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I met the most remarkable woman by chance at a holiday party.  Mrs. Zhao is a retired professor and researcher from UCLA. She was friendly and sociable and when I asked her what she did, she started to unravel her story for me.  Realizing that I am familiar with Chinese history and culture, she told me more than would normally be expected in polite conversation.

In the 1960s she was a Professor of Physics at Sun Yat-sen University in Guangdong, China. This was during the Cultural Revolution when Mao Zedong shut down all the universities because they were considered elitist and not revolutionary. When her university was closed, she was sent to a farm to be educated in the ways of working farmers. She plowed fields for three years as she was being “re-educated.” All day long the workers had to shout “long live Chairman Mao” as they plowed.  At night she taught the farmers to read and write.

During these years she never protested or complained, because to do so meant sure retribution including being denied meals, beatings and the infamous “struggle sessions” where people were forced to confess their “crimes” against the revolution. This was a difficult time in China, particularly for the well educated people and those in traditional arts. These people were viewed as proponents of the “old ways” and counterrevolutionaries. She told me that her colleagues were beaten and starved for disagreeing with the communist party bosses.  Many people died in prison or from beatings after struggle sessions, if they did not confess.

When the University reopened, farmers were sent there together with the previous students. No matter their educational level or experience, everyone sat in classrooms together to learn from Mao’s Little Red Book.  No other books were available for any subject because the books had all been burned by the Red Guard.

In 1982, a former colleague invited her to come to America to continue her research in microwave physics. She came to UCLA, where she continued her research and teaching for 25 years.

I know other people who lived through the Cultural Revolution and they will say that the period of struggle and change was worth it for China to emerge as the power house it is today.  They will say that Mao was 70% right and 30% wrong, and that he brought China through a metamorphosis and into its industrial age.  But Mrs. Zhao’s story and the way she told it to me touched a very emotional chord.

While China came out of the Great Famine and Cultural Revolution stronger, the effects are still apparent today. People in China are reluctant to talk about the government and its policies. China’s education system is rigid and structured around a fixed curriculum.  Students are not taught or encouraged to think critically. A back-door culture has developed where things get done behind the scenes or through the “back door” and where priorities are set according to who you know and what influence you have. As a result, creativity and innovation have suffered over the past 30 or 40 years, which has resulted in a copy-cat business environment.  Only now, with talented engineers, scientists and business people being trained in China’s top universities and in America and Europe, the historical and exceptional creativity and inventiveness of the Chinese is being renewed. The Chinese have a long history of invention and now it is blooming again.

There are lessons we must learn from history in China, America and other countries.  We must do all possible to protect our education systems for all Americans at all levels.  We must not allow the elites or political parties in power to dismiss or reduce funding to our schools.  We must defend the objectivity and teaching of the sciences.  We must be vigilant in maintaining high standards for STEM education. We must support and defend teachers and researchers.  These people are building our future through our children and grandchildren.

It’s common to evaluate potential supplier and supply chain partner’s financial position before placing an order or signing a contract. In fact, most purchasing departments these days, require obtaining supplier key financial data as a standard part of the procurement process. This financial data is then evaluated by the company finance or accounting department and the risk associated with the supplier or supply chain partner is determined. If the supplier is a publically traded US company, that’s easy to do as these companies must comply with SEC rules on financial reporting. But you should be leery of accepting information provided by Chinese suppliers at face value.

China’s largest banks typically only lend to the largest corporations, leaving small and medium sized suppliers to obtain loans from friends and relatives or from a “shadow bank.” Shadow banks are private lending companies that are not regulated by the Chinese government. These shadow banks lend money at a much higher rate of interest, squeezing the small suppliers’ already-thin profit margins. So if you are buying from a Chinese supplier, you should ask and verify where their working capital comes from. You just might find that some suppliers cannot make their loan payments and will simply shut their doors and disappear, leaving you scrambling to find another manufacturer. Finding working capital in China is risky business.

Enter: The Bank of Foxconn. Foxconn, the world’s largest contract manufacturer and maker of iPhones, iPads and many brands of laptops, has ventured into the lending world. To protect its suppliers from the pitfalls of shadow banking in China, Foxconn is now making business loans. That makes Foxconn the banker for the world’s electronics supply chain. And Foxconn isn’t the only company to provide banking services in China. Baidu (the “Google” of China), Alibaba (the “Amazon” of China) and Tencent ( WeChat and mobile games) all have lending banks, too. Lending to small and medium businesses provides higher returns to Foxconn than they can make on their contract manufacturing business. It also provides an opportunity for suppliers to borrow at a lower rate than from shadow banks. Foxconn reportedly has obtained licenses from Chinese local governments to provide loans, factoring, financial guarantees and equipment leasing.Foxconn

When evaluating suppliers, be sure to ask where their funding comes from, and don’t be surprised if the answer is the Bank of Foxconn.

Cof O UkraineIf you are an importer, you know the importance of US Customs regulations regarding Country of Origin markings. The regulations are in place so that US consumers can be informed about the origin of the products they buy. You can find C of O markings on adhesive stickers attached to products, on imported food labels, on soft labels in apparel and on the outside of a shipping carton or crate. But what happens when one country takes over another? How should the rules of origin apply?

