Topic Category: Manufacturing

In today's dynamic global environment, companies often need to implement new strategies to remain competitive. For many manufacturers, production sharing is part of the answer.

Also referred to as co-production, cross-border manufacturing and outward processing, production sharing occurs when producers in different countries share in the manufacturing of a product. For example, a Detroit auto parts manufacturer may team up with a Mexican company to produce high quality and competitively priced products.

Production Sharing Benefits Are Vast

Cross-border manufacturing allows companies to:

1. Complement each others’ strengths in order to create greater value;
2. Gain access to unique technology, raw materials, and specialized intermediate inputs;
3. Reduce overall costs;
4. Provide an important market for a company's component exports;
5. Retain higher wage jobs, product development and design, capital-intensive manufacturing, and marketing-related activities in the United States; and sometimes
6. Provide the only means to keep companies in business.

Cross-Border Manufacturing Is Growing Worldwide

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union (EU), most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production also is taking place in Northern Africa.

How big is production sharing? According to The World Bank, production sharing involves more than $800 billion or 30% of total manufacturing trade annually.

U.S. Tariff Code 9802

U.S. exports of components are co-produced abroad and often re-imported by the U.S. as finished goods. In most cases, these imports are entered into the United States under section 9802 of the U.S. tariff code.

Under 9802, U.S. materials assembled, processed or improved abroad can be shipped back to the United States, incurring duty only on the foreign labor and non-U.S.-made materials. As a result, these imports — which often contain substantial U.S. content — can be more price competitive than other imports with no U.S. content.

Outward Processing Advanced in the Auto Industry

Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As such, levels of productivity and competitiveness during the 1990s increased significantly.

The U.S. auto industry is no exception. As global competition continues to increase, production sharing is one strategy employed by U.S. and foreign auto producers to stay ahead of the curve. This may involve, for example, the capital, technology and engineering skill of a U.S. producers with precision assembly provided by a Chinese partner. The result: an attractive top quality product.

In 2002, U.S. imports under 9802 of automobiles, trucks, buses, bodies, and chassis from Japan reached $18.6 billion. Germany followed with $9.3 billion; the U.K., $1.8 billion; Sweden, $1.8 billion; and South Korea with $1.5 billion.

North American Auto Industry Is Highly Integrated

Since vehicles assembled in Canada and Mexico are eligible for U.S. duty-free treatment under the North American Free Trade Agreement (NAFTA), only a small percent enters the U.S. under the 9802 tariff code.

For example, according to the U.S. International Trade Commission (ITC), in 2002, U.S. imports of automobiles, trucks, buses, bodies, and chassis from Mexico and Canada under 9802 were $618 million and $36 million, respectively. However, in 2002, co-produced U.S. imports of motor vehicles from Mexico not entered under 9802 are estimated at $19.5 billion. Co-production data from Canada outside 9802 is not available.

How Important Is Production Sharing?

In the late 1980s, the ITC conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this Customs provision was eliminated, the firms said they would:

• Turn to foreign suppliers of components;
• Drop labor-intensive products and import them from East Asia;
• Move all manufacturing to Asia;
• Cut back U.S. production and target a market niche not threatened by imports; or
• Go out of business.

Since then, production sharing has become vastly more important to U.S. companies and workers. According to the ITC, it has been responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition.

Consider the Pros and Cons

Sharing manufacturing strengths with high and low-wage countries has become an important strategy for many companies. However, while co-production has been beneficial for many firms, some have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, several firms have abandoned their efforts.

Co-production can be a means to achieve a higher level of global competitiveness. However, before engaging in production sharing, it’s essential to fully understand your needs, in addition to the needs of your partners, their culture and their environment.

The events of September 11, 2001, the recent war in Iraq and the threats of future terrorism have forced Americans to identify and eliminate vulnerabilities. In doing so, our trade and transportation systems have become a major focus.

The Maritime Industry’s Challenge

An integral link in our transportation system and supply chain, the maritime industry is crucial to U.S. economic success. The impact of a terrorist attack on our waterway system could be enormous. Why? More than $738 billion or 7.5% of U.S. gross domestic product is derived from waterborne cargo.

