A recent BusinessWeek article highlights the more cautious approach many manufacturers are taking with regards to China. The biggest single issue appears to be intellectual property theft, although product quality and other issues (cost of fuel, logistics of extending your supply chain halfway across the world, etc.) certainly play a role, as discussed here in past blog postings.

"China ranked highest in 9 of the 15 risk factors. Rising labor costs are still an important factor for businesses, with 35% citing China as the leading source of concern. Other risk categories where China ranked highest included regulatory compliance, commodity price volatility, supply-chain security breaches, and information technology problems."

businessweek.com/bwdaily/dnflash/content/nov2008/db20081126_315336.htm

"...quality concerns are among the chief reasons U.S. manufacturers are scaling back plans to source more goods from China.  Instead, U.S. companies are looking harder at Mexico and other locales closer to home when exploring where to put new capacity."

I have seen this shift in many of the product lines I work with over the past couple of years. Mexico (see http://www.lmtruck.com/articles/petemplate.aspx?storyid=280, for example, to see how Mexico specifically "benefits" from higher fuel costs: "Moving to regional distribution means inventory can be reduced...because firms can take advantage of next-day delivery and cross-docking services to keep goods moving.") and Brazil now factor highly in any US-external manufacturing partnership.

Does this mean the Mexican or Brazilian governments do a better job of protecting intellectual property rights? In some cases, perhaps so, but overall it is likely due to the nature of their manufacturing industries compared to that of China's. Smaller, arguably more centralized (and certainly occupying far less territory), and more closely associated with "western" customs, Brazil and Mexico nevertheless, combined, have a population approximately that of the U.S  Meaning, if these developing nations were to become "developed", their middle classes might match China's (or India's) in size. Mexico and Brazil are also much more energy independent than China (the US still imports roughly as much oil from Mexico as it does from Saudi Arabia).

My argument has been, consistently, to make sure that any overseas manufacturers are integrated into your company--not simply "the cheapest option". Without showing loyalty, you can expect none in return.

US firms, in general, may have a culture more similar to Mexico and Brazil than to China. Being able to schedule meetings during normal business hours is, frankly, a big plus for me personally. Overall, there is no reason to believe manufacturers are going to bail out of China en masse--more than likely, the days of highly discounted overseas manufacturing are over, and businesses will be looking at many countries--including China as one option--before deciding on the location for partnership.

[Thanks to Greg Merten for the link!]

Cheers,

Steve