Experts: Outsourcing Needs Constant Care

As the global financial crisis appears to be gradually waning, European companies may soon pick up the outsourcing of cost-heavy manufacturing operations to China. But according to research carried out at the Aarhus School of Business in Denmark, such outsourcing should be handled very carefully, especially if you are a small- or medium-sized enterprise (SME), or your quest for cost-efficiency and increased competitiveness could end up as a truly expensive nightmare.

The main reason: Danish (and generally European) and Chinese business cultures differ greatly in several key areas. So even though wage costs may be significantly lower if an SME outsources to China, unforeseen hindrances may end up costing a lot of money to solve.

According to Poul Houman Andersen, a professor in international marketing and head of the Center for Design of Global Enterprise (DoGE) at the Aarhus School of Business, one of the key potential troublemakers for Danish companies in China is the concept of trust. Danish companies are generally known for the unusually high degree of trust they harbor towards most players both in- and outside their organizations. Thusly a Chinese supplier will often be awarded with a lot of responsibility, as the Danish partner trusts in his or her ability to independently adjust the details and find the best solution during the manufacturing process. But according to the Danish research – gathered through case studies and interviews with nine DK SMEs and several suppliers – such a situation is where Sino-Danish collaboration can really hit a snag.

"In Denmark everything doesn't necessarily have to be broken down into every detail, and Danish companies don't expect that to be the case in China either. But very often the Chinese suppliers need to be "led by the hand" a lot more than expected, and guided very precisely through the manufacturing process. Otherwise you risk ending up with a finished product that doesn't match what you ordered", says Professor Houman Andersen.

Lack of flexibility

According to the professor, another factor also plays a significant role in Sino-Chinese mix-ups: A lot of Danish SMEs want to manufacture highly specialized products in lesser quantities, which demands a certain level of flexibility from Chinese suppliers. But such an approach clash tremendously with most Chinese companies' main focus: To secure as big and as standardized a production as at all possible.

"Small- and medium-sized companies in China have a somewhat lesser chance of getting loans, which means that they are always on the lookout for productions where costs can be kept down and profits are fairly predictable. Consequently the suppliers regard mass production of standardized products as the best solution, and that's something Danish companies need to be aware of", says Poul Houman Andersen, and adds that the fact that many Chinese companies are owned by families with little specific technical knowhow, also serves to explain their preference for standardized mass production.

All this means that Danish companies might end up having to station a homegrown employee in China, in order to supervise production and correct details – an expense often not anticipated by cost-efficiency-hungry executives in Denmark.

"In China, things like deadlines, product specifications and pricing agreements are more often looked upon as guidelines rather than fixed deals. This means that if Danish companies aren't constantly keeping everything up to speed, they may end up being given a lower priority than more demanding customers", says Professor Houman Andersen. "A contract isn't assigned the same legal importance by Chinese, as it is by Danes".

It's still a good idea to outsource to China

However, all this doesn't mean that outsourcing your manufacturing operations to China isn't a good idea. But in order for a company to be successful in such an endeavor, it has to prepare itself as well as possible, by seeking qualified advice and conferring with others who have already been through the process.

"Especially the small- and medium-sized companies need to stay vigilant and prepare themselves thoroughly, as they may not have the option of sending a person out to supervise the production in China fulltime. Outsourcing requires a lot of resources and the communication needs to be constant and extremely precise", says Professor Poul Houman Andersen, Aarhus School of Business.

Full story in Danish

News category: Denmark