Advantages and Disadvantages of locating manufacturing production in the Pacific Rim: Michael Porter’s Diamond
The Pacific Rim plays a major role in the world economy, ever since the Asia Pacific Economic Cooperation was formed in the 1980s. The Pacific Rim is composed of countries from China, Singapore, Hong Kong, South Korea, Japan, Philippines, United States of America, Australia, New Zealand, Chile, Colombia, Mexico, Indonesia, Taiwan and Canada (, and , 1994).
These nations house the most important financial centres in the world, therefore the participation of these nations in every aspect and sector of the world economy is very significant. And one of those aspects in the business is manufacturing. According to (2003) manufacturing is the process wherein the companies apply and use processing mediums and other tools in changing raw materials into finished products that will be sold to the market. According to (2002) some economists and scholars view manufacturing as an aspect in the economy that produces wealth.
Manufacturing is an important sector in the business and without manufacturing there are no products that could be used by the consumers to make lives easier. Big companies from industrialised nations are the ones responsible for the massive scale of manufacturing in their own countries; an example is the Ford Motors in the United States. However, with the rapid embracement of huge companies in the concept of globalisation, more and more companies are looking for possible locations for manufacturing. In addition, with the new technologies in the market boundaries is no longer an issue in the business. An organisation may have its headquarters in the West but can open a factory in the East.
This paper discusses the advantages and disadvantages of locating and establishing manufacturing production in the Pacific Rim, particularly in China. The advantages and disadvantages will be tackled in the context of Michael Porter’s Diamond Model.
One of the emerging markets in the East is the People’s Republic of China. According to (2007) the country is now the fourth largest economy in the world and has the GDP growth of 10.7% in the year 2006. China is now considered one of the most important nations in the world today in terms of business opportunities. Aside from the fast GDP growth in China, the country has the biggest population in the world, and because of the booming economy of the country, investors are flocking in China. (2005) wrote that China has one of the largest and highest labour forces in the world having a population of 1.3 billion. Different organisations are setting-up factories in China when it opened its door to capitalists, and most of these companies are in the sector of manufacturing.
In order to determine the advantages and disadvantages of locating an appropriate manufacturing production in the People’s Republic of China, the Porter’s Diamond will be utilised. Michael Porter developed the Porter’s Model in order to give analysis on the reasons why some nations or locations are more competitive than other. In addition, according to (1998) the Porter’s diamond proposes that the location of an organisation is significant in developing the extent to which the company will probably attain advantage on a wider scale. The location of the manufacturing production delivers the basic factors that could support or obstruct the organisation from gaining the advantage in the global market. Traditional theories on economics often utilised five factors in comparing the advantages and disadvantages of locations and countries and these are Land, Location, Natural Resources, Labour and Local Population size. However, Michael Porter viewed these factors as passive and could weaken the competitive advantage of an organisation. Porter introduced the concept of clusters which is a group of interwoven firms, related industries and suppliers in a specific field. In addition Porter discussed that clusters could have an impact on the competition in the following ways:
· The productivity and efficiency of the companies within the cluster could be increased.
· Innovation and creativity will be enhanced in the field.
· Clusters could stimulate new businesses.
The Porter’s Diamond distinguishes four determinants of the competitive advantage and disadvantage of the location and these are:
Firm Strategy, Structure and Rivalry- it is the status in the country that determines how organisations are established, organised and managed, it also identifies the attributes of competition in the domestic market. In this determinant the cultural aspects plays a significant role. For a company that plans to locate some parts of the business in another nation, determining and understanding factors such as the structure of management, working morale of the employees, and interactions between the company and the local industries interconnected with the organisation in the particular country is also important because it shapes the structure of the organisation and it can either give advantages and disadvantages in some industries. The corporate strategy of an organisation is also important because the strategy has a huge impact on the structure and control of the organisation. In the Porter’s Diamond rivalry in the domestic scale could be a big help in organisations in achieving the competitive advantage in a global scale.
In the case of China, the economic condition of the country is very favourable for organisations that want to locate their manufacturing process and set-up firms or factories because of the cheap labour and robust economy. However, there is also a disadvantage since China is not a capitalist nation but a socialist therefore there are more restrictions when establishing a manufacturing production compare to capitalist countries. The corporate and management strategy and structures of the organisation could be an advantage if the company was able to have a deep understanding on the working commitment of the employees, however it could also be a disadvantage if the management of the company did not understand the culture and work ethics of the people wherein they plan to set-up the manufacturing process. China is the nation that produces huge quantities of counterfeit products, it would definitely be an advantage for some of the companies particularly the clothing companies because there is a possibility that the designs may be copied, and therefore the company must ensure that their designs will not be victims of counterfeiting.
Home Demand Conditions- it is the condition of the demand of products and services that is produced in the country wherein the organisation is planning to establish a manufacturing production process. The demand conditions for the product of the nation aids in shaping the direction of the development of the products. Moreover, Porter discussed that the home demand is driven by three characteristics which are the mixture of the needs and wants of the consumers, the scope and the rate of growth in the domestic market, and the mechanisms that convey the preference of the domestic markets to foreign markets. The manufacturing process of an organisation established in another nation could utilise the changing tastes and trends of the domestic consumers as an advantage, specifically in innovating the products and services due to the fact that the domestic market have bigger influence in the identification of the needs and wants of the consumers than its foreign market.
China poses advantages in the aspect of the home demand conditions because of the huge population of the country and the growing number of middle class families, the demand for the products that an international firm will be higher. Since the organisation will establish manufacturing production in China there is the advantage of obtaining the trends and demands of the consumers. However, there is also an advantage, particularly if the trends are picked up in China and sold it to other countries such as the United States because the trends and needs of people from China might differ from that of another country.