Customs and Border Protection support the US government’s political position in this matter with the enforcement of C of O regulations. Take for example, the current and very serious dispute over the Crimean Peninsula between Russia and the Ukraine. The US government has taken a clear stand against Russia and one of the ways is through C of O marking requirements. CBP requires products of Crimea to be marked with Country of Origin: Ukraine. This is a very significant point being made by the US government. Goods coming from the Crimea cannot be labeled “Made in Russia” because the US government does not recognize the Russian government there.

On April 28, 2014, the White House issued a press release announcing the implementation of further sanctions against Russia including export restrictions for high-technology goods, subject to the Export Administration Regulations (EAR), which could contribute to Russia’s military.

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) also announced that, effective immediately, they will “deny pending applications for licenses to export or re-export any high technology item subject to the EAR to Russia or occupied Crimea that contribute to Russia’s military capabilities.” Existing export licenses meeting these conditions will be subject to revocation.

Supply chain professionals often discover that the real reason for a trade law or country regulations is political, not economic. The laws are enforced to further the agenda of the importing country, in this case the US. For the US and Ukraine, this means supporting the Ukrainian government in their fight to keep Ukraine independent.

2013-07-05 01.58.31I took the bullet train from Shanghai to Nanjing today, a journey in a pleasant 1st class, sparkling clean rail car at 200 km/hour, for about $30.  Rail is such a great way to travel in China.  It’s efficient, convenient and inexpensive, plus you see things you would never see from an airplane.

Along the way, in every direction, are miles and miles of factories.  They come in all shapes and sizes – small and squat to enormous smokestacks –apparently producing simple assembled products, electronics, plastics, castings and everything you can think of in between.  

Chinese Finance Minister Lou Jiwei told the G-20 meeting in 2014 that manufacturing accounts for nearly 60% of Chinese GDP, an unsustainable share which has created the problems of pollution and overcapacity, he said.  This is very evident as I traveled through the manufacturing areas between Shanghai, Wuxi and Nanjing.  The pollution was overwhelming; the skies were thick with a smoky fog and the sun was a muted disk low in the sky.  The pollution gets so bad from time to time that people wear surgical masks whenever they are outside during the most dangerous periods.

The Chinese government is no longer shying away from or denying allegations of the horrendous air quality.  In fact, in the latest government Five-Year- Plan, China is finally putting real muscle and money into environmental clean-up.  I expect to see substantial improvement over the next few years.  In addition, China plans to use the excess manufacturing capacity to address the needs of their own burgeoning middle class by producing products demanded at home.

Americans need to work on balancing the difference between the Chinese economy supported by 60% manufacturing and the US economy where only 11-12% is based on manufacturing.  Manufacturing is the fundamental backbone of a healthy economy.  We need to bring some of it back to the US- but very carefully.  We want skilled jobs that pay a living wage and don’t pollute the environment.

2013-01-23 05.43.24I just finished a consulting project for a major international brand that wants to enter the eCommerce market in Russia.  Although not new to eCommerce, my client was looking for a more in depth review of the possibilities and capabilities.

Among the many challenges with logistics in Russia, some are unique requirements that don’t exist in other places.  For example, when customers order fashion items over the Internet or via a call center, they expect overnight delivery to locations in Moscow and St. Petersburg.  But this overnight delivery also includes a specific appointment time and a fashion consultant who delivers the goods to the customer’s door and then waits while the items are tried on.  I suspect they also provide feedback….”That makes you look fat”  etc…

Russian customers are among the most demanding anywhere in the world.  But there are other factors at work here, too.  In order to deal with significant petty theft, packages would never be left on someone’s doorstep. They must be delivered and signed for in person.  Credit cards are not widely used via the Internet or over the phone in Russia, so the majority of transactions are done COD.  Russian Post is often slow and unacceptable for customers of eCommerce. Call centers are expected to follow up with every customer to assure satisfaction with their purchase.

The logistics challenges in the Russian market are significant.  The overall supply chain has to be flexible enough to accommodate creative solutions to inventory stocking levels, security, customs clearance and currency exchange.  Returns are very high because customers will often order multiple sizes and reject the unwanted merchandise which then must be returned to the fulfilment center and restocked expeditiously.

To address these issues in Russia, some eCommerce companies have developed fully integrated end-to-end eCommerce businesses including: web store development, web site and shopping cart management, call centers, fulfillment centers, delivery services and fashion consultants. Necessity is the mother of invention.

eCommerce can be a challenge in any country, particularly the Third World where delivery capabilities are underdeveloped. But there is no stopping the double-digit growth of on-line shopping around the world.  The unique requirements of B2C business are yet another avenue for which Supply Chain professionals must gain competence

I spend most of my time working on global supply chain consulting engagements.  But from time to time, I also do Expert Witness work for legal cases involving supply chain issues.  At the moment, I am working on a legal case involving agri-business across Malaysia and Indonesia.

palm oil fruit

Arriving after midnight last night, I couldn’t help feeling a little creepy as we sped from the airport to town in a rickety old taxi.  The third world flew by the windows.  The ancient driver was going 140km/hr until I begged him to slow down. What if we broke down or had an accident?  Were there headhunters lurking? The $50 “best hotel in Sabah” turned out to be rather scruffy around the edges and even the bottled water looked suspicious.  But in the morning, things looked better. Our driver arrived with cold water and a 4-wheel drive Jeep to take us the 50 miles to the plantation, over rutted dirt roads. Finally, we arrived at the estate plantation, a bit rattled from the very bumpy ride.

