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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.

Hoverboards are very popular holiday gifts this year, but the stories about the boards that explode are all over the news.  Many retailers including Amazon.com and Target stopped selling them, and several commercial airlines banned them aboard their aircraft.

So what happened in the manufacture of these items to make them so dangerous? In the reported incidents, the lithium ion batteries in the hoverboards caught fire while charging or just riding them. The reasons for the combustion process is well-known when a battery is defective. The problems with these batteries were identified in laptops and cell phones a few years ago.  What isn’t so transparent are the sourcing and manufacturing processes for the boards being produced in China.

Hoverboards are new, exciting and popular products and this combination creates a frenzy of manufacturing opportunity for Chinese manufacturers. Because of the popularity and the potential for high volumes and high profits, knock-off brands proliferate very fast in the extremely competitive changed to avoid patent infringement laws. The raw  materials sourcing for knock-offs may come from completely different suppliers. Cheaper knock-off products means cutting corners in the factory to keep production costs low.

US safety standards are not all in place yet for these new products. US Customs may be allowing imports to enter the US based on safety standards for similar products, following the current requirements for imports. Some manufacturers may have obtained UL certificates on certain component parts, but not for the hoverboard as a whole. Raw materials such as the actual batteries may be knock-offs, too. You cannot trust the  well-known top brands either. The high demand is likely to cause sourcing from multiple Chinese factories with limited experience and untested component suppliers. No Chinese agency is overseeing the quality of exports from China.

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Montgomery County Fire and Rescue

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I can’t get that hit rock song by the Clash, “Should I Stay or Should I Go” out of my head.

“Should I Stay Or Should I Go” by the Clash
Darling, you gotta let me know
Should I stay or should I go?
If you say that you are mine
I’ll be here ‘till the end of time
But you gotta let me know
Should I stay or should I go?

I’ve been talking to companies that are now making decisions about keeping their manufacturing and supply base in China or bringing manufacturing back to the US. They are asking the question, “Should I stay or should I go?” and that triggers the song playing in my brain…over and over and over. I wake up hearing it and it plays in my head all day long.
In the 1990s and 2000s, companies went to China out of fear of being left behind, not necessarily because they had made an informed decision based on data about the Total Cost of Ownership (TCO). Now it seems they are coming back for fear of being left behind again.
Total Cost of Ownership is an all-encompassing estimate that helps business people determine direct, indirect and consequential costs of one decision versus another. The idea was developed in the 1980s and applied to the costs of implementing software over its entire lifecycle. But when using TCO in a manufacturing or sourcing decision to stay in China versus moving back to the US, there are many more components to monetize and compare.
For example, you may find additional factors that must be considered beyond simple labor costs, import and logistics costs, such as supply base considerations, automation opportunities, supply chain latency, cost of travel, IP theft, quality and so on.
There are also costs associated with leaving China such as buying out employment contracts, obtaining permits to shut down operations, and the tools and dies left behind. The legal ramifications of these things can add up quickly. There is a lot to consider and trying to monetize all of the hard and soft benefits can be very challenging.
Nonetheless, it is important to consider all costs for a true comparison before you decide, “Should I Stay of Should I Go?’

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

RESHORINGFor the past 15 years or so, I have been helping companies offshore their manufacturing.  There have been, and continue to be, pretty significant cost savings in low-cost labor markets.  But with the waning US economy, it’s time we wake up and put some Yankee ingenuity into bringing some manufacturing back. We think it is possible to bring 15-20% of offshore manufacturing back to the US.

I am not saying we can or should bring it all back.  There are still global cost advantages to low-cost labor markets.  And China represents the largest single target market in the world to sell goods to.  Companies should continue to  manufacture in China to serve the Chinese market.

The U.S. manufacturing sector has added 430,000 jobs since 2010; a small trickle of what we need to recover, but still a move in the right direction. Companies that are reshoring include some of the nation’s largest manufacturers: Apple, General Electric, Ford, Caterpillar and NCR.  A 2012 study concluded that reshoring could add 2 million to 3 million jobs and an estimated $100 billion in annual output to a range of industries by the year 2015.

