Your Manufacturer as Your Competitor

Private labeling and unbranded products could have unintended consequences. An emerging trend amongst “contract manufacturers” is the development of strategies to move up the value chain.

Consider:

1. A July 18th Wall Street Journal article entitled “Contract Manufacturers Shift to Brand Building” highlighted the efforts of technology companies such as Asustek (a producer for Sony and Apple), Hon Hai Precision Industry Co. (a manufacturer for Apple, Dell, Nokia and HP) and Acer are developing brands “in their quest for better profit margins and to establish a global presence”.
2. The April 20th WSJ headline article was “GM’s Chinese Partner Looms as a New Rival” and further states that “Beijing … is pushing foreign manufacturers of airplanes, power-generation equipment and electronics to share technical know-how with Chinese partners.” While the Chinese government’s initial endeavors are to create Chinese competitors for the domestic market, the opportunity to export will prove difficult to resist.
3. In July, the Asia Pacific USA Chamber of Commerce held a conference in Pasadena that was attended by over 45 Chinese companies who met with over 300 American business people over a two day period. The purpose of the meeting was to “seeking partnerships with small to medium-sized American concerns to help broaden distribution for their products and services in the United States”.

According to Stacy Sun, a Pasadena-based business consultant, “Now, Chinese companies want to move up the value chain.” Economists who have testified to Congress and Chinese government officials have stated that Chinese manufacturers receive 20 percent or less of the value of merchandise they export to the American market. American companies typically design and order the products, receive them at American ports, distribute and market them across the country. In doing so, they gain up to 80 percent or more of the value in the whole process.

One company mentioned in the article is Puluosi Lighting Company, which manufactures for Sylvania, Philips and GE, and has since established a U.S. operation under the name of Plus Lighting.

So what does this mean? Brand building and competitive pricing will continue to be the keys to success. Potential short-cuts such as private labeling and contract manufacturing may result in you creating a competitor. China may be appealing from a manufactured cost perspective, but is it the only option?

Perhaps Sun Tzu’s (no comment on the irony!!) advice in The Art of War of “keep your friends close, and your enemies closer” should be interpreted as “keep your distributors/customers close, and your manufacturers closer.”

What do you think?