China: Ready For the Next Sourcing Wave?

Boston Consulting Group's Jim Hemerling says China is emerging as a global R&D and innovation hub in its own right. Sourcing execs take note

by Jim Hemerling

One critical dimension of business operations that is both driving, and being driven by, globalization is the sourcing of components and products from China and other rapidly developing economies (RDEs)—and this mega-trend is entering a new era.

For some companies, global competitiveness will depend on their willingness and ability to anticipate and shape the coming changes. This may involve rethinking sourcing strategies, devoting far more resources to recruiting and grooming sourcing executives, and reorganizing and even relocating procurement organizations.

This continuing rapid change comes at a time when many Western companies are starting to feel comfortable with their existing sourcing arrangements. They have gone through a series of wrenching organizational and strategy shifts and have survived both the culture shock and growing pains associated with moving major portions of their sourcing thousands of miles from home. While many would like more time to fine tune or streamline these operations, or just to take a well-deserved breather, they can't afford to get too comfortable, because global sourcing is evolving rapidly.

Wave 1.0: China for low cost

The first wave of Chinese sourcing was driven by Western companies' competitive search for low cost components and finished goods, both for Chinese and home markets.

Numerous U.S., Japanese, and European companies established corporate beachheads in China to implement their low-cost strategies. Stand-alone sourcing offices sprang up in Shenzhen, then Shanghai and other locations, and anyone with even a few years of sourcing experience became a hot commodity. During this initial phase, Western multinationals looking to source from China faced two significant hurdles: a dearth of qualified suppliers and a dearth of qualified sourcing people.

Wave One sourcing from China and other RDEs took off when manufacturers in these countries demonstrated they could produce quality products for less money, more often than not using the buyers' own designs. During this initial stage, companies were able to recruit, train, and retain enough qualified sourcing specialists to tap into China's supplier networks.

Wave 2.0: China participates in innovation

As sourcing matured, so did the suppliers. In a wide range of industries, from consumer electronics and IT equipment to automotive manufacturing, many Chinese suppliers moved far beyond being arm's length suppliers. They started to innovate and collaborate with their customers on component and product design, marking the transition to sourcing 2.0. Today, many of these same Chinese suppliers are designing new products for global markets as part of supply chains that are integrated into global procurement processes.

The expanded role that Chinese sourcing offices—and their suppliers—are playing in the conceptualization and design of new products and processes shouldn't be seen in isolation. Like India, China is moving fast forward in the research and development (R&D) arena.