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A while back there was a pretty good thread on this forum entitled Will your manufacturer be here in April? Now that we have passed April, the next challenge looms. I will start this one off with a Wall Street Journal article. So will YOUR manufacturer be here next week?

China’s bosses are abandoning ship
http://online.wsj.com/article/SB123215043508192065.html

Financially troubled plants are being abandoned by the boss, leaving behind unpaid workers and debts.

By Don Lee
November 03, 2008 in print edition A-1

First, Tao Shoulong burned his company’s financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

And just like that, China’s biggest textile dye operation – with four factories, a campus the size of 31 football fields, 4,000 workers and debts of at least $200 million – was history.

“We’re pretty much dead now,” said Mao Youming, one of 300 suppliers stiffed last month by Tao’s company, Jianglong Group. Lighting a cigarette in a coffee shop here, the 38-year-old spoke calmly about the bleak future of his industrial gas business. Tao owed him $850,000, Mao said, about 60% of his annual revenue. “We cannot pay our workers’ salaries. We are about to be bankrupt too.”

Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year, said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year’s end, he said, more than 100,000 plants will have closed.

As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China’s worst manufacturing decline in at least a decade.

Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold – prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories – many operations were pushed over the edge.

China’s engine slows

China’s industrial decline is a main factor in the sharp economic slowdown of late. The nation’s gross domestic product grew at an annual rate of 9% in the third quarter, the lowest in five years and worse than what analysts had forecast. China’s GDP expanded 11.9% last year. Now, economists worry that the one big remaining engine of global growth is rapidly losing steam.

Chinese leaders are trying to maintain stable and fast growth to control rising joblessness and the risk of political and social turmoil. Last month, Beijing increased tax rebates for many exported goods and pledged to take other steps to spur development, including prodding banks to boost lending to small companies. But many businesses and analysts are not optimistic.

“Honestly, I think whatever measures government would take at the current stage would not turn around this trend,” said Ye Hang, an economics professor at Zhejiang University. “The government can only try its best to put out a fire here and there.”

In recent weeks, there have been many fires, increasingly large-scale. In Zhejiang province, south of Shanghai, Ye counted at least six major bankruptcies, including Jianglong; Feiyue Group, China’s biggest sewing machine maker; and Zhejiang Yixin Pharmaceutical Co., among the largest in that industry.

“Of these six, one [owner] committed suicide, one was detained by police, and the remaining four all escaped,” he said. “I can imagine that in the future, there would be more such cases as a result of the chain reaction.”

The wave of factory closings began in Guangdong province, where the nation’s economic reforms were launched three decades ago.

The region accounts for about 30% of China’s exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.

By the official numbers, Chinese exports remained brisk through September, except for a few categories such as apparel, which fell 3% in September from the same month in 2007. But many exporters aren’t making a profit, and others are seeing shrinking orders or are starving for cash. Newspapers in Hong Kong, which is close to Guangdong, have been running virtually daily reports of the latest factory to falter.

“Don’t even mention the U.S. market,” grumbled Zhong Shijun, general manager of Foshan City Golden Furniture Co. “Even our EU market is dropping seriously in the last two months because the euro is depreciating.”

Toy makers are among the hardest hit. More than 3,600 such factories have closed – about half the industry’s total, government figures show. Most were small operations, but last month Smart Union Group’s three huge factories stopped production, leaving more than 8,700 workers jobless.

After workers protested in the streets, Guangdong’s government said it would cover $4 million in back wages and help them find jobs. But many others have no one to help them. Migrant workers generally don’t qualify for unemployment benefits, and although China’s bankruptcy laws give unpaid workers priority, that’s of little value if owners run away and there are few corporate assets.

Left without wages

Yang Shenggang, 33, had been at a Shenzhen shoe factory for seven years, working his way up from the assembly line, making $50 a month, to become a supervisor earning six times that amount. This spring, he said, the Hong Kong owner fell behind in paying wages.

