The Demise of Chinese Manufacturing

Recent stories in the Western press describe impending doom for Chinese manufacturing, relating the Chinese demise to Japan in the 1990’s.  But to real China-watchers and experts, this is a naïve view.  It assumes that the Chinese government will sit back and do nothing to correct the trends and that the Chinese economy will stagnate.

While Chinese manufacturing is not known for innovation, it really is just a matter of time.  With 700,000 graduating engineers per year, China is quickly becoming the world’s powerhouse in manufacturing engineering and in continuous improvement.  The next phase is innovation and optimization. 

To address innovation, the Chinese government advocates student exchange programs and invites thousands of visiting US professors into its universities to infuse creativity into the education systems. Over time, this will reignite the creative innovation spark that the Chinese displayed over thousands of years, inventing printing, gun powder, deep water bridges, massive sailing ships and irrigation to name a few.  While US politicians tell us not to worry because China cannot innovate, the Chinese are busy proving them wrong.

To address optimization, China has started on the journey to automation.  Automation and the adoption of software systems will dramatically increase productivity at the factory level and will drive continuous improvement and optimization.  Although this is a long road to travel, it is nonetheless the road Chinese manufacturers are on.

It’s time to wake up and smell the green tea.

Apple’s Foxconn Factory and Mike Daisey’s Lies

Mike Daisey, a journalist and feature writer, delivered a radio show about Chinese factory workers on NPR “This American Life” in January.  I listened to the show one Sunday morning with a friend and kept thinking how odd it was that the things he was saying about his interviews with workers outside of Foxconn, just didn’t ring true.  I remarked to my friend throughout the broadcast that his examples weren’t true, or were odd. For example, he claimed he talked to several young girls who told him they were 12 and 13.  If they were underage workers at the Apple factory, why on earth would they say so and risk losing their jobs in one of the best factories in China?  In another example he talked about guards at the factory gates toting guns.  I have never seen anything like this in the factories I have visited.

Well, it turns out that Mike Daisey lied and embellished his story for NPR and for his off-Broadway monologue called “The Agony and Ecstasy of Steve Jobs”.  Only a few parts of his story were true…enough to make it sound real.  NPR has broadcast a retraction and the world press has skewered Mike for lying.

It’s not that those of us with China experience don’t believe there is room for improvement.  Chinese factories in general have a long way to go to improve working conditions and address human rights issues.  Conditions are not consistently up to world standards yet.  But the Foxconn factories are some of the best places to work.  Apple, HP, Dell and other companies have taken pains to monitor the production environments to make them humane and safe.

What bothers me most about Mike Daisey’s lies is that he has incited people to believe more fiction about China.  It’s time we dig deeper and question stories like this in the Western press and demand that our news companies verify all facts prior to printing or broadcasting.

The Silk Road – first global supply chain

Spices have been traded in Istanbul for 2000 years

I spent the holidays on vacation in Venice and Istanbul on a mission to understand more about these two important end points on the Silk Road. Starting around 200 BC and extending 4,000 miles, the Silk Road got its name from the lucrative Chinese silk trade and tea trade in exchange for spices, nuts and jewels from Europe and the Middle East.  In addition, various science and technology innovations were traded along with religious ideas as well as the bubonic plague.    The Silk Road was a significant factor in the development of the great modern civilizations. 

Very few people actually traversed the entire Silk Road.  Mostly it was made up of agents and merchants who bought and sold goods along the way.  At major points, great bazaars opened to facilitate a meeting place for traders.

Istanbul is a city that spans the continents of Asia and Europe and was the end of the overland Silk Road.  Merchants took their goods to the Grand Bazaar where they also traded ideas and innovations.  Walking through the Istanbul Spice Market and Grand Bazaar you can just imagine what it must have been like centuries ago packed with merchants bargaining with one another.  The influences of both Asia and Europe are evident here in the architecture of places like the Blue Mosque and the Hagia Sofia representing Islam and Orthodox Christianity.  And of course in the history of its name: Constantinople and Istanbul.

Venice became a major trade port in the Middle Ages when the Chinese Treasure Fleet (at least 100 years ahead in the mathematics needed for navigation) sailed in, ladened with treasures from China.  In Venice you can see the influence of Asian architecture in the mosaics installed in the Basilica of San Marco.  In the Doge’s Palace the famous maps show the Americas and Australia long before Columbus “discovered” the new world.  Plenty of evidence indicates that the Chinese heavily influenced Venetian map making in the 1300s and early 1400’s.  Just imagine what the Europeans and Chinese thought of one another.

I tried to imagine what it was like in these two cities in the Middle Ages.  With a little site seeing at the Spice Market and a walk through San Marco, it wasn’t hard to do.

Counterfeiting is a problem worldwide, but it is particularly acute in China.

