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The Flattening Forces Affecting the Japanese Optical Industry: How Netscape Changed the World
In the book “The World is Flat, A Brief History of the Twenty-first Century”, author and famous editor of the New York Times, Thomas Friedman, talks about “ten forces that flattened the world” and revolutionized the way we do business. in the last 15 years. He refers to the forces that “level the playing field” and allow the entire world to cooperate and compete against each other in ways never before imagined.
They are briefly as follows:
1) Fall of the Berlin Wall (1989/11/09) – this opened up East and West and allowed two cultures to meet.
2) Netscape IPO (1995/08/09) – this started the dot.com boom, which led to tons of companies getting funding for crazy projects, laying tons of fiber optic cables around the world, and basically laying the groundwork for ultra-cheap broadband to the world.
3) Workflow software – people could now send files back and forth to each other via email, work on those files on their computers, and actually collaborate over long distances.
4) Open source – this movement led to affordable, cheap and free software that could be used on many different platforms over the Internet, developing servers for companies to run intranets and communicate more effectively.
5) Outsourcing – this movement is the result of companies trying to “trim the fat” by finding cheaper places to do work “outside the house”. With internet and broadband available cheaply, companies were able to outsource cheaper labor, have the finished product re-imported and finished for market.
6) Offshoring – by transferring entire factories to countries where labor was cheap and the number of workers was large, it was possible to achieve “economies of scale” and dramatically reduce production costs.
7) Supply chains – it became possible to develop systems where all the components for your product were sourced from all over the world, where it was possible to get the best product at the cheapest price. Look at Dell Computers as a perfect example.
8) Insourcing – logistics was born and transport companies transformed themselves to take care of whole parts of companies that had some connection with moving products from A to B. These could be stocks, computer repairs and more.
9) Informing – now it is possible to research anything on the Internet and learn about anything in a much more detailed way than ever before, thanks to the huge amount of data stored in the systems connected to the world.
10) Steroids: Digital, Mobile, Personal, Virtual – these extra little tools acted as a catalyst to make the other nine flatteners extra powerful. Now people could communicate freely anytime, anywhere and on a wide variety of portable machines. Free internet telephony (Skype) is one example.
Now I’m going to talk about the Japanese optical industry and how these flatbeds are changing the face of doing business in that industry.
The most important planar devices influencing the optical industry today
The biggest market for glasses is the USA and from the point of view of the optical industry (maybe others) America seems to only want “cheaper” products. This desire to “cut the price” (at the expense of quality) has driven a lot of business to China. Manufacturers in China produce acceptable quality at a dramatically lower cost compared to the rest of the world. Japan had a competitive advantage by being able to process titanium and titanium alloy materials, which are in high demand globally for eyewear. Due to the “nickel-free” policy in Europe, many “standard metals” are being phased out, and titanium, which is considered “nickel-free”, has become a hot commodity.
Japanese manufacturing is very high quality (the rest of the world can’t match the quality of the glasses manufacturers here) but also very expensive because we don’t use a production line in this small industry. Although everyone would have preferred Japanese quality, the price pushed them to China.
Many Japanese manufacturers went bankrupt, and those that survived did so either by moving into niche production for a smaller market, or by outsourcing their production to companies in China. Outsourcing to China for the Japanese market was very difficult because I have to agree for the optical industry, even though Friedman talks about “high quality manufacturing in China”. The poor quality emanating from Chinese factories and the way they do business is extremely frustrating for companies that outsource their orders to companies there.
To overcome this, companies that could afford to do so started OFFSHORING their operations by building their own factories in China and managing them themselves, or partnering with an existing Chinese manufacturer but sending the Japanese to manage the production of their product. .
Outsourcing is not a new concept in optical manufacturing in Japan. There are really very few actual eyewear manufacturers that go through the entire process from A to Z. The Japanese system is such that they all use smaller companies that specialize in one or more of the 200 steps required to make frames (brazing, plating, painting). , polishing, shaping, etc.). Part of the order goes out, is completed, and comes back to the company, which sends it to the next process. This is very common in this industry.
However, carrying out the entire process in a foreign country was very difficult for this industry. This has become necessary and essential for the survival of frame manufacturers without a manufacturing competitive advantage. They need affordability to survive.
In the optical industry, outsourcing the entire process by developing a new factory in a foreign country to compete is a very new way of thinking for eyewear manufacturers/suppliers in the global market.