One morning in September, the plant abruptly closed.

“The boss was just gone,” Yang said. “I have to get my five months’ salary back. My family needs money to eat and live.”

Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, a trade group with 3,000 members, said he didn’t know how many owners in Hong Kong had run away.

“I think it’s wrong,” Lau said. But he added: If a factory operator went by the book, it could take two years to close a shop because of regulations and red tape.

Others may flee not out of aversion to bureaucracy but because they want to get away with what cash they have left and not face angry suppliers, lenders, employees or regulators. Sometimes relatives and managers who help run operations flee too, and without anyone who can take responsibility, some factories have little choice but to shut down.

Lau’s trade group has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days.

“Once workers go home, they can close down the factory quietly,” he said in an interview in Hong Kong.

Taiwanese operate about 20,000 plants in Guangdong, and some of them also have walked away from their factories, workers and labor groups say. In northern China’s Shandong province, dozens of South Korean export company managers have fled, according to state-run media reports.

“If these laid-off migrant workers stay in the city, it might cause social problems in the urban areas,” said Cao, the Chinese academy economist. “But if they go back to their hometown, they won’t have enough to do to make money.”

Thousands of workers face that dilemma in Shaoxing, about 140 miles south of Shanghai. Companies with names such as Rich-tex and Sun-tex dot the city, the capital of China’s textile industry.

Industry giant falls

Few were bigger than Jianglong, which is Chinese for “River dragon.” The company posted sales of about $110 million and a profit of $14 million last year, according to its annual report. Its owner, Tao, boasted of the company’s sophisticated research and development capabilities and a base of global customers that included Wal-Mart.

Tao, a balding man with thick bags under his eyes, was a mystery to most workers and suppliers. He and his wife arrived in Shaoxing earlier in the decade, opening a four-person trading firm catering to Middle Eastern buyers, said people from Tao’s hometown in neighboring Jiangsu province.

By 2004, he was exporting $2.5 million of goods, and two years later, after listing the company on Singapore’s stock exchange under the name China Printing & Dyeing Holding Ltd., Tao bought two companies and built a massive factory outfitted with Japanese and Italian equipment. This year, as he began to miss or delay payments to suppliers, Tao told them he would soon be raising tens of millions of dollars by listing the company on the Nasdaq Stock Market.

But Tao’s plans were foiled by the global financial crisis and the sudden turn of fortunes for exporters, according to suppliers, many of whom fault the local government for supporting Tao and continuing to assure them and employees that the company’s listing on Nasdaq was on track.

Government officials said last week that Tao and his wife had been caught, but they refused to comment further. “It’s very hard for me to analyze why or how it had this problem,” said Jin Agen, vice director of Shaoxing’s Publicity Department.

On the day Jianglong was shut down, 2,000 workers jammed the streets outside the factory, blocking traffic and demanding answers. Several hundred police officers scuffled with workers. Later that day, government officials agreed to pay employees.

“I’ll go home and farm,” said Yang Chaoxian, 43, who had earned about $260 a month working 12 hours a day, seven days a week. “Labor here is too hard,” said the Chongqing native, a cigarette tucked behind his ear. “After I leave, I don’t ever want to come back.”

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By Susan Fenton
Reuters
Thursday, March 5, 2009

HONG KONG: China's hopes for a speedy export recovery from the global crisis could be undermined by the weakest links in its powerful supply chain - smaller companies too damaged by the downturn and credit crisis to get goods to market.

As collapsing sales to recession-hit Western markets weigh on China's economy, bankruptcies pose a growing risk to its export machine, threatening everyone from suppliers of crucial parts and materials to companies that transport finished products.

Struggling Chinese exporters are facing higher costsand need to keep closer checks on suppliers, and a shrinking pool of financially healthy companies to deal with is limiting their vaunted flexibility, slowing down delivery times.

