BusinessTN

American manufacturers' dependence on outsourced labor production to Chinese factories began to hit stride about the time "consumption" evolved into an "-ism" in common parlance. Though growing distress over China's gutting of the American manufacturing sector sparked protectionist sentiment stateside, it was a toy scandal coupled with an energy crisis that finally forced executives to admit to the elephant in the boardroom.

Outsourcing labor across the Pacific is de rigueur despite the fact that surveys like the Aberdeen Group's China Trade Management Strategies Benchmark Report suggest that "price-based supplier selection" is not always the best option. Factors such as increased transportation costs, extra resources expended in local oversight and fewer dependable supply-chain links surrounding the production hub can lead to a net result that is more expensive or of lesser quality. Nevertheless, thousands of labor positions are annually sent abroad under the pressure of an ever-narrowing profit margin. Consequently, analysts say Chinese factories are experiencing major growth in Midsouth manufacturing institutions such as paper, furniture, ceramics and textiles.

But instead of joining the clamor to cut off the Chinese connection, Tennessee is embracing an increasingly lucrative "Sino-synergy" strategy.

For the first five years of the new century, Tennessee led the United States in export growth to China, according to the U.S.-China Business Council. Last year, trade with China amounted to $1.8 billion. It's not surprising that Gov. Phil Bredesen announced plans last fall to open an economic development office in Beijing, or that Deb Wooley, head of the Tennessee Chamber of Commerce, visited China earlier this year.

But despite Bredesen's encouraging outlook, local manufacturers face something of a devil's bargain by doing business in China.

"When a company sends something to be manufactured in China," says William Ferrell Jr., a Nashville-based patent litigator with Stites & Harbison, "they should assume their product will be knocked-off and resold in China or the U.S."

As a result, forward-thinking companies, whether potential plaintiff or defendant, find it prudent to factor into production costs the loss of property as well as the possibility of what can be extremely expensive infringement litigation.

"Everyone knows that the risk is there," Ferrell says. "They just include it as part of their business model—[and] if they don't, they should."

China's seemingly innate disregard for Western notions of property ownership has enraged everyone from software designers to rock stars, with most questioning China's integrity.

"I don't see it as much of a moral issue as it is a cultural one—a difference between how people perceive property," Ferrell explains. "Our intellectual property rights are foreign to the Chinese, and they've been forced on them by the international community."

Even China's biggest proponents admit that the country needs to improve policing IP piracy. Stacy McGuire, founder and CEO of AIM Global, says IP litigation is on the rise, indicating China is ramping up efforts to curtail its famed black market.

"They understand the sensitivity about this in the U.S.," says McGuire, whose Brentwood-based custom manufacturing/solutions company was an early American entrant into the Hong Kong business community. "The days of a copyright pirate going to court and just getting off are over."

If anything would sour U.S. manufacturers' appetite for Chinese labor sourcing, you'd think it would be the likelihood of IP piracy. The devil's bargain may still be among the best in the bazaar, but who really wants to ship parts or materials across the Pacific, navigate an exceptionally foreign business climate and communist administration to manufacture the product, and then ship it back across the ocean to the U.S. just to compete with a cheaaper knock-off made by the same people? (According to one lobbyist, that conundrum, along with rising shipping costs and the firestorm over the recent toy scandal, are leading some to explore possibilities in countries like Vietnam and Mexico.)

Unfortunately, the question really isn't so simple now that China's middle class may outreach anything ever imagined in the West.

Importing cheaply manufactured goods to the States is still big business, but selling goods in China, whose economy is growing three times faster than the U.S., will be even bigger.

"It's not so much what they bring to us," says the Tennessee Chamber's Bradley Jackson, "but what part of their market they open to us."

In agricultural products alone, he says, the possibilities are huge.

And according to McGuire, the country will have plenty of money.

"China could surpass the U.S. economy in the next decade," he says, which is why he suggests partnership with China over direct competition.

"If anybody tries to compete, they're going to get crushed," McGuire says.

Such sentiments suggest that, recognized or not, this is one elephant that won't be going anywhere.