The maritime industry already has implemented several important security measures. One of the most sweeping is the U.S. Customs’ 24-hour manifest information rule. Initiated on December 2, 2002, it requires sea carriers or non-vessel operating common carriers (NVOCCs) to electronically provide detailed descriptions of U.S.-bound sea container contents 24 hours before containers are loaded at foreign docks. This is designed to help Customs better analyze container content and identify terrorist threats.

Non-Compliance Will Not Be Tolerated

On February 2, 2003, after a 60-day phase-in period, Customs began fully enforcing the 24-hour advance manifest regulation. According to U.S. Customs Commissioner Robert C. Bonner, “all parties who have implemented the rule seriously deserve commendation, but for those who have not, U.S. Customs will not tolerate non-compliance.”

Although an important step in preventing terrorism, the rule is likely to impact your imports and supply chain. As a result, it’s necessary to become familiar with the regulation’s requirements and carefully implement them in order to prevent supply chain disruptions.

You Must Utilize AMS

All cargo declarations are required to be sent to Customs via its automated manifest system (AMS). If you are not set up on this system, you can utilize a service provider or a port authority who is, or you can provide paper documents to your carrier for input into AMS. Visit www.cbp.gov/xp/cgov/import/carriers/ams_ports/for a list of entities using the direct interface system.

Common Terms No Longer Accepted

The use of common cargo descriptions such as “said-to-contain,” “general merchandise” or “freight-all-kinds,” are no longer accepted. Instead, a precise narrative description of the cargo or its six-digit tariff number must be supplied. In short, Customs must be able to identify physical characteristics and packaging so irregularities can be determined. The cargo’s description also must be precise enough to identify any goods which may emit radiation. For example, “electronics” is not an acceptable description, but “CD players” or “computer monitors” are.

Beware of Do Not Load Messages

As of the phase in period, Customs Service ports began to issue “do not load” messages to sea carriers and NVOCCs not in compliance with the 24-hour rule. In fact, between February 2 and April 29, 2003, Customs reviewed more than 2.4 million bills of lading, and approximately 260 containers with inadequate cargo descriptions were denied loading for violation of the 24-hour rule. However, most of these violations were resolved in time for the shipment to make its original voyage.

If carriers or NVOCCs are found in non-compliance, they may be fined between $5,000 and $10,000, their container may not be allowed to be unloaded at the port of destination, or the vessel may even be denied docking privileges. And although an error may arise because of false information provided by the shipper, Customs will still pursue the party it regulates — the sea carrier or NVOCC.

In addition, if a container is examined by Customs, either at home or abroad, and the manifest description of the contents is in Customs’ opinion inaccurate, carriers can be held liable for penalties and NVOCCs can be held liable for liquidated damages.

Greater Shipper Disclosure Required

In the past, Customs may have only received information that identified the shipper as a carrier, importer or even a bank, which didn’t allow Customs to track specific shippers. Today, specific information about the shipper is required, including the shipper’s full name and address. If shippers don’t comply, they run the risk of closer scrutiny and increase the likelihood that their container will be examined. Furthermore, Customs may be more inclined to issue do not load messages.

Other Important Issues at Hand

Because more detailed information is now included in the manifest, shippers are concerned that their information could be obtained by competitors or criminals. And, if competitors learn of a new foreign source or identify a strong U.S. buyer by reviewing the data, the shipper could lose its competitive advantage. To prevent this, shippers should request confidentiality. They also should talk with their customs broker or freight forwarder to protect themselves from potential misuse of information.

Truck or Rail Cargo Is Exempt

The 24-hour rule does not apply to cargo that is shipped to Canada or Mexico and then brought into the U.S. by truck or rail. However, if Customs suspects goods are being routed in an attempt to evade scrutiny, those goods will likely be treated as high risk.

C-TPAT Membership Offers Benefits

It is expected by Customs that members of the Customs-Trade Partnership Against Terrorism program (C-TPAT) will provide the required 24-hour information as a regular part of their security-related procedures.