On Nov. 8, 2011, the Senate Armed Services Committee held a hearing on counterfeit parts in the defense supply chain, including electronic parts used to manufacture weapons and other defense department equipment. Investigators found that counterfeit or suspect electronic parts were installed or delivered to the military for several weapons systems, including military aircraft such as the Air Force’s C-17 and the Marine Corps’ CH-46 helicopter, as well as the Army’s Theatre High-Altitude Area Defense (THAAD) missile system. Legislation is being proposed to require defense contractors to certify all parts for authenticity.  This will place a tremendous burden on defense supply chains in terms of authentication process verification

But of course, counterfeiting is not limited to defense goods.  Any electronic gadget or equipment is likely to include some counterfeit parts, and the counterfeiters are getting better and better at it. It is so difficult to tell counterfeit from legitimate parts, that industrial buyers are often fooled.  Even the price of counterfeits may be equivalent or close to legitimate parts, thus eluding suspicion about parts origins.  This is a problem of such magnitude, that we are just beginning to unravel the stories.  Counterfeit parts may cause your iPOD to fail early or not work properly at all.  But think about the real danger in counterfeit parts in machinery, automobiles and aircraft.

The only way to control counterfeiting is to maintain control over your entire worldwide supply chain.  This means verifying and monitoring all parts suppliers, distributors, subcontractors and manufacturers.  Take nothing for granted. Know your supply chains from start to finish. Verify and monitor every step of the way.

ASEAN Single Windows Project

The Association of South East Asian Nations (ASEAN) Single Windows Project is a USAID-funded initiative to facilitate trade between the 10 member states.  This includes developing standard documents and processes across the member states of Singapore, Indonesia, Malaysia, Philippines, Thailand, Laos, Vietnam, Myanmar, Brunei and Cambodia.

I was invited to lead a Business Process Design Workshop for this group in Singapore in August.  What an honor it was to participate in this event with policy makers and customs officials from the member states.  There were 2-3 delegates from each country plus representatives from the ASEAN Secretariat in attendance.

I started off the day with a lecture about Business Process Design and then introduced a toolkit to assist in developing or revising processes.  The challenge was to use examples that were relevant to import/export and logistics as well as those things that are specific to ASEAN regional trade.  As a consultant and coach, I also like to add colorful examples to drive home the points I want to make.  I chose some images such as an elephant to enrich my stories.

Lecturing and coaching in a very diverse cross-cultural meeting was one of the more difficult things I have ever done….and also one of the most rewarding and enriching.  I hope they invite me back for more.

Year of the Rabbit

The Lunar New Year started on Feb 3 and lasts about 2 weeks.  This is the time that Asian families across the world gather to celebrate family and good fortune.  This year is the Chinese Zodiac Year of the Rabbit or The Year of the Cat in Vietnam.  The Rabbit or Hare is the 4th animal in the 12-year cycle.

Happy New Year wishes are expressed as:  “gung hau fat choy” (Cantonese) or “gong xi fa cai” (Mandarin) which generally means “Congratulations, may you be prosperous”

The Year of the Rabbit is expected to be a placid year and very much welcomed and needed after the ferocious year of the Tiger.

Here’s the prediction from the Chinese Cultural Center in San Francisco: Good taste and refinement will shine on everything and people will acknowledge that persuasion is better than force. A congenial time in which diplomacy, international relations and politics will be given a front seat again. We will act with discretion and make reasonable concessions without too much difficulty.

If you have manufacturing sites in China, you should expect delays in shipping as most of the factory workers return home for the long holiday.  During Chinese New Year, there may be no one left in the factory to answer the phone or check email. 

Be vigilant in checking the quality of products made just before and just after the New Year.  Before the start of the holiday, factories rush to complete all orders and ship everything possible.  Quality may be overlooked in anticipation of the holiday.  Just after the New Year, a significant number of new migrant workers (30% to 40%) start jobs or change jobs in factory towns and there may be a significant learning curve, causing quality deterioration.

A Change In Attitude

I’ve been watching and listening to the events and chatter about Hu Jintao’s visit to the US.  There is certainly a striking difference between the way China and the US are acting now that Obama is President and Clinton is Secretary of State.  While there are still many issues to be resolved, there appears to be mutual respect between the leaders.  This makes me hopeful.

President and Mrs. Obama even hosted a rare State Dinner for Hu.  President Bush just had a working lunch.  This is a significant difference in the respect given to US-Chinese relations.  It’s about time America took its head out of the sand and fully acknowledged the second largest economy and fastest rising super power in the world.

