Archive for September 7th, 2008

Sunday, September 7, 2008

Great Quote

“Right-wing Conservatives hope for a dividend in heaven. Left-wing Conservatives  – the PDS/ML –  (promise) Heaven on Earth.

But progress is a snail. We are fighting for every inch.”

Franz Müntefering, designated chairman of the German Social Democrats (SPD)

(This is a very local topic, but it matters for Germany.)

Sunday, September 7, 2008

Every Fifth Production Operation Leaving China? – second thoughts

In some cases where German companies moved production to China “starry-eyedly” in the past, and where they are now considering pulling the plug, more disillusion may loom once they re-read their joint-venture contracts or their investment agreements with those authorities that approved their operations in China. One question is how clearly the Germans, in all these cases, have defined their rights to pull out if need be. Another is if the Chinese stakeholders – and authorities above all – view the relevant clauses the same way. Starry eyes tend to neglect the small print when negotiating and when putting their signature to the documents that launch their China enterprises.

It wouldn’t be too surprising if they announce their withdrawals first, and then still stay after all, fearing the repercussions of leaving (or trying to leave). Those repercussions (even only the judicial ones) will sometimes be hard to assess, and not every German company is a big one, to say the least. It would be smart to make a careful assessment of the withdrawal options before hurling an immature departure decision into the faces of the Chinese.

For that reason alone, I don’t expect the numbers of relocations out of China to be as high as the VDI estimate suggests. No matter if rising labor costs or lacking quality (or both) is the problem, the Chinese sites may get a second chance, or a third.

They will have likely allies both in China and in Germany. Hardly anyone of the Germans who made the decision to move production capacity to China, nor those Chinese who gave the project their blessings in the past will like to be proven wrong. And the heart of an investment is that the stakeholders want to see profits, not losses. Disappointment alone would be a faulty factor in reasoning. Besides, it is a plus to produce in China, if companies want to sell there.

There should be cases where neither the stakeholders themselves nor the courts or arbitrators will have to take sudden decisions. The German sides might consider another round of training, or improved kinds of training for the staff at their operations – or changes in staff. The Chinese sides may be ready to make concessions in terms of salaries, wages, and other cost drivers. And in the end, the customers will decide, anyway. No sales, no production. In that case, the operations will come to a silent death. Who could be blamed for that?

It takes both parties to succeed. But it may not take a big brawl to come to reasonable conclusions, in favor of or against an existing production site in China. However, it may take some more time, money, and more efforts.

That said, there will be withdrawals. And if future German projects in China will be based on more sober deliberations than some were in the past, it shouldn’t hurt.

For now, many questions are open at any rate. China’s challenges go way beyond the question as to how to attract foreign investment. Recent changes in the country’s visa policy suggest that the CCP leaders are either infighting, or preparing new development strategies.

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