Although C-TPAT participants will not be excluded from advance reporting requirements, their participation in the program may assist them during the targeting process. Furthermore, C-TPAT participation by the carrier or NVOCC may be a mitigating factor in the case of penalties.

Keep Operations Running Smoothly

Supply chain managers should note that other modes of transportation, such as air, rail and truck, soon will be subject to advanced notification requirements from Customs, too. So what can companies do to ensure successful business operations as a result of the new 24-hour rule?

To begin with, each company must contact Customs and review all the details. Importantly, firms need to reevaluate their supply chain to ensure that every involved organization, starting with the overseas exporter, understands the rules and is complying. Then, it is vital to determine where changes need to be made and to quickly implement them. The traffic departments of both exporters and importers should work closely together and with all intermediaries to build in the necessary lead times and prepare the required information accurately.

Keep Abreast of New Requirements

The 24-hour rule, along with a variety of others, likely will change over time. As a result, it is vital to keep abreast of changes and new requirements. For more details about the 24-hour rule, go to www.cbp.gov/xp/cgov/import/carriers/24hour_rule/ or contact your local U.S. Customs office.

Due to the unfortunate events of September 11, 2001, the war in Iraq and new threats of terrorism, the United States continues to examine its vulnerabilities. To keep America safe, new national security initiatives have been announced almost weekly.

To date, many security improvements have been made, including bullet proof cabin doors on airlines, stricter border crossing identification requirements, and the passage of both the Homeland Security and the Maritime Transportation Security Bills.

But how will this impact your supply chain?

Homeland Security’s New Initiatives

The new Homeland Security Department is responsible for analyzing intelligence on cyber, nuclear, chemical and biological terrorism, protecting the U.S. infrastructure, guarding our borders and airports, and coordinating responses to future emergencies. In short, Homeland Security combines the entities responsible for coastline, border and transportation security.

Although imperative to our country’s future safety, these measures have caused supply chain disruptions. To avoid problems associated with longer waits at ports and borders due to increased inspection and identification requirements, some supply chain managers have shifted to a “just in case” inventory, rather than depending on “just in time” delivery.

Cargo Inspection Improvements

The United States' 361 sea and river ports are responsible for the transfer of more than 2 billion tons of freight annually. Yet, until recently, only 2 percent of containers arriving here were inspected. Through new U.S. Customs initiatives centered on inspections, risk reduction and container security, this has improved.

In the past, Customs primarily used physical inspections to examine cargo. Today, technological inspections are becoming the norm. Not only do x-ray and gamma ray machines increase the speed of inspections, but they are more effective at detecting dangerous substances and/or suspicious materials than dogs or humans. Technology, however, is not error-proof and mistakes can cause delays.

Inspections at Home and Abroad

To address suspicious cargo entering the U.S., the Sea Cargo Targeting Initiative is in place. It includes the processing of all manifests through the Automated Targeting System and the standardization of Customs procedures and practices.

In addition, non-intrusive technology is being used to examine potentially high-risk containers and their seals. By doing this, Customs is trying to quickly separate cargo into general and high-risk categories, limiting any delays for general cargo.

Two other programs, the Container Security Initiative (CSI) and the U.S.-Canada Smart Border Plan, are now being used to scrutinize inbound containers. Under CSI, U.S. Customs personnel are stationed at 20 ports throughout the world, including Singapore, Antwerp, Le Havre, Bremerhaven, and Hamburg. These personnel, in coordination with the host country, identify and pre-screen U.S. bound containers before they are even loaded.

Since cargo destined for Canada and U.S. are often transshipped through each others' ports, both countries have assigned Customs personnel to inspect cargo bound for each others' countries. The ports currently involved in the Smart Border Program are Newark and Seattle in the U.S. and Vancouver, Halifax and Montreal in Canada.

Risk and Information Gathering

Information gathering is a key piece of U.S. Customs’ new approach. In fact, in February 2003, Customs enacted the 24 hour manifest rule. This requires carriers to electronically send detailed manifest information at least 24 hours in advance of loading cargo on a ship destined for the U.S. If Customs is unable to process the manifests in a timely manner, it could mean costly delays for shippers and carriers, and negatively impact your supply chain.

