One of the few well-reasoned articles about manufacturing leaving China. NYTimes: Mexico: The New China http://nyti.ms/Wo0qiu
Jan 27 2013
Sep 02 2012
UPDATED: Gordon Chang’s latest Forbes article reads a bit like pornography for those frustrated China-watchers who are excited by bad China news, and who get off fantasizing about a China crash & burn. As with most China-fail enthusiasts, he downplays the financial and political resources available to the central government which might mitigate downturns in the economy. (A link to Chang’s article appears at the end of this post)
And look at the idiocy of this passage (emphasis added by yours truly):
It’s hard to see how manufacturing will recover soon. Manufactured goods are stockpiled at record highs across China. “My supplier’s inventory is huge because he cannot cut production—he doesn’t want to miss out on sales when the demand comes back,” said Wu Weiqing to the New York Times.
Perhaps that explanation makes sense, but it’s far more likely that Wu’s supplier, which makes sinks and faucets, had been told by the local government to keep production lines going no matter what.
You see, he doesn’t just think it’s possible that governments are telling this guy’s supplier to keep producing regardless of weak demand, he says that this explanation is ”far more likely” than Mr. Wu’s more mundane (and better informed) explanation.
Far more likely? Really?
I’ve been manufacturing here in China since the year 2000, and have been doing business here for several years before that. I’ve been through a number of economic disruptions, starting with the dot-com bubble, moving through 9/11 and up through the recent downturn. I can tell you Gordon Chang’s explanation of why the supplier is overstocked is the unlikely one.
Chang offers no evidence for his supposition. It’s little better than a conspiracy theory. I don’t pretend to know the future of China’s economy. I’m pretty sure Chang doesn’t know it any better than I do. How this guy gets any credibility in 2012 is a mystery.
Link to Gordon Chang’s new Forbes article: http://www.forbes.com/sites/gordonchang/2012/08/26/omg-chinas-manufacturing-is-crashing/
Aug 05 2012
Took my usual weekend ride (mostly) along the Nanshan coast from Shekou through the Shenzhen Bay Park (深圳湾公园 — a work in progress) up to Mangrove Bay Park (红树林公园). I was surprised to find, not far from where the coastal path transects the Shenzhen Bay Bridge, this impromptu doggie water park. I sometimes can’t help thinking back to the Chinese I met almost 30 years ago in Shandong and across China, and how they would have regarded this type of activity.
Jul 31 2012
HERE’S WHAT YOU SHOULD DO ABOUT IT
I’m often asked by foreign factory managers in China how I would handle the various difficult situations that might arise; fake resumes (fire the perpetrator), violence among the workers (fire anyone who throws a punch), sexual harassment (fire the guy who…), etc. But the one questions I get asked most often goes something like this: I can’t prove it, but I suspect my Purchasing Manager is corrupt. What should I do?
And here’s the answer.
First, any sizable factory has some corruption, and the Purchasing Manager is a perennial suspect, regardless of whether or not any evidence of corruption exists. While any corruption is unacceptable, you have to get used to it the way you would cockroaches in your apartment. No matter how much stamping or spraying you do, you will never truly get rid of all the cockroaches and always assume that cockroaches are out there. What you can do is contain the population to a size that allows you to act as if there are no more cockroaches, because you are pretty sure they are not in your bedroom, nor are they in your fridge, crawling over your food at night. And so it is with corruption in your factory. You cannot really eliminate it, but you can take steps to contain it so that it doesn’t bother you.
(Note, however, that when you can see or prove corruption, you must stamp on it immediately, just as you would a cockroach walking across your kitchen floor. Unlike cockroaches, corrupt employees will feel empowered by your tacit approval.)
Now comes the hard part. You suspect so-and-so’s been taking money from a vendor, but you can’t prove it. You would hate to accuse, and likely lose, an innocent employee. But you just can’t let it go. How can you get the proof you need to take action?
The answer is, that you don’t need proof to take action, nor do you have to accuse anyone. What you need to do is make corruption a bit less profitable and a bit more risky than it has been.
