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I spoke at the Global Supply Chain Council’s Sourcing Shift Conference in Shanghai last week. The audience was a mix of c-level executives and very senior sourcing people. These folks have been running international sourcing and manufacturing operations throughout China and across Asia for many years. They are savvy business people with amazing international experience.
So I was astonished that almost no one in the crowd had heard about America’s Reshoring movement. A 2014 Boston Consulting Group report says that 52% of American corporations over $1B in revenue are considering Reshoring. And with Walmart’s new pledge to spend $250B on US-made goods over the next 10 years, Reshoring is all over the news.
We listened to various speakers talking about the shift of manufacturing from China to even lower cost countries including Indonesia, Vietnam, Myanmar and Bangladesh. The cost per hour comparisons were remarkable. They quoted “cut and sew” and assembly operations in Myanmar at $.35/hour and Bangladesh at $.33/hour. Yes, you read that right…thirty-three cents per hour. These sourcing folks and the multinationals they represent are still chasing the lowest labor cost to produce their products.
Then it was my turn to talk about how Reshoring will affect China and specifically, how it will change these people’s jobs. I asked for a show of hands to see how many people were familiar with the American Reshoring movement. Only three or four raised their hands.
So as I described the Reshoring movement in America, they were fascinated. “How can it be that Americans will pay so much more for American-made goods?” they asked. I explained about the new “economic patriotism” that has enveloped the country. Americans want to rebuild the economy and believe that bringing back manufacturing is one way. But products must also be cost competitive. To achieve this, reshored manufacturing must be very automated including the use of robotics, 3D printing and 5-axis milling. “This is not a return to 1960’s manufacturing,” I said. “It is an evolution. And, in fact, the costs can be very competitive with China, when production is fully automated and when the total cost of ownership is considered.”
That got their attention. They are used to dealing with total cost comparisons. They have seen amazing changes in China over the past 25 years and understand the potential for evolution. And suddenly they understood. Their sourcing jobs are going to change, too.
Sourcing Shift Conf

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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.

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.

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.

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.

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!

I’ve been holding off writing about Foxconn’s woes in its factories in Southern China.  There, multiple suicides have made international headlines and have highlighted working conditions in Chinese factories. 

 

Taiwan-based Foxconn (AKA Hon Hai)has been dragged from relative anonymity of contract electronics manufacturing services (EMS) into the glaring spotlight, together with its customers, Apple, Dell, HP and others.  Under the lamp, Foxconn’s practices have been examined for evidence as to why young people are committing suicide on the Foxconn manufacturing megasite in Shenzhen.  Shenzhen is a city of about 14 million people (approximately 12 million of them are migrant workers), about 40 miles from Hong Kong.  The press and Human Rights activists point to the low pay, long hours and cramped working conditions.

 

But all of the stories seem to be out of context.  If you consider the suicide rates for high school and  college students in the US (approximately the same age group), you’ll find that the Foxconn rate is actually quite low: 5.4 per 100,000 which is roughly one-half the rate in the US.  If you consider the wages and working conditions at Foxconn vs other factories in Southern China, you’ll find that they are competitive if not slightly better.

 

Foxconn is by far the largest contract manufacturer in the world, with about 400,000 workers in China alone.  As a result, they are often the industry leader in innovation, trends and tactics in the management of their manufacturing and assembly operations.  They are also a target for the criticism launched by the Western world and human rights activists. 

 

All facts and context  considered, Foxconn should not be criticized for their working environment, and the Western world needs to calm down.

 

 

Hello from Shanghai and Nanjing…

For the sixth time in three days, someone has told me that “Shanghai isn’t really China.”   This is because Shanghai is a major international cosmopolitan area that seems to be more like Manhattan, London or Paris than it is like WuXi, Nanjing or Guangzhou.  And they are probably right…even though people speak Mandarin or Shanghainese here; they also speak English everywhere and lead a typical urban life. 

Shanghai has been a major international port since the 1800’s where European and American traders established headquarters here and traded opium for tea and silk.  It has also been known for haught couture and its large artist community.  It is a lovely city, really.  Pudong, a section of Shanghai that was developed over the past 25 years is beautiful and modern…it kind of reminds me of Irvine, CA.  My contacts are right, it doesn’t really feel like China.