Another new initiative, the Customs-Trade Partnership Against Terrorism (C-TPAT), is a voluntary program designed to improve supply chain security. Participating businesses agree to self-assess their supply chain security, submit a supply chain security profile, create and implement a supply chain security program, and communicate C-TPAT guidelines to other businesses with which they work.

For doing so, participants may have fewer Customs inspections when their cargo arrives in the U.S. — a way to keep supply lines intact and running smoothly.

Improving Container Security

Currently under development are tamper-proof seals for containers that will indicate if containers were opened. Also being developed are new containers and global positioning system transponders which will track containers in real-time and determine if they alter course or schedule. As such, to expedite their shipping process, companies should think about obtaining these new products.

Adapt to Tomorrow's Changes

In order to comply with today's new security initiatives, supply chain managers need to stay abreast of new regulations and implement new procedures. And this may require the purchase of new technology and equipment.

But to successfully keep your products flowing tomorrow without disruptions, you may need to develop a new and flexible strategy that will keep you one step ahead of the curve.

Sharing different stages of the manufacturing process with producers in different countries has many benefits. For example, it can result in lower manufacturing costs while increasing your level of global competitiveness.

Importantly, this process can help retain jobs that would have been lost due to competition and even grow them in capital-intensive manufacturing, product development, design, and marketing related activities here in the United States. During periods of slow economic growth, these advantages are worth considering.

Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As a result, levels of productivity and competitiveness during the 1990s increased significantly.

The Manufacturing Process Is Evolving

In the 1990s, the manufacturing industry grew faster than the U.S. economy and generated 29% of gross domestic product (GDP) growth. This is significantly greater than its 21.5% contribution in the 1980s, according to the National Association of Manufacturers (NAM). In addition, manufacturing productivity (output per man hour) grew by 3.1% annually from 1991 through 1998. This was considerably higher than productivity in non-manufacturing sectors.

The September 11th terrorist attacks on the United States and additional potential attacks here and abroad require the business community to reassess its international strategies and practices. For many, this will involve accommodating change and managing disruptions in supply chains, inventories, travel frequency and destinations, overseas buying patterns, accounts receivable risk, and shipping and insurance costs. A number of new issues will need to be considered and important questions answered for any business preparing to do business internationally in 2002.

Is Your Supply Chain Vulnerable?

U.S. companies that rely on foreign-made components or material to complete their manufacturing process need to establish a plan should their supply chain become disrupted. And for those companies that rely on just-in-time deliveries, it may be wise to maintain larger just-in-case inventories or identify additional suppliers.

In 2000, U.S. companies imported more than $1.2 trillion in merchandise. Of this, $367 billion was purchased from suppliers in the Western Hemisphere and $257 billion from suppliers in Europe. Asian suppliers provided $485 billion in goods, representing the largest share at 40% of total U.S. imports. Since the September 11th terrorist attacks, the U.S. State Department has identified related security threats in Indonesia, the Philippines, Pakistan, and many other countries. Should ocean shipping lanes be affected in the South China Sea or in the Strait of Malacca — a particular vulnerable point due to its narrow passage between Malaysia and Indonesia — imports from countries in the region and marine vessels en route may be required to take circuitous routes, thereby delaying delivery.

Is Your Product at Risk for Delay?

Manufacturers and distributors who rely on merchandise worth $80 billion from Singapore and Malaysia (the United States’ 10th and 12th largest suppliers), the Philippines, Indonesia, and India might consider alternative strategies for guaranteeing timely deliveries. The dominant products imported by U.S. companies from Malaysia, the Philippines, and Singapore include computer equipment and parts, as well as semiconductors and other integrated circuit devices. However, delays resulting from sabotage in the Strait of Malacca are mitigated since most of these products are shipped to the United States by air and not by sea.

Many of the components used in the assembly of these products originate in the United States, reflecting production-sharing arrangements. Popular U.S. imports from Indonesia include footwear, apparel, natural rubber, and other goods which are often delivered by ship.