I have two separate strategies, one for major component or material purchasing, and one for the miscellaneious or administrative purchasing. Corruption in the major materials purchasing is more serious, and the efforts to controlling it should be systemic, procedural and on-going. For the miscellaneous and administrative purchasing, corruption is not usually damaging, but targeting corruption at this low level is easy and it puts the evildoers on notice that what’s below the radar today may not be below the radar tomorrow.
For baseball fans, think of this as a pitcher “dusting off the plate” with a high, inside pitch.
FOR MAJOR COMPONENT OR MATERIAL PURCHASING
- Ensure that your vendor qualification procedures require sign-off from people in various functions, not just purchasing. Often, engineering, quality and production staff will have a say in new vendor qualification.
- Ensure that your internal procedures require quotes from multiple vendors for major purchased items, and use those alternate vendors to get competitive quotes. Once you’ve gotten a competitive quote from an alternative vendor, let it be known that this is the work expected fo the Purchasing Manager, not the boss. Let your Purchasing manager know that you will now be looking at other large-ticket items, and you expect him or her to start proactively requesting quotes from more alternates.
- Track, over time, your purchasing costs for those items and compare them to the market prices. If it’s commodity whose price fluctuates over time, plot your pricing, along with the market price, on a curves and compare them.
- Set very aggressive cost-reduction targets, incent various people (not just purchasing staff) to hit them. For instance, don’t just reward purchasing staff, but maybe also people in engineering and quality (assuming they are involved in the process).
- Sometimes you can jump in yourself, find a new vendor, and put them into the qualification procedure. If their pricing is competitive, make it known that you expect your Purchasing team to get these types of results.
FOR SMALLER / ADMINISTRATIVE PURCHASING
- Occasionally, ask probing questions about smaller purchases. Find an excuse to ask detailed information about a specific small vendor. Where are they located? Why choose them?
- For appropriate admin items, direct your staff to buy from large stores such as Wal-Mart, or from large on-line stores that offer legal receipts.
- If not disruptive to your business, guess at one of the vendors you suspect is paying off your staff, and summarily disqualify that vendor and order an alternative be found.
Once again, the goal here not to eliminate unseen corruption, but rather to control it, keeping it as far below the radar as possible.
Jul 15 2012
Jun 15 2012
I like this article in EBN, The Stupid Futility of Cost Cutting. As usual, Mr. Bolaji Ojo gets it right.
I’ll make this short. Cost-cutting does not ignite growth, no matter what any management guru has published. Unfortunately, in the electronics industry as well as in other manufacturing sectors, this seems to be the only strategy many executives would rather wield as a defensive weapon against loss of profitability.
My reply on the EBN site:
Cost-cutting should be the method of last resort. The focus should be on adding value and reducing waste in operations. Those initiatives can simply never be wrong.
If you implement waste reduction and value add, you will not be tempted to cut costs.
May 19 2012
Time was, when everyone was talking a manufacturing exodus from China. I felt like the lone voice saying “not so fast!” I cited a number of strategies which offset rising labor and other manufacturing costs mainly by adding value, as opposed to chasing cheaper labor.
Now it seems that media reports are falling all over themselves to agree with my position, that adding value and reducing waste makes more sense that pulling up stakes and moving out. This article, S’pore manufacturers to stay in China despite facing higher costs quotes HSBC as follows:
While rising costs has become a concern, many firms said that it is unlikely that they will uproot from China.
HSBC economist Donna Kwok said: “There is no other country in Asia at present that offers a better or bigger infrastructure network than China. We’re still seeing only a gradual experimentation by lower-value added producers in relocating some, but not yet all, of their presences overseas.”
Economists said it will take at least five more years before more lower-valued manufacturing activity move out of China to countries like Vietnam and Indonesia.
May 18 2012
Just who are these manufacturers who keep moving inland to chase cheap labor? Global Sources Security Products answers this question in their May 11 article , at least with regards to LED and security devices.