The economics of  the two countries tell the story of why it is so important to have a good working relationship.  The US GDP is $14.6 trillion.  The Chinese GDP is $5.7 trillion and rising at double digit rates.  But if you compare PPP (Purchasing Power Parity) or PPC (Purchasing Power Correction), a comparison of consumer buying power in each country, China’s economy is already larger than the US.  And it will continue to grow.  In the next few years, China’s middle class will be 700 million people;  more than double the population of the entire US.  Not only will this be the largest consumer market in the world, it will become the greatest target market ever for US goods and services.

Of course we all understand that China is still working on things like human rights and democracy.  But there is no stopping the warp-speed economic development inside China. 

A new perspective on Chinese toys manufacturing and currency re-valuation

I visited a toy factory in Guangdong Province, China on Friday.  This factory manufactures plastic toys and represents other manufacturers that produce radio-controlled toys and dolls.  It was quite amazing to see so many plastic toys in one place.

I noticed though, that the Chinese staff was less enthusiastic than usual about selling to me.  I wondered about this, but didn’t say anything.

Then I saw an article in the South China Morning Post about toy manufacturers at the Canton Fair, the largest trade show in the world, going on now in Guangzhou.  The article reported that toy manufacturers were rejecting large orders and those that were more than 3 months out, for fear of RMB currency adjustments.  Apparently, toy manufacturers typically operate on a 2-3% margin and fluctuations in currency can result in losses.  Western toy buyers, however, are still demanding lower prices.  This double-whammy is causing toy manufacturers to reject orders or cautiously proceed.

I am not sure if this is good or bad.  I do know that the low-end toys are sold at low-end retailers such as Wal-Mart where the shoppers cannot afford to pay more.  If there is a shortage of cheap plastic toys, will family lifestyles be affected?  Will this begin to happen with other products?  Is this a vicious cycle?

Currency adjustments to the RMB not only affect the price of imports into the US but they will also affect the razor thin margins that Chinese manufacturers earn.  We must proceed with caution and gently allow the RMB to adjust.  Otherwise, we may be faced with whiplash economic peril in the East and in the West.

China Currency Won’t Fix US Problems

There is a lot of discussion in Congress, the domestic Press and the international Press about the Chinese RMB (yuan) appreciation against the dollar and other world currencies.  China is being pressured to take action by the US Government, WTO and IMF. 

But Chinese Prime Minister  Wen Jiabao  and others in the Chinese government are fighting back.  If the RMB is re-valued, they say, it will cause full scale recession in China.  In America and other Western importing countries, it would cause an automatic rise in prices for imported Chinese goods by 5-15%.  If China goes into recession, the whole world will suffer.  The cost of goods to American consumers would increase, theoretically causing us to buy less, thus ordering less from China…and so on.  It’s a vicious cycle that hurts both US consumers and the Chinese economy.  There’s a new world financial order and China can tip the delicate balance if the RMB suddenly increases in value.

But our American politicians on both sides of the aisle argue that millions of jobs will return to the US because it will no longer be cheaper to manufacture in China.  HA!  No way!

Consider the lowly industrial spring.  As I discussed in my recent interview on NPR Morning Edition http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=130258250&m=130260491  even if the price of Chinese-made goods increases by 5% or 10% or 20%, it is still much cheaper to produce goods in China.  The biggest effect will be increases in costs to low-end US consumers.  Consider Wal-Mart.  When low-end goods increase in cost, the Wal-Mart shopper, (probably the least able to afford an increase) gets the brunt of the increased price.  It will cause low-income American citizens to suffer…and it will put low-paid Chinese factory workers out of their jobs as demand decreases.

The same is true if the US Government slaps import tariff increases on Chinese goods.  The effect will be shoved off onto consumers who must now buy the same goods at higher prices.  Again, not a brilliant idea with so many people struggling in this economy.

This is a serious no-win strategy.  I agree the RMB should be re-valued gently over time to create a more level global playing field.  But making revaluation happen rapidly will cause big, ugly repercussions.

NPR Morning Edition

Since my book, 42 Rules for Sourcing and Manufacturing in China, was published, it has done very well on www.amazon.com .  It continues to be a top seller in the US, UK, France and Germany.  My publisher also sent out a press release to TV and radio stations and over time, I have been interviewed on several radio stations.  I was also interviewed for CCTV (China’s CNN).

But when NPR called me, I was truly honored and thrilled.  I have listened to and been a fan of and member of NPR for years.  I respect NPR’s approach to programming and enjoy the feature clips.  So the opportunity to be interviewed was fantastic.  The link to the audio story is here http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=130258250&m=130260491   

Adam Davidson, and NPR reporter called me early on Thursday morning and asked me several questions about the cost differential on Chinese-made products if the RMB was allowed to freely float against the dollar.  One of the examples I used was of the industrial springs I have written about in this blog on May 26, 2009.  That was the anecdote he chose for the story.

The story aired on Friday, Oct 1, 2010 on the Morning Edition show.  My 15 seconds of fame!