Chinese New Year falls on 10 February this year, when the Year of the Dragon ends and the Year of the Snake begins. A year ago, as the Year of the Dragon began, I posted a commentary on how China affects smaller American manufacturing firms. I liked Jousting with the Dragon when I posted it, and I like it now. It is worth another look now, as the Year of the Dragon ends. It’s one of my favorites. — C.H. ================================================================== From: 19 January 2012 *Werbach, Adam, Strategy for Sustainability, page 9
Jousting with the Dragon
I spent most of the years 2005 – 2008 in Asia and Australia, on business for a manufacturing firm. I traveled often and widely in China, visiting at least a dozen Chinese cities, including Beijing, Shanghai, Guangzhou and Dalian. I visited lots of Chinese factories, trade shows and offices. My personal experiences and impressions color much of the material in this post. – C.H.
China, Sustainability and the Smaller Manufacturer
In China, New Year (2012) begins on 23 January this year. The new year will be a Year of the Dragon, the most auspicious in the 12 year cycle that is China’s zodiac. Since the dragon is often used as a symbol for China, this seems an appropriate time to talk about China and Sustainability, in relation to smaller manufacturers in the U.S. and elsewhere outside of China.
As most manufacturers are aware, over 42,000 American factories have closed their doors since the millennium. Manufacturing employment has dropped precipitously. Those 42,000+ factories clearly were not sustainable, or as Adam Werbach* says, not able to “thrive in perpetuity”. Much of the lost production and the corresponding manufacturing jobs have gone to China. Some relocated to American – owned plants in China, others were lost to Chinese firms.
Globalization – In the years following World War II, Japan rebuilt itself through a process of: (a) first, producing low price, low cost goods for export, (b) then building a modern industrial base, (c) then investing in technological improvements, (d) then moving upscale to more profitable goods for export and for domestic consumption. The Pacific Tigers (including Taiwan, South Korea, and Singapore) followed a similar path. Now China, with its huge population. Others are following China, notably India and Indonesia. Globalization means global markets. Those who cannot compete don’t “thrive in perpetuity”*.
Value Chains – Consider your products’ complete value chain, from the mines, farms or forests your raw materials come from, all the way to the ultimate customer who uses and finally disposes of that product. At each step along that chain, globalization means global markets. You suppliers or their suppliers may well depend on Chinese suppliers. Your customers or their customers may be in China. The same is true for your competitors, and your suppliers’ competitors, and your customers’ competitors.
The Ubiquitous Chinese Government – Consider that the Chinese Government is sufficiently authoritative to enforce a one child policy in a nation with 1.3 billion people. Further, the Chinese Government runs the Chinese economy with equal authority. The Chinese Government operates entire industries as vertically integrated entities. And the Chinese Government operates the economy on a “China First” principle – industry is operated to China’s advantage, as the Chinese Government sees it. This is very different from an economy that consists of independent entities that compete with one another on a more or less level playing field. In the U.S. manufacturers compete with other manufacturers, not with nations.
Chinese Manufacturing Costs – Everybody talks about direct labor costs. But direct labor costs in China, while much lower than the U.S., are higher than in many other countries, and Chinese wage rates are increasing quickly. There are a lot of other costs to consider, including these:
>> Structural costs: According to the National Association of Manufacturers (www.nam.org), “structural costs” (Corporate tax rate + Employee benefits cost + Torts cost + Energy cost + Pollution abatement cost) averaged 38% higher in the U.S. than in China in 2011.
>> Construction costs: Industrial building costs are much lower in China than in the U.S., due to low construction labor costs and to the much simpler design and finish of most Chinese factories.
>> Capital costs: Chinese government-owned banks make low cost capital available to Chinese manufacturers.
All of this is intended as an indication of differences between the U.S. approach to manufacturing in a global economy and the Chinese approach. It is not my intention to accuse China of cheating or any such thing. China is quite up-front about these policies.
What Can a Smaller Manufacturer Do?
Develop a Zoom Lens Mind – Many smaller manufacturers have their hands full with day-to-day operations in these difficult economic times. However, to thrive in a global economy, it is critical to work on the business while working in the business. Beyond the pressures of the immediate, it is essential to also attend to “big picture” matters, especially business strategy and business model robustness. Globalization calls past ideas and practices to question, no matter how venerable.
Focus on Competitiveness – Increase emphasis on improving cost competitiveness. Accelerate the deployment of Lean Manufacturing practices. Get even more serious about energy and materials utilization. (See the Resources Utilization page on the Jera website, www.JeraSustainableDevelopment.com, and surf previous posts on this blog.)
Learn to Innovate Continuously – Globalized manufacturing has dramatically increased the need to bring a continuing stream of innovative products and processes into commercial reality. Sources for innovative ideas aren’t limited to some R&D function. One can learn a lot by paying attention, in a systematic way, to what others are doing, within your industry and without.
Strengthen Trade Organizations and Partnerships – Before globalization, there was legitimate concern about collusion to monopolize markets and industries. Globalization greatly extends the potential number of competitors into any market or industry. Direct government participation in industry, such as government owned manufacturing firms or sovereign investment funds, bring further change. It is important for American manufacturers to work jointly with other firms through trade associations or partnerships for specific purposes. American anti-collusion laws need to be reviewed and prudently revised in view of global realities.
Support an Explicit National Manufacturing Policy – Private industry is ill-prepared to compete with foreign governments. America needs a sound National Manufacturing Policy to thrive in the realities of a global economy. (Look for more on National Manufacturing Policy in future posts to this blog.)
Understand Your Value Chain – Diagram your entire value chain, from raw materials to ultimate disposal of finished goods. Make a plan to address those links in the value chain that hint of being unreliable or even unsustainable. Act on your plan.
Read, or Re-read Andrew Liveris’ Book, Make It In America. Liveris is the CEO of Dow Chemical, one of America’s five most global manufacturing firms. He adds much to this discussion.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
Chinese New Year falls on 10 February this year, when the Year of the Dragon ends and the Year of the Snake begins. A year ago, as the Year of the Dragon began, I posted a commentary on how China affects smaller American manufacturing firms. I liked Jousting with the Dragon when I posted it, and I like it now. It is worth another look now, as the Year of the Dragon ends. It’s one of my favorites. — C.H.
From: 19 January 2012
*Werbach, Adam, Strategy for Sustainability, page 9