How these forces affect/affect industry strategy
This need has dramatically impacted businesses, forcing them to do one of two things:
i) Move deeper into a niche market to keep manufacturing in Japan at a higher cost, but produce a product that is specialized and cannot be copied or produced in the mass market of Chinese manufacturing. These frames are much more expensive than those made in China (in the retail market) due to the eyeglass marking system in Japan. Even manufacturers here have had to cut their margins to be able to sell a Made in Japan product, despite a niche market where, because the huge difference in mass-produced Chinese frames has diluted the market, they have always undercut the value of Japanese quality, regardless top quality.
ii) Accept a lower quality product at a lower price to capture more market share. This has been difficult for the Japanese companies involved in this business, but the outside observation that “the Japanese demand higher quality” does not seem to be entirely true for this market (or for other products after seeing the market shift heavily to “made” on China” goods). Those who took advantage of this fact were the first to enter the “three-price glasses market” and profit greatly from it. They adapted their strategy to buy offshore through OEMs in China instead of they would be produced in Japan at higher prices.
Another interesting effect of this change is that even in Europe, the “origin” of eyeglass manufacturers, manufacturing in Europe is no longer a profitable option. Europe didn’t invest in titanium or niche manufacturing, so when the Chinese learned how to process the material from Japan, Europe couldn’t make anything the Chinese couldn’t do at a fraction of the cost. My partner/customer in France who used to buy my materials can no longer buy them because all the manufacturers have stopped making glasses in France. They have had to completely change their survival strategy and instead of making their own frames now, they use their deep understanding of fashion and design to come up with a product and have it made in China, which they order through companies like my colleague who have connections with manufacturers .
Changes in the structure of the industry that can improve the company’s competitive position
As this process has been going on for the past few years, the structure is slowly changing so that the lower end product (or “standard” we might call it now, as the quality has certainly improved over the past few years) is manufactured in China through outsourcing in Chinese factories, or transferring the company’s own factory overseas, while the high-end product is kept in Japan, produced in the traditional way of outsourcing to specialists who are skilled in certain aspects. This polarized the industry and created a very different market segment for companies to target.
Companies that have chosen to stay in Japan find that over time even overseas customers return to higher-end products because they realize that quality really affects the profit margin. There is a new movement that rewards these niche markets by increasing orders for higher quality products.
Another change that can improve a company’s competitive position is to determine whether or not it can offer a product in both ranges, outsourcing the lower/standard models to customers who request it and keeping the higher/specialty product “in-house” (in the country ). This requires developing relationships with other companies that have links with such overseas manufacturers (as in France).
China clearly has a comparative advantage in terms of economies of scale. In the beginning, when the company wanted to order from a Chinese company, they could get a great price, but they had to order a ridiculous amount of product, like 10,000 frames! No one in Japan could do it, so it was extremely difficult. Over time, Chinese companies reworked their production lines (like all companies in the world to get more orders) to meet the needs of customers who could not order such large quantities. Over the past 5 years, these numbers have dropped dramatically from tens of thousands, to thousands, and now even hundreds. This is a real squeeze for the Japanese optical market, as well as for other manufacturers around the world who could once receive “small volume” orders. Now China has positioned itself to capture even THAT market. This change definitely improved the competitive AND comparative position of Chinese manufacturers.
The “broker” system in the optical industry is very popular for several reasons: Japanese companies have relied so heavily on importers/exporters that many small to medium-sized players lack the capacity or understanding to import/export. in the company. They are also known for their lack of English skills. In addition, another factor is their fear of “foreign payment recovery”.
Because of these factors, many companies fear direct outsourcing. They need the business, so contract brokers do the work/take the risk on their behalf. This of course raises the price because brokers in this industry are known to take a high margin. I believe that changing this mentality, better understanding the global industry and better mastering international business is necessary for manufacturers in Japan to take full advantage of low-cost acceptable Chinese products and combine them with their competitive advantage of maintaining their manufacturing niche in the high-end market segment.
Having said all that, the fact that China can now produce most of the low/mid-range eyeglass frames for Japan (for the world) will allow them to avoid the low profitability of these products (in Japan). and producers can instead focus on regions with a higher profit margin in the market. In the end, those who want cheap glasses can get them, and those who want expensive glasses can also get them. The total market surplus from this new business style is positive and outweighs the reduction in producer surplus because the consumer surplus is greater than the loss of producer surplus. The market wins.
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