"The financial crisis is creating a situation that is unparalleled. If a Chinese company cannot sell to a Hong Kong company, which in turn cannot sell to, say, a foreign department store, each of their businesses will be affected," said Satpal Gobindpuri, a partner in Hong Kong at the DLA law firm. "It's creating a domino effect."

PricewaterhouseCoopers estimates that 670,000 small companies have closed across China because of the global crisis.

In addition to tumbling exports, companies have been hit by a squeeze in credit markets. About 90 percent of world merchandise trade is funded by trade finance, such as letters of credit.

A report Wednesday showed that factory output and new orders had returned to mild growth in February after shrinking for four months, though analysts cautioned about reading too much into the rise.

Wing Fung Optical International of Hong Kong, which makes sunglasses and eyeglass frames in the southern Chinese city of Shenzhen, has seen sales skid 25 percent in recent months as demand shrank in its key markets, Italy and the United States.

But its director of business development, Raymond Chan, said recent bankruptcies among suppliers posed a bigger risk to the company.

When a parts supplier went bust recently, sending Wing Fung scrambling to find an alternative source that could offer the same quality, delivery on a U.S. order was held up by two weeks - a delay that could have cost Wing Fung its customer.

"Delivering on time is crucial if we want to stay competitive," Chan said.

Adding to the problem is that many owners of small businesses in China arerunning away and leaving their companies in legal limbo, often just posting a notice on the factory door. Customers are left in the lurch with no chance of getting back any money owed or receiving goods they have ordered.

"They see no point in winding up operations properly if they don't have assets to pay creditors and workers," said Gobindpuri, the Hong Kong lawyer.

The risk-consulting company Kroll said it had seen a surge in demand for checks on Chinese suppliers. Red flags include workers not being paid on time or being laid off, delays in delivery times and a sudden shift to a new business.

"If a supplier is moving into another area of business, they're doing it for a reason," said Jack Clode, the Kroll managing director of business intelligence and investigations. It also means the existing "customer may no longer be a priority."

Clode, who foresees a sharp increase in factory closures in China this year by midsize Western companies as their domestic demand evaporates, said financial strains were also prompting suppliers to cut corners with cheaper materials.

Wing Fung, the eyeglass maker, has cut its number of suppliers by a quarter in recent months, dropping those that are late paying their bills. It also said it was extending credit to longstanding, reliable suppliers who are having short-term financial difficulties.

Chinese manufacturers are also growing worried about the health of their customers in the West as economies there worsen.

For the first time, Kroll is being asked by Chinese companies to conduct due diligence on Western customers.

"Li & Fung set off alarm bells," said Clode, referring to the Hong Kong blue-chip, global supply-chain manager.

Li & Fung sources goods for Wal-Mart Stores, among others, and is the biggest creditor of KB Toys, the former leading U.S. toy retailer.

When KB Toys filed for Chapter 11 bankruptcy protection in December, Li & Fung was owed $5 million.

Wing Fung was also caught last year when an Italian wholesaler suddenly went out of business. The Hong Kong company is still awaiting payment for goods, but does expect to be paid eventually, which is not the case with its bankrupt Chinese suppliers.

While rising bankruptcies are raising the risk of doing business in China, the country is unlikely to lose its status as a low-priced global trade center, not least because many companies are focused on the country's huge domestic market in the long run.

A survey of multinational companies in China, released this week by the U.S.-based management consulting company Booz & Co., showed that 90 percent of 108 respondents said they had no plans to relocate from China, up from 83 percent in a similar survey a year ago. Executives cited China's domestic market as the main reason for staying put.

The chip maker Intel recently announced it would close plants in Malaysia and the Philippines but would stay in China, relocating from Shanghai to Dalian in the northeast and Chengdu in the west, where land and labor costs are lower.

Wing Fung has also considered shifting within China rather than leaving.

