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Overseas Sourcing — China: A Limited Threat

May 2007 By Erik Cagle
Senior Editor
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AS ALL book printers are aware, the practice of publishers outsourcing certain work to Asian, European and South American countries is not a novel concept—no pun intended. But the rules of engagement have changed in the Internet age, and some of the firms impacted most by the inequity of the U.S. trade imbalance have taken exception to advantages that foreign governments provide firms who export to America.

In the case of China and the recent tariff levied on the import of coated paper, it matters little. Book publishers are saving as much as 50 percent by farming book manufacturing overseas to popular industrial locales such as Shenzen, in a country where labor rates are ridiculously low (as in $1 per hour).

The U.S. Commerce Department found that Chinese exporters of coated free sheet paper reaped what are termed “countervailable subsidies” of just above 20 percent from their government. South Korea and Indonesia could also be subject to tariffs, but aren’t viewed as the level of outsourcing threat China poses in the book printing realm.

It’s difficult to examine the topic of overseas sourcing without overly obsessing on the subject of China. Generally speaking, the United States has a trade imbalance with China that swelled to more than $2 billion in 2006. It has become the poster child of lost market share for many U.S. book printers, who either steer clear of market segments that are most susceptible to outsourcing, or they find value-added alternatives that can keep publishers in the fold—not an easy task.

Certain products beg to be outsourced: medium-length sheetfed runs for trade publishing, such as children’s books (especially pop-ups), cook books, coffee table works, and photographic and art books with high-quality illustrations. Products with long lead times and heavy doses of hand assembly also fall into this category. There are other printed items that can be more economically produced overseas, such as posters and calendars, but books clearly pose the greatest danger to North American printers.

Yearly Income Is $1,000

Rémi Marcoux, executive chairman for Montreal-based Transcontinental, explored the threats posed by China in a speech, “Quebec Inc. in the Chinese Age,” that he gave last October to that city’s Board of Trade. Marcoux spoke of touring some of the country’s printing shops and how they had gone through a major transformation, with inefficient state-run shops replaced by modern, specialized plants that are privately held or partnering with the government or foreign interests.

Between 2002 and 2005, he noted the Chinese printing industry grew at an annual rate of 20 percent, double that of its economy. Chinese press operators make about $1,000 a year, whereas their Canadian counterparts earn $60,000 (all expressed in Canadian dollars). And, of course, paper is not only less expensive in China, but is subsidized 12 percent to 15 percent by its government.

“We came back to Canada with two conclusions,” Marcoux said. “That we would encounter increasing competition from China in some segments of our industry; and that the most vulnerable activity for Transcontinental is book printing, a segment that is part of our growth strategy.”

Not that China is without problems. Turnaround time is the greatest enemy facing the Chinese: Lead times are typically in the range of four weeks. Communications is an issue, along with service. And, as far as quality is concerned, some observers feel Chinese printing is, at times, severely lacking, while others fiercely defend the Chinese printed product as being superior.

From the latter school of thought is George Dick, president and CEO of Louisville, KY-based Four Colour Imports. The company acts as a manufacturers’ representative for Everbest Printing of China, Times Offset Printing of Singapore/Malaysia and Friesen Printers of Altona, Manitoba, Canada. Four Colour handles administrative functions for the overseas companies—credit checks, invoicing, collection and sales/service—that are hampered by language barriers.

Dick has been representing foreign concerns since 1985 and scoffs at the notion that quality is a sticking point for Chinese printing. Aiding its cause is the rock-bottom cost of manufacturing.

“When I began in 1985, Japan was where most of the book manufacturing was being done,” Dick says. “As their economy developed and labor costs went up, the lower cost centers such as Hong Kong came on board. Now, we have finally reached into China, and I don’t think there’s a lower cost place of manufacturing in the world. And public awareness of imports coming in from China has increased.”

Dick feels the best opportunities for growth from the Chinese point of view are those jobs requiring extensive hand labor in binding. He notes that most books planned months in advance won’t suffer from spending a month floating and railing its way to the final destination.

“There’s no evolution in plants, so a book about plants is not going to suffer” from being obsolete, Dick says. “The savings can be as much as half of what you would have to pay for similar books printed here in North America.”

