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What are the strategies and vehicles for initiating sourcing from China?

China's liberalized investment rules generally allow a foreign buyer seeking to source products or services to select from a wide range of sourcing models. These models include classic third-party outsourcing arrangements in which the buyer contracts with the supplier; sourcing through joint ventures; and even sourcing through wholly owned (foreign) enterprises.

In China, as elsewhere, customers are challenged to adopt and structure the sourcing model that best meets the needs of the particular transaction. The selection process should drive to identify the most appropriate model for the particular transaction mix, based on buyer, supplier and sourcing objective. Fortunately, buyers seeking to source from China can select from among most of the strategies that have historically been used in offshore sourcing.

A buyer may initiate a China sourcing by using any one of several classic entry strategies or by combining elements of several strategies. Typical sourcing entry strategies may involve:

• Utilizing pilot programs to become familiar with and to confirm the viability of the sourcing (i.e., “testing the water”), although this approach may risk insufficient commitment on the part of one or more of the sourcing parties and may thus set the stage for failure.

• Providing an extended transition period to allow for confirmation of successful assumption of responsibility and performance by the supplier, although this approach, like the pilot program, may risk insufficient commitment, making any change-management needs associated with the sourcing more difficult to fulfill.

• Utilizing relatively short-term contracts with extension rights to allow for flexibility in substituting solutions, although this approach may be less attractive to suppliers and may nonetheless create long-term dependence on the part of the buyer, despite the shorter term.

• Limiting offshore direct reliance and exposure by utilizing a US or other home-country supplier in conjunction with Chinese capabilities, although this strategy necessarily reduces potential savings opportunities and increases risks of successful service integration.

Again, lessons learned from prior sourcing experience can and should be applied in evaluating and approaching the dynamic and evolving Chinese sourcing market.


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