"Everything is available in China, all the parts," Chan said.

http://www.iht.com/articles/2009/03/05/ ... s/yuan.php

Postby Timf » March 6th, 2009, 12:16 am

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millstonetrading,

Thanks for taking this topic back up. The articles you site are very interesting, especially where they state that the reason for staying is to tap the China market rather than low price export. other things that have happened is that 50% of all toy factories have closed.

It gets more interesting all the time and really hints at a need for a paradigm shift.

Keep them coming :)

Postby millstonetrading » March 26th, 2009, 11:39 am

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Definitely an interesting time to be doing business in China (and Asia). About a year ago we let go of one of our salespeople (a foreigner - not local Chinese) as the downturn hit the furniture industry first so we felt it quite early on. He was simply too costly. He did find a new job fairly shortly after with a much larger, more established, better financed company which was a good thing. However, just the other day, he stopped by for a visit and informed me that almost a year to the day, they then laid him off as well for the same reasons. I was quite surprised - that company seemed to be very well established. Seems to be the story everywhere.

My point is it seems the bigger manufacturers are letting go off anyone non-essential staff or just going under (see link to Decoro below), the smallest companies are definately going under, and those in-between seem to be shifting phase either into other products/services or else focusing on other markets - mainly domestic China. The larger ones with fancy marketing and well written business plans seem to big and clumsy to change quickly. Its the medium sized ones who are making the switch.

The real question is has the ripple effect really hit China yet. The Chinese are legendary for saving and skimping on costs, but after so long, some of these guys are spread pretty thin, even if they are doing domestic sales. I think its possible some of them may go under just when the rest of the world starts to pick back up mainly dying from a slow starvation.

Either way, there is definately a big shake up in the design and manufacturing industry and it will be interesting to see what the landscape looks like after things settle back down.

http://www.acf-china.com/blog/2009/02/23/decoro-the-rise-and-fall-of-an-italian-leather-upholstery-producer-in-china/

Postby one-word-plastics » March 26th, 2009, 12:28 pm

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I've been following all of the gloom-and-doom articles about the Chinese economy over the last year. I've been doing business in China for almost 25 years and have seen both the rise and fall.

This article just came out in The Atlantic magazine and it makes some interesting observations about how China can use this global meltdown to their advantage. It's written by an American living in China, so it has a better perspective than most of the articles I've read.

http://www.theatlantic.com/doc/200904/chinese-innovation

Postby millstonetrading » April 12th, 2009, 1:48 am

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Its a good article.... I tend to like this guys writings and have read many in the past. Some general counter comments (with quotes from the article) for the sake of discussion:

When it comes to business and politics, China will always win but not for the reasons mentioned in the article. Its much more then just "economics." The reasons are multitude but the largest factor is much of the rest of the world is just simply not ready for China's way of doing things. Ill prepared, naive, fearful of giving constructive criticism and prey to profit and flattery when required and as well as fatally clinging to the belief that people are generally all the same with similar ideals and goals. In many ways the world has reversed course and returned to 200 years ago when kowtowing to the emperor was a prerequisite to trading with the middle kingdom.

China marches to the beat of a different drummer - one which is not constrained by any of the normal factors the rest of the world considers from ethics to human rights to pollution to mutual respect. In many ways China (and thus its people) are like amoebae - able to morph into any shape that suites the situation. Masters at drawing comparisons between apples and oranges when it suites them. Able to blur the line until even the original point is a grey haze. Almost like the perfect virus which multiplies and adapts without funny notions like morals, mutual respect, long term thinking or win-win.

Because it makes so many of the goods the world isn’t buying now, China stands to be worse hit than the rest of the world —just as America was during the Depression, when it was the world’s sweatshop. But like America then, China will use tough times to design innovative products that will get it the high profits and the high-value jobs Americans kept to themselves for decades

China manufactures mass quantities of low quality garbage which is resource intensive and highly polluting. Yet criticize them about this, and the Chinese response will be "its your problem since we make it for you." The outside world yes yet to remind them, that they manufacture this by choice because it turns them a tidy profit - in fact, made them rich. And what about the fact that they also NEED all the even poorer quality items which have failed quality control in order to sell domestically at even lower prices. If China was not manufacturing garbage for the rest of the globe, it would have nothing to sell domestically to the local population which buys primarily based on lowest price. Stores are filled with low quality cost goods mainly from factories that can't pull themselves up to make export quality.

