Playing with dragons

Chinese manufacturing has been in the news recently with various exposés of factory conditions by the New York Times, the now discredited Mike Daisey and a fascinating look at US chain store Wal-Mart’s supply chain by Mother Jones’s Andy Kroll.

In his examination of Walmart’s Chinese suppliers, Andy Kroll interviews factory owners and managers with a common theme, they are all loath to be identified for fear of incurring Walmart’s wrath.

This wall of silence is familiar in Australia; the reluctance of local suppliers to speak about Coles’ and Woolworths’ policies has hobbled enquiries into the domestic retail market

Another thing Chinese and Australians have in common is how the retailers drive down costs with big buyers insisting upon regular price reductions from their suppliers. 

This is what happens when your business is a price taker that relies on one or two suppliers; you accept what you’re offered or lose a large chunk of your business.

With many of Australia’s industry sectors now dominated by one or two incumbents, this way of doing business is now the norm rather than the exception. 

Australia is now in that position as well. Our governments and business leaders have decided Australia will only dig stuff up, with a few favoured, uncompetitive industries like car manufacturing being protected. 

Having that dependency on one or two major customers is a risk and when the commodities boom turns to bust – commodities booms always do – our relationships with these customers will be tested.

When that test comes, the clumsy way the Federal Government has banned Chinese companies from tendering to the National Broadband Network or blocked investment in mining projects may turn out to be mistakes.

This is the problem with being a price taker selling a commodity product, you become hostage to fortune and when the market turns against you there isn’t a great deal you can do.

In the early 2000s computer manufacturers like Dell and HP decided to sell commodity products then watched with despair as Apple captured the premium, high margin end of the market. Neither business has truly recovered.

Being trapped at the commodity end of a market is not a comfortable place to be, particularly if you don’t have a plan to move up the value chain.

If your business is currently selling low margin, commodity goods then it’s worthwhile considering what Plan B is should the market turn against you. You might also remember to be nice to your customers

At least you’ll show you have more forethought than our leaders in Canberra, who seem to like to play with dragons without thinking through the consequences.

Paul Wallbank is one of Australia’s leading experts on how industries and societies are changing in this connected, globalised era. When he isn’t explaining technology issues, he helps businesses and community organisations find opportunities in the new economy.