As remote as this plantation is, in the hot and humid jungles of Borneo, it strikes me that the supply chain issues faced by this company are not that different from any other company large or small, rural or in a metro area.  Here, in the wilds, the managers are worried about planning and forecasting, raw materials such as fertilizer and seeds, labor and transportation.  Harvested product needs to be processed within 48 hours; shipped to the processing plant via rag top trucks.  Then, processed product must get to market to meet customer demand.   The managers worry about IT systems to capture production data and pay the workers.  They do analysis for continuous process improvement.

The plantation workers live in plantation housing and their bare-foot children attend plantation schools.  The people are poor, but very friendly.  Hopefully, the year-round harvest is good, and too much of it won’t be eaten by tree rats or monkeys.  Even rain can ruin the workday.

This is indeed the third world, but they must deal with first world global supply chains and technology. It is gratifying to know that the topics we master as supply chain professionals are truly universal.  The skills we learn apply across industries and continents and cultures.  The differences are fewer than we might expect.

It was an interesting adventure and about as far away from my Silicon Valley home as one could possibly get. At least at home, I don’t have to deal with monkeys…at least not that often.

I recently had the opportunity to travel from the US to Europe to Asia and rode in taxis in all three places.  I was reminded that while a taxi ride may seem mundane, the differences are quite significant. 

 

Take London, for example.  The famous shiny black cabs are the pride of the city: neat, clean and the drivers are professionals who are required to take a test of their knowledge of London before they are allowed to drive a cab. 

 

You will experience the complete opposite in a place like Chengdu, China, a city of 14 million people, where you risk your life when you go for a wild taxi ride…that is IF the taxi driver knows where you want to go and is willing to take you there, after you argue over the destination and the price. It’s the Wild, Wild West of China, where traffic laws and standard driving rules are still in the early development stages.  When the ride is over, you’ll breathe a polluted, but grateful sigh of relief that you survived.

 

In Germany, the taxis are likely to be Mercedes Benz, which feels a little less threatening as the drivers go at break-neck speed to your destination.  Everyone in Germany will tell you that speed is safe. What is it about the Germans and their love of speed?

 

Then there is Seoul, Korea.  A taxi driver will simply refuse to take you anywhere he doesn’t want to go.  And knowing the secret between black cabs (those drivers speak English) and the silver cab (good luck trying to communicate) is important to a successful journey.

 

Un-huh…then there is New York City: taxi drivers in stinky cabs honk at one another, people, cars, and trucks for seemingly no reason at all, all day long and all night long.  On one journey in NYC, when I argued with the driver that my building was across the street in Times Square and I expected him to take me all the way there and not drop me in the middle of the chaos, he yelled at me, “get out of the cab, lady and walk!”

 

And San Francisco, where a drive through the steep hills at 0-60mph for every block, will take years off your life. The drivers are quite friendly and often chatty there, while they risk your life.

 

And then, there is Beijing.  If you don’t ask for the driver to turn on the meter, you will get charged 5-10 times more for the fare than you should.  On a recent trip from the Beijing airport to the Hilton Beijing, I asked for a meter cab.  The driver took me to a side street across from the Hilton, instead of the entrance, and unloaded my bags.  The fare was 58 RMB.  I handed the driver 100 RMB and asked for change and a receipt.  He got in his taxi and drove off with my 100.  I should have known better.

I visited a State Owned Enterprise (SOE) machine shop near 5th Ring Road in Beijing one very hot and humid August afternoon.  The machine shop was located among a cluster of buildings that didn’t seem very remarkable from the outside.  But inside was a different story.

We were greeted by the Plant Manager and the Operations Manager, who were expecting us for a visit that afternoon.  After the greetings were exchanged, the two managers disappeared to take a phone call and we were left to wander the plant by ourselves, unescorted. 

We walked down the center aisle of the machine shop, surrounded by giant drilling and cutting machinery making thunderous noise and throwing off metal shavings.  We were offered no eyewear protection, no foot/toe protection and no earplugs.  The Chinese machine tool operators were wearing black cloth shoes with rubber soles; not the steel-toed boots you would expect in a US factory.  About half way down the center aisle, a chemical smell was so overwhelming, that I looked for an open window or door to gasp some “fresh Beijing air”.  I was allowed to take as many photos as I liked.

The lack of safety standards and allowing us to walk through the factory unescorted was a dose of reality regarding Chinese manufacturing.  China’s steady climb in the industrial world has not been paralleled with world standards for safety.  The climb to achieve these standards in China is extremely steep.

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.

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.