Should Orders Be Placed Sooner?

Due to potential civil unrest in particular countries, as well as new U.S. customs and transportation security procedures delaying ocean and air shipments, purchase order lead times on overseas custom-made goods are likely to increase.

Consequently, custom designed electronic components ordered from Malaysia or private label apparel knitted in Pakistan may need to be ordered weeks or even months earlier than normal to ensure delivery by a specific date. This will undoubtedly add to inventory costs. But as many manufacturers well know, unavailable or delayed inputs can slow production schedules to the point of jeopardizing customer relationships.

Will Your Importers Continue Buying at Current Levels and Pay On Time?

During this period of unusually slow global economic growth, coupled with regional political instability and civil unrest, overseas buying patterns may be disrupted. As a result, it is important to identify your most vulnerable target markets and reassess export destinations, focussing on economic strength and political stability.

Importantly, the level of international receivable risk may climb. Commercial risks, mainly viewed in terms of the credit strength of the buyer, involve the buyer’s ability to pay, terms of payment, and the credibility of the buyer’s bank. If the commercial risk is questionable, consider more secure payment vehicles.

Has Foreign Country Risk Increased?

In various parts of the world, country risk, as well as commercial risk, have risen. Country risk involves economic, political, and social risks that are largely beyond the control of the buyer, but can seriously impede or prevent payment. Generally, economic conditions are reflected by growth, inflation, unemployment, balance of trade, and taxes.

Political risks are often assessed in terms of country stability, and sometimes measured by the level of confidence in a government. Social factors usually include social unrest and violence. Should social turmoil envelop a nation, the disruption of activities could put your foreign buyer’s business at risk. And, a new government may impose economic policy that could prevent you from being paid for goods shipped.

Additionally, currency volatility can have a major impact on country risk and could affect your ability to collect anticipated payments. For example, if your buyer’s currency is devalued by half its value and you are collecting in U.S. dollars, it will take twice as much of your buyer’s currency to pay you. On the other hand, if you are collecting payment in the foreign currency, you’ll receive half of what you expected.

Various methods of payment exist that serve as an alternative to an open account without insurance. From least to more risky, these include letters of credit, open account with insurance, documents against payment, and documents against acceptance. In addition to payment concerns, don’t underestimate the need to reassess the short and long-term stability factors of countries in which you have foreign subsidiaries or investments.

Will Higher Shipping and Insurance Rates Be Built into Your Prices?

Due to security surcharges on cargo in a riskier business environment, shipping and insurance costs are anticipated to rise. In fact, some insurance companies have increased the number of countries subject to “war risk” surcharges. This means shipping lines must notify marine underwriters before their vessels move into designated waters, as these vessels may be subject to significant additional insurance premiums. Much of this added expense will be passed along to customers.

September 11th Impact on Trade

Since September 11th, the number of business people traveling by air dramatically declined, but then it began to pick up. How will all the fear of flying combined with additional costs of doing business impact international trade?

At least in the short term, fear probably will continue to keep a segment of business travelers from attending far away meetings in the U.S. and abroad. This, combined with flight delays due to extra time required for security checks, plus the declining cost and adaptability of telecommunications equipment to internet technology, likely will result in an increase in video conferencing.

Consequently, international trade will slow in the short-term partly due to the impact of terrorism and slower economic growth. And although there is no substitute for face-to-face rapport building, improved electronic communication is likely to keep international trade on track.

Globalization and new technologies are having a profound impact on the U.S. manufacturing industry. This is affecting business worldwide and may demand new strategies for your firm.

On October 10, 2000, Permanent Normal Trade Relations (PNTR) status for China was signed into law. This was necessary for U.S. companies and farmers to benefit from China’s commitment to reduce or eliminate tariff and non-tariff barriers as a prerequisite to joining the World Trade Organization (WTO).

As a result, U.S. exports to China are estimated to increase by $13 billion annually by 2005, according to Congressional Research Service. And, the U.S. Department of Agriculture projects an increase of $2.2 billion annually in agricultural exports alone. How will this affect your business?