Soooo….on Wednesday, I hopped on a train to Nanjing (more traditionally Chinese and a very old city).  I know the CEO of Apprise Software and although he is American and the company is headquartered in Bethlehem, PA, he moved to Nanjing in 2007 to be close to his developers and his customers.  Nanjing is an important area for innovation and software development  because of its many excellent technical universities.  The bullet train took 2.5 hours each way and traveled about 200km/hr…we passed through farmland dotted with enormous power lines and traditional 6-8 story Asian factories (I am not sure why they build factories this way).  These structures and the relentless construction of more infrastructure was everywhere.

After a delightful Chinese lunch with the Apprise development team, I returned to the Nanjing train station to wait for the train back to Shanghai.  I was the lone Caucasian in a sea of hundreds of Chinese people who were openly staring at the single laowai (foreigner – not a particularly friendly meaning).  I might be a little crazy to be traveling all over China by myself…but it is truly an adventure and I am seeing the real China, too!

Lately I have been hearing a lot about “quality fade” in China.   Generally, when a contract is signed and specs are given for initial production at a new supplier, importers of Chinese-made goods are thrilled.  I have worked with several clients that were very pleased with the quality and especially the price of initial production.  Although selecting and qualifying a new supplier is a complicated process, it is typically a sound economic decision and new importers feel like they’ve hit a home run.

But don’t be fooled!  The initial production runs are often not sustainable.  In order to quote a low “China price,” a Chinese manufacturer knows that he must continuously look for ways of reducing production costs in order to make a profit.  Reducing production costs takes one of two forms:  using shadow factories or cutting corners. 

In a previous post, I have discussed shadow factories – those “behind-locked-gates obscure production facilities”  that you will never see.  These shadow factories are the true Chinese sweat shops where costs are lower than in Five Star Factories.

The other way costs are reduced is through the process of quality fade.  This is where your supplier will subtly start to cut corners to reduce costs.  The plastic bottle your product comes in may get slightly thinner.  The label may get 10% smaller. The wiring used in electronics may get slightly downgraded.  The paint used for your product may be slightly lower quality, or contain more lead so it dries faster. The water used to mix products may be a tiny bit less pure. The bottles may be slightly less full by a cc or two.

Unfortunately, these slight changes may not be noticeable for a very long time or until the combination of corner-cutting makes the product fail or be unacceptable for consumers …or in the case of Mattel Toys or White Rabbit candy, downright dangerous.

To many Chinese manufacturers, this is just a normal part of the “game” of the manufacturing business.  Quality fade is a common tactic employed to keep the China price low.

So what can you do to avoid quality fade?  First, make sure that the exact specs for production are written into every contract.  Don’t assume anything. 

Second, there is no substitute for constant monitoring.  You must constantly test, review and audit all products coming from Chinese manufacturers and take immediate action if you detect a problem. 

Third, establish an on-going on-site QA process (both announced and unannounced) to validate everything.

20160516_142613 - CopyAs business people evaluating potential suppliers and manufacturing locations in China, you and I will be shown the “Five Star Factory”.  You will see “Five Star” ratings throughout China on places such as restaurants and public toilets.  This rating tells you it is the best.  Five Star Factories will have proper safety and working conditions, meet cleanliness targets, have friendly workers, good dormitories and eating facilities.  What we won’t be shown are the “shadow factories.” 

Shadow factories are secondary manufacturing facilities, perhaps nearby the main factory.  They are closed to visitors and often unregistered, so there are no official records of their existence.  Here, people might work 16-18 hour days, 6-7 days a week.  Often, workers are paid less per hour, violate safety and work conditions regulations, avoid taxes and produce goods that are sub-standard.   Most experts say that about 70% of all legal factories in China also have shadow factories.  The thing is though; very often migrant workers are looking for places where they can earn more money by working more hours. 

While the world may view 16 hours of work per day as a human rights issue, Chinese workers may view it as an opportunity.  You must understand that migrant workers come to the manufacturing areas in Southern China for a few years to earn enough money to send home to their families or to return to their country homes, marry and live a more comfortable life.  Even though there are strict labor laws to protect workers in China’s factories, these laws are readily ignored.  In China, work is a kind of religion and many workers seek as much of it as they can find.  It is also important to note that Chinese workers save on average, 42% of their income.  So while the wages for factory work average $.56/hour, the savings rate is still unbelievably high.

Personally, I do believe we should be concerned about Human Rights violations around the world, but in the manufacturing areas of China, we need to understand the complete picture before forming opinions.  And 16 hours per day?  Just ask any Silicon Valley worker with email, a laptop, a Blackberry and cell phone how many hours they work.