But bringing manufacturing back isn’t as easy as you may think.  There are a host of considerations and analyses that companies must do to determine the costs and feasibility of reshoring. Several of the important factors in the original offshoring decisions have dramatically changed. Consider these 5 factors as the initial steps in determining your need to rebalance global manufacturing and reshore some activities back to the US.

1)      Cost Increases, Taxes

2)      Innovation and Automation

3)      Market Access and Localization

4)      Skills

5)      Political Environment and Public Sentiment

We are helping clients evaluate the possibilities now.  For more information go to www.BlueSilkConsulting.com/Reshoring

flag (2)There are some fundamental differences in business practices that you should know when working with Chinese suppliers.

Culture impacts everything

China’s 5000 year history and traditions affect everything.  The dichotomy of modern industrial China, superimposed with traditional values and approaches to doing business, is often a surprise to Westerners.

Guanxi is not networking

Guanxi is someone’s personal network and long-term trusted relationships between parties. It is not simple networking.  It involves a commitment over time. You cannot do business effectively in China until you build this type of trusting relationship.

Validate everything in writing

Even though there are more English speakers in China than any other country in the world, it is often a mixture of Chinese and English that is not understood by either party.  Just because a Chinese business person speaks English, does not mean he understands the nuance of the language.  Every detail of the contract, specifications for production, expectations, etc., should be put in writing, discussed and confirmed several times.

Contracts are viewed differently

In the Western world, contracts represent the culmination of negotiation on price, delivery, specs and other terms.  In China, a contract is viewed as just the beginning.  Just as an American high school student may view graduation as the end, parents view it as commencement or beginning.  A contract in China is a commencement and the start of real negotiations.

Quality fade

Quality fade, the process of quality degradation over time, is the single biggest issue in low cost manufacturing countries. It happens frequently in China where manufacturing processes are immature and competitive pricing drives the profits to extremely low levels.  You have probably noticed quality fade, but didn’t know what to call it, or understand how it happened.  Maybe you noticed a plastic shampoo bottle that seemed too thin.  Maybe that hand-held electronic game you put in your son’s Christmas stocking stopped working after a few days.  Maybe the zipper in your pants broke after a few zips. The initial production may have met all expectations, but over time, there was degradation in production quality.

Outsourcing and subcontractors

China business is typically a combination of primary manufacturers and many sub-contractors that provide parts and services.  Without regular monitoring of the production processes in China, this common practice of sub-contracting and outsourcing gets out of control.  US importers find it harder and harder to control quality over time and sustain delivery schedules from Chinese vendors.

Importers must remember that doing business in China is not at all like doing business in America.  The processes, culture and legal environments are a world apart.

I am in China again this week and it seems everyone wants to know about the US elections.  They watched the Presidential debates and the election news with great interest and a kind of wondrous amazement.  “We heard what your politicians believe and what they will do,” one executive told me.  “In China, we have no idea what the policies of the leaders will be.”

I hadn’t really considered the difference in politics this way.  Americans have access, information and a fundamental understanding of what the leadership is planning.  Chinese people have none of this.  Most people have no clue about what is in the new Chinese 5-year plan, or how the new Communist Party Chief Xi will lead the country.

With the US elections now over and Obama reelected, the new President Xi assuming the leadership of China and Putin in Russia, we should all be wondering what will change in the world.   These three super-powers will surely bring dynamic change in the world order.

The Chinese Communist Party began its leadership transition as the 18th National Congress opened in early November.  This transition in leadership happens only once every 10 years. The new President Xi will be charged with executing the new Chinese 5-year Plan, developed earlier this year.  This plan includes a heavy emphasis on the environment, and from what I have observed in China, whatever the government decides to do, gets done.

In the US we have had the privilege of watching the Presidential and Vice Presidential debates, listened to endless TV advertising and news reports.  We have a pretty good idea about the President’s agenda.  But how that agenda will interact with Xi’s and Putin’s is a big unknown.

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.

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.