Upon China’s accession to the WTO, its duties and quotas are scheduled to be reduced at different rates. The phase-out period could be rapid or stretched out over several years. Consequently, the impact on your business will vary depending on the product or service you export to China, or the industry you choose to invest in. Below are sectors we believe will be significantly impacted.

The Computer Industry

According to the U.S. High-Tech Coalition on China, a group of leading U.S. technology associations, U.S. exports of computers to China increased more than 500% from 1990 through 1998. The Chinese computer market is growing by 20% to 30% each year, and the PC market is growing twice as fast as the world average. By the end of 2000, China is projected to become the second-largest PC market. Plus, China has agreed to adopt the Information Technology Agreement (ITA), which eliminates China’s 10% - 15% duties on computers and peripherals by 2003.

Additionally, China is expected to extend full trading and distribution rights to foreign firms within two years of WTO accession. This means U.S. computer companies, and others, can import and export without going through a Chinese middleman, and can provide direct after-sales service and support. As a result, U.S. producers and distributors of computers could benefit significantly.

e-Commerce and the Internet

The number of Chinese internet users jumped from 1.1 million in May 1998 to 9 million by December 1999, according to the U.S. High-Tech Industry Coalition on China. And, it is anticipated to climb to 20 million by December 2000.

As part of China’s commitment to join the WTO, it also has agreed to open its information technology sector. Consequently, it is expected to reduce tariffs from 13.3% to 0% by 2005 on a wide range of information technology products — laying the groundwork for e-commerce. Importantly, the Chinese liberalization of financial services, express delivery, air courier, and freight forwarding services will help support e-commerce growth.

The Telecommunications Sector

U.S. exports of telecommunications equipment to China rose more than 900% from 1990 through 1998, according to the U.S. High-Tech Coalition on China. This includes optical fiber, telephone and cellular equipment, satellite services, and networking equipment that ties communications devices together.

By December 1999, China claimed to have 40 million cellular subscribers, one of the world’s largest markets. As cellular use increases, the number of fixed telephone lines also is anticipated to rise from 100 million to 175 million, while the number of wired households is predicted to climb from 12% to 22% by 2003.

According to the WTO accession agreement, China is expected to open its telecom market by eliminating duties on most telecom imports within three years. Additionally, it is anticipated to phase-in: foreign participation in paging and other value-added services, allowing up to 50% foreign ownership; mobile/cellular services, allowing up to 50% foreign ownership; and fixed line/international long-distance services, allowing up to 49% foreign ownership. China also signed onto the WTO Agreement of Basic Telecommunications Services. This grants public telecom networks access on a nondiscriminatory basis. Plus, technology choices are to be made as commercial decisions, rather than government mandate.

The Software Industry

The software sector is one of the fastest growing and largest job creating industries worldwide. In fact, according to the U.S. High-Tech Industry Coalition on China, the U.S. industry has grown 18% annually, and is projected to contribute more to the economy than any manufacturing industry, including the automobile sector.

In 1998, China’s packaged software industry market was valued at $756 million. It is expected to grow to $5 billion by 2003. And, as part of its decision to join the WTO, China has agreed to abide by the Agreement on Trade Related Aspects of Intellectual Property (TRIPs), the best vehicle available to combat software piracy. This is essential, since in 1998 it was estimated that 95% of business software used in China was pirated.

The Medical Industry

China is anticipated to eliminate its quotas on medical equipment upon WTO accession and reduce tariffs on medical equipment from its current rate of 9.9% to 4.7% over a three-year period. Due to China’s agreement to allow foreign firms to import, export, distribute, and provide after-sales service, its medical imports are anticipated to increase.

The Chemical and Pharmaceuticals Sector

As part of its WTO commitment, China has agreed to reduce tariffs on chemicals from an average rate of 14.74% to 6.9%, and eliminate almost all chemical quotas upon accession. Additionally, it is expected not to enforce export performance, local content requirements, or similar requirements as a condition of importation or investment approval.

China agreed to reduce its average tariff on pharmaceuticals from current levels of 9.6% to 4.2% over a three-year period.