First, a look at who isn’t moving away from the PRD and why?
Despite the promise of lower production costs, many China manufacturers hesitate at moving inland because most of these provinces still lack a developed supply chain. Companies are taking a wait-and-see stance to ensure inland providers can meet material and component requirements before relocating.
This is particularly true among SMEs offering high-value products that are already based in the Pearl River Delta region and other traditional hubs. The Pearl River Delta region, for example, boasts complete resources for LED production, from upstream substrate materials and wafers, and midstream chips and packaging to downstream applications and supporting materials. Processing and testing equipment are on hand as well.
Companies leverage abundant materials and components in these manufacturing centers, and the resultant lower shipping costs, to balance out higher land, living and labor expenditure.
Who are moving?
- Tier one enterprises moving to more effectively service inland markets.
- SMEs manufacturing the most labor-intensive product (like shoes).
I’m finding as time goes on, the media is finally starting to understand and report on the nuances behind the trends it perceives.
May 17 2012
Lots of experts are still talking about how manufacturers in China, faced with rising labor and other manufacturing costs, might preserve their competitiveness and profitability. Here’s rundown on the strategies championed (mostly by those who manufacture nothing… but that’s another story).
Everyone chased cheap labor to China. Now that it’s not so cheap in China, you can just chase it right back to the good ole’ USA. It’s called re-shoring and, if you believe the newspapers and the interwebs, everyone’s doing it! This is the strategy for you if…
- You believe the infamous Boston Consulting Group’s report stating that China’s labor rates will reach parity with the U.S. labor rates in 2015, and
- you take on faith the oversimplified factoid that U.S. workers are 10 times more productive than the Chinese (and if you further lack imagination and can’t fathom that the Chinese might also invest in productivity-improving technology).
Time to move your manufacturing from Shenzhen to Georgia. What’re you waiting for?
If the incremental (and likely temporary) variance in labor costs seduce you, and feel they are really attractive enough to offset the huge –but occluded– costs of moving from the coast into the hinterland, then this is the strategy for you. After making your move from the coast, you will be greeted at your small town destination by a cheaper and less productive workforce, and by conciliatory local officials who make all the right noises (they’ll build a paved road right up to your factory gate so transit time from factory to port is reduced to a little over 13 hours!)
We’ve not heard from these guys so much lately, but they are still out there. These are the guys who looked at the low Vietnam labor rates and decided that moving production from China to Vietnam was a no-brainer. Those who heeded the siren call were soon sorry they did. As it turns out, you see, labor costs rise when labor demand increases against a stable supply. Who knew? Same with supply-chain costs. Shocked!!!
Buy lots of robots for your China factory and you won’t have to pay those over-demanding workers ever again. Of course, you may never make back your investment, and you will lose your flexibility, but that’s a small price to pay for empty dorm rooms.
GO INNOVATE (mine):
I have long argued that concentrating on adding value through innovation while, at the same time, reducing waste is a better strategy than focusing on cost-cutting and chasing cheap labor. I just read a post ”SEARCHING FOR AN EDGE” on the Cheung Kong Graduate School of Business blog which states the case in an interesting way. This post talks about “service-rich” manufacturing. I might re-coin the phrase as “service-enhanced manufacturing”. But basically it says to add value for the customer by innovating.
The money quote:
Instead [of pinning their hopes on domestic consumption], Fischer bets that service-rich manufacturing that pays increasingly close attention to the customer’s needs as China’s next killer app.
Handled well, however, Chinese companies will move from an era in which they all shared a single advantage (cheap labor) to one where they will be able to develop different kinds of advantages – a privilege, Fischer notes, that “typically only large nations can enjoy.”
- Southern China Manufacturing Survival Strategies
- China Manufacturing Survival: From LCC to “HCM”
- LEAN Lifeline: Surviving the Downturn
- Labor rates rising, but labor is still “cheap” if you get more value.
- PRD Labor Costs Rising: Run Away, Run Away!!! Not so fast.