U.S. manufacturers, retailers see more China risk

NEW YORK Thu May 21, 2009 3:43pm EDT

Workers solder circuit boards at a production line in a Hong Kong-invested factory in China's southern city of Shenzhen March 5, 2009. REUTERS/Bobby Yip

Workers solder circuit boards at a production line in a Hong Kong-invested factory in China's southern city of Shenzhen March 5, 2009.

Credit: Reuters/Bobby Yip

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NEW YORK (Reuters) - U.S. manufacturers and retailers that get products or components from China are increasingly concerned about quality, intellectual property and rising costs in China, and more are looking at alternate sites, according to a study published on Thursday.

Twenty-six percent said China contributes the most risk to their supply chain, up from 21 percent who said so three months ago, according to AMR Research Inc, a Boston-based market research firm. Other Asia-Pacific countries and the United States were seen as less risky in AMR's quarterly survey.

"The perception of risk has increased in China," said Kevin O'Marah, AMR's chief strategist.

The group works on supply chain issues with companies such as Boeing Co, Cisco Systems Inc, Intel Corp, Safeway Inc, Johnson & Johnson and Genzyme Corp.

More manufacturers are concerned about labor costs in China and 51 percent cited product quality as a risk, up from 45 percent in the first quarter. More of them are rethinking their China strategy, according to AMR.

O'Marah cited Samsung Electronics Co Ltd, sound systems maker Bose and Hewlett-Packard Co among companies favoring other Asian countries. German toymaker Steiff will shift production back to Germany and Portugal after outsourcing a fifth of it to China in 2003.

"People are rebalancing their portfolios," O'Marah said. "They will end up not looking at China as the be-all, end-all low-cost manufacturing location of the world."

CONCERNS OVER INTELLECTUAL PROPERTY

AMR's survey of 133 companies found 59 percent say China poses an intellectual property (IP) risk, compared with 8 percent who said so about India and 4 percent for Eastern and Central Europe.

A quarter said IP is a bigger risk than a year ago, reflecting the extent to which China has become an integral part of the supply chain. Where before Chinese factories merely assembled products, today they make them from scratch and have greater access to engineering and sourcing information.

As a result, auto, technology and drug companies cite IP as a growing risk, O'Marah said. Machinery makers such as Caterpillar Inc and Deere & Co are concerned about counterfeit parts. Such parts are also a "major issue" for aircraft makers, including Boeing.

Boeing -- along with Cisco Systems, Jabil Circuit Inc and FedEx Corp -- are members of a supply chain risk leadership council, whose goal is to set standards that would allow manufacturers to grade a supplier, or a whole country, based on its risk profile.

Companies will not abandon China outright, but more are likely to rebalance their supply chains, gradually reducing capacity in China, O'Marah forecast.

Already, more are using multiple or redundant suppliers, insisting on performance-based contracts, or pushing for closer collaboration with trading partners, AMR found. Four in 10 companies say they keep sensitive components and processes in-house to shield them from piracy.

AMR says companies should be willing to sacrifice some cost savings to diversify their supply base, in part by setting up shop in Latin America, Eastern Europe, or other parts of Asia, such as Vietnam and the Philippines.

Those that have adopted a successful regional strategy -- manufacturing close to the eventual market -- include cell phone maker Nokia Oyj and industrial conglomerate Emerson Electric Co.

"If you put all your eggs in one basket and that basket is China, if things go awry you are stuck," O'Marah added.

(Reporting by Nick Zieminski; Editing by Andre Grenon)

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