The Agricultural Industry

Based on the WTO accession agreement, China should reduce agricultural tariffs from an average of 22% to 17.5%. Duties on “U.S. priority” agricultural goods are anticipated to fall from 31% to 14% over a four-year period.

China is committed to eliminating non-tariff barriers and will use a tariff-rate quota (TRQ) system for wheat, corn, rice, cotton, and soybean oil, thus expanding market access. Chinese imports above the quota level will be subject to a higher duty rate. China said it will not use agricultural export subsidies and will reduce domestic subsidies.

The Emerging Economic Power

“China will increasingly become a regional economic power and trading hub after its WTO entry,” said Frank Gong, Bank of America Vice President and Senior Research Analyst for Asia. “As its trade barriers fall, China’s labor-intensive exports will become more competitive. This will put pressure on China to reduce prices, especially on agricultural products, which are 15% to 20% higher than world prices, and could worsen its unemployment rate leading to social instability.”

“Due to greater competition for foreign direct investment, China will increase its competitiveness in value-added exports in the medium to long-term,” Gong added.

Currency Convertibility

Within five years of WTO accession, Beijing’s commitment to allow foreign banks to deal in the Chinese currency, the renminbi, will increase pressure for interest rate liberalization and accelerate movement toward full currency convertibility. According to Gong, “A free-floating foreign exchange system is the only feasible alternative.”

Chinese Economic Growth

China’s gross domestic product growth rate is projected to reach 8% in 2000, and 8.5% in 2001, one of the world’s highest. As growth continues, and as China liberalizes its economy, demand for your products and services is likely to rise.

In today’s consumer driven economy, you must fully satisfy your customer’s needs or your competitors will. But as customers’ needs grow increasingly diverse, keeping up with their demands can be overwhelmingly difficult.

In the 21st century, customer differentiation is based more and more on market segmentation, not national borders. Consequently, your target market — which is more like a moving target — may span dozens of countries. This brings rise to the concept of the “global consumer.”

What Is Mass Customization?

Dynamic global markets, rapidly changing consumer needs, and emerging technologies have challenged the existing manufacturing paradigm of mass production. Instead of large plants turning out mass quantities of the same product, a highly flexible manufacturing process that can efficiently produce small lots of specialized products at a low cost is required. This is called “mass customization.”

In order to achieve this, you’ll need a sophisticated system of communications among all levels of distribution. This is made possible by advanced information technology that closely links the producer all the way up the chain to the customer. So you’ll know exactly what to produce and when to produce it.

And that’s not all. New technologies, like CAD/CAM, make possible instantaneous changes in the specifications and customized adjustments in production without any machine downtime.

Mass Customization Is Not New — But the Elimination of the Waiting Period Is

Mass customization has been going on for years. What is changing today is the elimination of the waiting period.

In some stores, you can now have shirts made to order in 24 hours. And in Japan, the majority of men’s suits are sold door to door. Salesmen employed by department stores carry 10 sizes for fitting and they customize by color, fabric and style.

Years ago only a few TV channels were available. Today, cable networks cater to very select interests, including food preparation and fitness. Even birthday cards can be tailor-made satisfying your interests.

Some large eyewear retailers now allow their customers to build a pair of glasses, choosing the lens shape and style, nose bridge, hinges and arms. The design system takes a digital picture of the customer’s face, analyzes the attributes and customer-provided information, and prints out a photo-quality picture of the customer wearing the proposed eyeglasses.

Some auto manufacturers can even deliver a custom-built car in just a few weeks with no extra cost. Mass customization can and will be applied to every industry — even agriculture, which now offers custom-blended fertilizers.

You Must Achieve Economies of Scope — Not Economies of Scale

The message is clear. Industries must learn how to engineer for economies of scope rather than economies of scale. Thus, the more your company can deliver customized goods on a mass basis, the greater your level of competitiveness.

With the emergence of globalization, and the global consumer, manufacturers in every industry will need to mass customize their products. And distributors and retailers must be in a position to sell them — domestically and internationally.