Related and Supporting Industries- it is the existence or non-existence of industries that supply the needs of the organisation in order to compete internationally, as well as, the supporting industries of the organisation. If the organisation was able to obtain a competitive supplier for the international market it can also lead to the advantages with supporting industries. Having a good and competitive supplier and related industries will aid in the innovation and internationalization in the organisation in the future years. As mentioned earlier, aside from the suppliers related industries also plays an important role in the producing products that are have great quality, related industries could be activities that are needed such as design of the products.
Since a number of raw materials could be found in China and nearby countries the cost of the production and manufacturing will be relatively cheaper, therefore the location for possible suppliers that offer cheap raw materials is easier to find thus it is an advantage for a company. On the other hand, there is also a disadvantage because there is a possibility that the products and designs could be copied during the production process by some people working in the related industries.
Factor Conditions- it is the condition in the country regarding the factors of production such as labour, infrastructure and many more which is important in some industries. The factors are assembled into human resources which includes the cost of labour, commitment and many more, the material resources such as the space and natural resources, capital resources, knowledge resources and the infrastructure. Some organisations even include the stock market, policies on labour and employment and educational backgrounds. These factors could be an advantage for an organisation if the management was able to identify and determine the factors that could be exploited and developed in another country. That is the reason why the idea of transferring to low-cost countries came about. The factor condition according to Porter could be modified and change in order to suit the needs of the organisation. The political and technological changes in the society could also trigger changes the conditions of the national factors.
In the case of China the human resources is an advantage due to the fact that the cost of labour in China is very cheap. However, cheap labour does not necessarily equate to skilled workers, although China has cheap labour there are still only few workers that have the sufficient knowledge to perform in some activities. Furthermore, , , and (2000) discussed the challenges a firm faces in Human Resources when establishing a business in China. First, is on the selection, in China connections is important in facilitating a business without connections the business will be in a slow process, another challenge in the selection process is the belief of the government in which private firms should be absorbing excess employees from state-owned companies, in which leads to overstaffing in private firms, and empire-building is also a challenge in the selection process. Next is Training and Development, the Chinese Employees are risk averse and seldom takes initiative. The third is on Appraisal and Reward, the appraisal on the performance for non-production revealed to be a problem and loyalty of employees is hard to get. And finally Control and Socialization, the top managers use the firm’s money to use for their own personal needs without paying interests, the iron rice bowl mentality of Chinese workers does not fit well in the private sectors in which most of the companies are owned by foreign investors.
In the material resources, China has a number of advantages due to the fact that it has a massive land area and is also near to countries that have abundant natural resources therefore obtaining raw materials is easier if the manufacturing production is established in China. Furthermore, with the massive land area of China, manufacturing companies could tap out possible substitutes from this country. An example is in the case of drinks, tea is one of the drinks used by East Asians for hundreds of years, and because people nowadays are more health conscious and have started to discover the benefits of tea, therefore soda companies are threatened by the entry of these substitutes that originated from the Eastern part of the world, various food companies from different parts of the world have seen the potential of these food products and have set-up production in the country since the information and resources could be found there.
Knowledge resources could be both an advantage and disadvantage in China. It is an advantage because there are a number of potential individuals from reputable universities that could be trained by the management. However there are also disadvantages in the knowledge resources in China, in the study conducted by (1997) Taiwanese managers told the problems with local workers in China such as poor job commitment and work discipline, high turnover rates, not interested in learning new skills, intergroup hostilities and poor training and education. In addition, and (1996) made a comparative study on women managers in China and Hong Kong the study revealed that managers from China were not as mature as in Hong Kong. Women managers in Hong Kong regarded their job as a path to career development while managers in China regarded the monetary reward as their motivation for the job. Moreover, Hong Kong managers concentrate on planning whereas managers in China concentrate on directing.
The advantages of manufacturing in China are due to the fact that the raw materials and people is very abundant in China the organisation could switch easily from one supplier to another, therefore the richness of resources and population of China is an advantage to organisations. However, there are also disadvantages in manufacturing in China include the rampant piracy of products, although raw materials and labour is cheap in China the possibility of copying the products and technology of an organisation is inevitable. It is a clear fact that organisations flock to China and establish factories because of cheap labour; however there is a shortage of skilled labour despite the fact that the population of the country is 1.3 billion therefore it becomes a disadvantage to the organisation (, 2006).
The Role of the Government
According to (2007) the government of the nation wherein an organisation is planning to establish a manufacturing process plays an important role, although the government does not have a direct impact to the organisation, the institution serves as a medium that incites activity and challenges the organisations. The government is the one that encourages and push organisation to be more competitive, in order to produce high quality products and even stimulate healthy rivalry among other firms.
China is one of the fastest emerging nations in the world in terms of economy and even politics. Many companies are clamouring to set-up factories in firms in China due to cheap labour and resources. Manufacturing is one of the industries that have been establishing firms and factories and have taking advantage on the cheap labour and costs of production. However, just like in any places there are advantages and disadvantages that must be determine to in order to create risk measures. In this case, Michael Porter’s Diamond Model could be a useful tool in determining useful information for decision-makers of an organization when identifying possible locations to set-up their manufacturing process. By having an analysis of the industry, entrepreneurs could identify the optimal industry in which to enter. Overall Porter’s Diamond Model gives people the basic understanding of the competitive structure. Different organisations could use the model to determine the magnitude and scope in which they can turn the advantages in order to develop a competitive advantage to other organisations in a global context.
Every country has its own advantages and disadvantages. China is not an exemption to that, even though it is one of the business hotspots in the world. Companies, regardless of the nature of the industry must have a full understanding of the location in order to maximize the resources and prevent risks that may hinder the progress of the company.
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