US companies have captured only a fraction of China's potential as a source of low-cost products and plan to strengthen their purchasing activities in the country, despite high employee turnover and other difficulties. In a survey of 39 US companies with sourcing offices in China,¹ the respondents estimated that these companies buy only 30 percent of the goods they ultimately could buy there, though that figure will rise to 50 percent three years from now. Moreover, to date, the respondents' companies have captured only about one-quarter of the potential savings from purchasing in China—a proportion expected to hit 40 percent in three years. (Volumes increase faster than savings because it takes time for suppliers to squeeze out costs.) Notwithstanding all the press about Chinese exports to the West, only a fraction of the full potential has been captured so far.

Companies maintain that they are overcoming many of the cultural and logistical complexities that vex them. Some of the issues (such as communicating with corporate headquarters, training Chinese workers, and overcoming cultural and language barriers) are expected to be less pressing three years from now as companies gain experience and streamline their purchasing processes (Exhibit 1). However, companies expect...