Fear of the Unknown

Language and cultural barriers, and perhaps a fear of the unknown, has stifled overseas sourcing to a degree. But Steven Frye—who heads Frye Publication Consulting in Hailey, ID, which works with both publishers and printers domestically and overseas—feels that the Internet has opened up direct communications, along with easy file and proofing transmissions. Also, he points out that the Chinese government is encouraging printers to work with U.S. publishers.

Still, conflict resolution is an issue that keeps U.S. print buyers at bay. It is companies like Frye’s that have benefitted by providing that bridge between the parties.

“One of the services we offer U.S. book publishers is having an American publishing and printing quality control expert onsite in China,” Frye notes. “We understand the U.S. publishers’ expectations, offer real-time communication in English, and our customers have confidence that their job is understood and under control.”

Some of North America’s largest printers, like RR Donnelley, have developed global platforms with worldwide locales (including China) to enable clients to reap lowest-cost scenarios in those products that lend themselves to overseas sourcing. Others, such as Montreal-based Quebecor World, have taken the tact of establishing Latin American alternatives that are competitive pricewise, while also providing a smaller window of delivery time.

Kevin Clarke, president of book and directory services for Quebecor World, notes that the firm’s Latin American platform—which consists of Mexico, Colombia, Peru, Chile, Brazil and Argentina—has grown 300 percent in the past three years.

“There’s a billion dollars worth of product coming into the United States that’s being produced offshore,” Clarke says. “We’ve combined Latin American sources with our U.S. offering to give all our publishers a combination of options. They can drive their supply chain with our U.S. platform and take advantage of the economies that are available for certain products that match our Latin American offering.”

Latin American Option

Sean Twomey, Quebecor World’s senior vice president of market development, points out that the Latin American alternative provides a slightly faster turnaround at prices just above those offered in Asia. “Clearly, the whole impetus in the publishing industry has been to reduce the levels of inventory and have more reprints faster, closer and more quickly to market,” he says. “If you’re going to take the trade off along the delivery time, you’ve got to be very clear about the cost and benefits of that.”

Clarke believes that Asia has been seeing a lot of industry buzz because of trade imbalance initiatives such as paper tariffs and manufacturing taxes to appease and protect U.S. manufacturing interests and to level the playing field. Outsourcing in general is still a popular topic in light of the influx of customer service/call center activity taking place in India, which incidentally also boasts a share of printing’s prepress market.

But will Quebecor World ever set up shop in the Orient? In its constant quest to put the best value proposition on the table for customers, the answer never is never.

“We’re going to look at every option out there,” Clarke says. “The trend today is accelerated publishing and the ability to take content and repurpose it in a variety of different products, such as digital printing or putting it on the Web. Our U.S. platform is headed in that direction. We’ve made significant investments in our hardware and press equipment, and our front-end global data networks are now in place, so we’re prepped for that additional capital. As long as we can couple it (with the U.S. platform) and improve our offering, that’s something we’d definitely explore.” PI



Takes Two To Tango?

Is there room for U.S. book printers to forge relationships with Asian sources in an effort to preserve market share on the types of product that lend themselves to outsourcing? Here are some of our panel’s views:

KEVIN CLARKE, Quebecor World: “For the small guy out there, his niche is to create some unique value. While there might be opportunities, it’s a distraction and gets him out of focus. From our perspective, for the small guys to be successful, they need to look at what they do well rather than trying to find a solution in China.”

STEVEN FRYE, Frye Publication Consulting: “Some are succumbing to the adage, ‘If you can’t beat them, join them.’ Our company is currently working with several U.S. printers that are looking to set up brokerage partnerships with Chinese printers. In China, we tour plants, meet staff and review quality, technologies, communications and business policies. We find appropriate partners for U.S. printers to work with instead of to compete against.”

GEORGE DICK, Four Colour Imports: “It’s not out of the question. That market is fairly saturated with direct salespeople from some of the overseas printing companies, and alliances that have been formed with bigger companies like Donnelley or Quebecor, or with direct manufacturers’ representatives like myself. There is not a shortage of representation of foreign printers in the United States.”
 

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