Chinese quality has improved, mainly due to foreign investment and huge amounts of blood sweat and tears in the factory teaching them how to do it right. And patience. Lots and lots of "patience" and "we will get right next time."

Giving factories incentives to go green is a lost cause - most factories would simply find ways to "pocket" that green money. In fact, I am sure they would prefer the world just clean everything up for them. That would be the ideal situation since the rest of the world would both fund their factories through investment and at the same time pay for the cleanup. For China this is the definition of win-win.

When China needs to, its a poor rural "developing nation" - especially when it comes to contributing to the world bank and carbon emissions. Other times, like when it comes to having a say in world affairs, it suddenly says its a rich and developed place with modern cities.

With human rights, the US is the terrible aggressor which China qill be quick to point out when criticized yet comparing Guantanamo to a Chinese prison is like comparing the Hilton to a tin shack with a dirt floor, leaky roof. The US is getting criticism from a country with mobile execution units, closed trials and horrors unmentionable here.

"At the Davos conference in January, Premier Wen Jiabao made the point by outright scolding America for dragging down everyone with its excesses. "

Without investing in foreign and US government bonds their currency would instantly appreciate causing their manufacturing sector to collapse. Sure, China is the largest holder of US foreign debt but lets not forget that this is intentional. They NEED to buy that debt to keep their currency undervalued. Nor can they invest this money domestically as it would have the same effect. Amazingly though the Chinese PR machine paints themselves as doing America a favor by buying its debt. Its almost a bit like the Stockholm syndrome - the hostage actually believing the hostage taker is acting in their best interests... Someone should scold them for not investing more of that money into things like rural hospitals, education and pollution controls.

Layoffs and stagnant wages? People have seen worse. Last summer my wife and I went through villages in Sichuan province where refugees from earthquakes prepared for the next few years of residence in temporary shelters and tents.

Interesting that no one is mentioning there is pretty strong evidence that this earthquake was caused by the three gorges dam. (Dams are one of the most common causes of man made earthquakes).

"The real counterpart to Smoot-Hawley would be Chinese protectionism......... - as with its recent pressure on China’s airlines to cancel outstanding orders for Boeing and Airbus airplanes."

Isn't China building its own airplanes now meant to compete against Boeing and Airbus? Canceling orders in order to become a competitor i's not protectionism.

Don't get me wrong - I love China and have devoted 1/3 of my life to it but I think its about time the rest of the world starts getting smart and leveling the playing field. Its good for us and its good for China who will sooner or later need to mature. Besides, its always good to look at both sides of the coin.

Postby iab » April 13th, 2009, 4:47 pm


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millstonetrading wrote:Without investing in foreign and US government bonds their currency would instantly appreciate causing their manufacturing sector to collapse. Sure, China is the largest holder of US foreign debt but lets not forget that this is intentional. They NEED to buy that debt to keep their currency undervalued. Nor can they invest this money domestically as it would have the same effect. Amazingly though the Chinese PR machine paints themselves as doing America a favor by buying its debt. Its almost a bit like the Stockholm syndrome - the hostage actually believing the hostage taker is acting in their best interests... Someone should scold them for not investing more of that money into things like rural hospitals, education and pollution controls.


I found this to be very interesting. Pardon my lack of knowledge, but why would their currency appreciate if they did not invest in US bonds or if they had internal investment? What is the mechanism at work in this situation?

Edit; I kind of get it about the internal investment. If they invest there, they need to get a return and the only way to do that is by raising the prices of their goods. Is that it? Is it similar for the purchasing of bonds?


