and demand had outgrown the Shanghai facility and we relocated the manufacturing to Shenzhen, China in 2005 under managing director Jeremy Chang.

Hidden dragon

Trying to follow this path in China today, however, carries new and growing risks. Clearly lower costs are still the primary driver for most companies, but I caution international firms that their cost to manufacture in China will always be higher than that of a Chinese company. The communications and systems manufacturing industries have already provided an example of this differential.

Foreign business in China is also experiencing rapidly escalating material and labor costs, driven in part by increasing energy prices and the declining dollar. Likewise, hidden costs and risks such as competition for personnel and material resources are becoming more apparent as production volumes rise and the number of companies in China expands. Even the Chinese themselves are looking to move further inland or out to countries such as Vietnam to obtain lower costs.

Then, there are the well-known risks associated with bringing intellectual property to China. For example, EO products have been directly copied on several occasions. In one instance, a Chinese businessman shamelessly explained to me directly, “We followed Edmund.” I have found many other similarities to EO in Chinese product positioning and catalog communications.

Retaining key staff is perhaps the next biggest problem. The local population in Shenzhen seems to change jobs every 18 to 24 months, burdening the manufacturer with the need to recruit and train skilled staff only to see them quickly exit for jobs at other companies. It seems as though the youth of China have been injected with the perception that advancement can only be attained by seeking alternate employment. Further, though China graduates more optical engineers than any other country in the world, it does not produce a wealth of talent. Most graduates start at very low-level positions. This leaves an engineer with five years experience in China with less project experience than peers in Europe or North America. Many of the Chinese engineers wind up taking jobs unrelated to engineering.

The economic boom seems to have created a “gold rush” mentality that has many Chinese believing they must create their own companies to become rich. We receive more than 20 e-mails a day from small optics vendors seeking partnerships or assistance with distribution from small, entrepreneurial startups all along China’s coast.

Furthermore, the Chinese government is investing millions of dollars in capital equipment for Chinese optical manufacturers. Currently their focus is on high-volume projects, but clearly capabilities are being redirected to meet demand for smaller quantities and higher precision manufacturing. Thus, government-supported competition against foreign competitors is on the rise.

Clearly, if you are involved in optics, you will deal with China one way or another. It is not a given, however, that you will want to build your own factory in the land of the Golden Dragon. Buying from China may prove better in the long run. As my company’s China strategy continually evolves, I am watching with great interest as Japanese firms locate their new manufacturing in frontier sites such as the Philippines, Thailand, and Vietnam.

Robert Edmund, son of founder Norman Edmund, is president and chief executive officer of Edmund Optics, 101 East Gloucester Pike, Barrington, NJ 08007; e-mail: [email protected]; www.edmundoptics.com.