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Tag Archives: production

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.

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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.

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.

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.

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!

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.

Shenzhen, China January 2
Shenzhen, China magnify

I have learned a few things over the past couple of days. On Jan 2, we rode the train from Hong Kong to Shenzhen, China, just 40 miles from downtown Hong Kong. Shenzhen is a new manufacturing city, established just 20 years ago. Everywhere you look for miles and miles are all kinds of factories and ocean containers packed for export through the booming nearby port.

The cost to produce things here is just a fraction (1/10 to 1/20) the cost to produce in the US. As a result, this area of China is experiencing exponential growth. The infrastructure is being built as fast as possible, (a subway system is under construction in Shenzhen), however electricity production cannot keep pace with demand. We were told that the manufacturing plants close 1 day per week in the summer because the use of air conditioning causes excess demand for overall power in Shenzhen.

We met with some business contacts, toured a plastics plant and had a very rare and privileged opportunity to tour some workers’ living quarters. The plastics plant was clean and efficient and although the production of precision plastics is not as labor-intensive as assembly work, the operation is still low-cost. This company is rapidly investing in new machine tools, has implemented SAP as their business system. They work hard to procure low-cost materials, but are also obsessively focused on quality standards because they know this strategy will help them retain long-term customers.

The managers had impressive credentials including MBAs from Shenzhen University. They all spoke English and were proud to explain their part of the operation. Workers at this company stay in the company dormitory Monday-Friday and go home on the weekends. Inside the dorm, they sleep 6 to a room, except for managers, who have private rooms. Workers have access to PC’s and the Internet, a TV room, exercise equipment, and a reading room. While Spartan by US standards, the dorm reminded me of my college days.
Each time we crossed the border (Hong Kong to Macau and return, Hong Kong to Shenzhen and return and Hong Kong to Beijing) we were required to prepare exit paperwork from the origin country and immigration paperwork for the destination country. Coming back from Shenzhen, we were also checked for our body temperature, I suppose to make sure we weren’t sick. One has to wonder what happens to all of those exit and immigration forms because the process also includes a passport scan and computerized check of your visa. It’s worth it though. Visiting for business and sightseeing in China is amazing!