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Thanks so much for useful info

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I'll preface these comments with this: we've been designing, manufacturing and exporting from China and South America for about 15 years (early in that time I was senior staff with a Fortune 100, then midway thru this journey I left to build our current company). I've found it is easy to manufacture in China (and as a PM I can drive innovation) but tough to sell innovation for its own sake to Chinese manufacturers.

Lots of good comments and observations in the posts and article links above but I tend to think China is going to be hurt from this Global recession and the idea that they will recover stronger is optimistic - I think they'll need to change their ways to make that happen. China relies heavily on Europe and North America, secondarily on South America and others - all those regions have been hit and so China will bear the wrath of that in total - figure they're halfway thru a 3-5 yr slump.

Add to that China's continuing resistance to stand back from a problem and innovate to find a solution (they love to use the term to capture the minds and hearts of customers and they smile all the while but they don't yet REALLY appreciate what it represents) and the result is soon to be a horse with either a broken cart or no cart at all.

The stories of the big bosses running away are true, and I can attest to that personally, as our company took a high 5 figure loss in 2008 from one such boss, but in that same time and since we have recouped the loss from other Chinese partners who did not slow down and who continued to use our services, but in general terms I'm not sure our Far East clients have truly valued the innovative solutions we help them uncover...they don't do it themselves and their generation of up and coming designers and CAD jockeys don't do it yet either - that's a big problem for them.

China should beware the last piece of the puzzle - the double edged sword called the US...downtrodden, in debt, lied to for the last 10 years...only recently have its citizens been awoken from their slumber and told the truth. The US will begin a rebirth of innovative thinking and doing as a whole, just like after the Great Depression...but who will they choose to be the manufacturer of their innovative new world of products? There have been grumblings of 'where's the next low-cost manufacturing base'...is it Turkey, the Eastern EU, South America? Or will the US once again turn to China and help them while it helps itself?

Good stuff to consider.
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Scott,

While I agree with the statements you have made, I think we are moving towards a tipping point where China's internal market will dwarf the current trading partners. As an individual, the Chinese do not hold the same purchasing power but as a mass their purchasing power cannot be ignored.

I am so happy this topic has popped up again. lets keep it going.

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Tim / all,

I noticed no one else piped in after we last talked shop. An interesting and related development is happening for our group at the moment. While demand for our innovation and development services has lessened from our Chinese clientele, a better alternative is showing it's potential. We're working with one of our guys on the ground in China and a newly formed distribution arm to export 'made in the USA' products for sale in China. As you'd expect, we've had to filter the potential products based on the chance and speed-to-market of knock-offs but this is an opportunity for which we'd been waiting nearly 5 years - only now is it feasible, as the Chinese middle class is beginning to show true purchasing power along with an equal desire for Western brands.

While we might selfishly hope to see a continuation of less manufacturing in China with a parallel rise of a return to US manufacturing, I'm not so sure that will really happen. I think other developing regions will simply take the torch of low-cost labor from China - so we're going to bet our investments on products made here that offer true value-add and have unique appeal to targeted groups of Chinese consumers.

As I can share more in the coming year I will do so. We're excited about the idea of turning the tables for the benefit of both sides.
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Generatewhatsnext,

Thanks for bringing this back to the forefront. I am currently helping a client set up manufacturing in the US for what would traditionally be done in China. It helps that we have developed a smart business model that helps make US manufacturing more appealing. I have been amazed at how easy it has been to find what this client needs. And I finally see that some manufacturers get what they need to do to bring manufacturing back to the US. Turnkey approach to create fully packaged products, an ability to source minor components from China where needed, and interest in both the client's business model and friendliness towards start up manufacturing needs are all refreshing to see.

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I wish we were having as much luck on that front Tim - we have done parallel sourcing efforts for several clients over the past few years - in each case the domestic one-stop-shops are still too rare here. So, we've taken it into our own hands to help bring some life back to consumer products made here.
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It would be fitting after moving so many things to China in the 1990's.


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