SinoFactory

Obsessing about cheap labor without considering overall value can be pretty stupid.

About 10 years ago, I was hired as the sourcing director for ***** Electronics, a privately held company headquartered for over 40 years in southern California.   We were a smallish power supply company, supporting OEM projects for some major players in the medical, commercial and sometimes retail electronics markets.   We had no China facility, and relied on our Taiwanese suppliers to realize the designs, make the products and ship them to us.   My job was to setup and run a small liaison office in Taiwan,   managing the development and sourcing of power supplies with our Taiwanese OEM and ODM vendors, and ensuring the quality of products made by those vendors in their Taiwan and Chinese factories.

Previous attempts at outsourcing in Mexico had failed miserably, and now it was time to try Taiwan as a manufacturing center.  Prior to my arrival, Taiwan wasn’t working either.   It was clear that Taiwan wasn’t “working for us” because it’s factories in Taiwan didn’t have the quality understanding to satisfy our market’s demands, and their factories in China (where an increasing number of our products were being made) didn’t have the flexibilty to “buy into” our high-mix low-volume high-value model.  The results: projects sold to major customers  got to market late, or never made it to market at all.   Most damaging were product recalls for power supplies sold to Bloomberg and Kodak.

I found that the problems were manifold: the vendors were quoting and planning our production on a mass-production model, but in the end were getting the small, unattractive orders our company had come to expect.  In their business models, low volume = low value.

While I was able to improve the results we got with our Taiwan vendors, I could not change the basic DNA of the situation:  we had a  fairly large large number of vendors, each geared for mass production of commodities, each getting small orders of products requiring a quality and technical level they had never encountered before.   Products and Projects stalled, sputtered and failed.

So it was decided sometime in 1999 that we would solve these problems by setting up in China.   When I mentioned to our current vendors that we would be setting up in China, they tended to snicker as they mumbled “chasing cheap labor”.  My dirty little secret was out, as if I’d winked while mentioning I was “going for a massage”,

This was when labor WAS still cheap in China, but cheap labor was not even CLOSE to being the driver for the move.  This facility was set up (and remains) in Shenzhen city (in Nanyou), which is a much higher cost setting than where any of our competitors had set up (usually in Shenzhen’s  outskirts, or in Dongguan).   We paid our people more, and spent more on housing and other benefits than our competitors did (many called me stupid to do this, and warned me against “spoiling” the workforce).

What we chased, or what we caught, was a stable and flexible workforce.   In retrospect, cheaper labor would have been much more costly.  That facility, with it’s high labor costs, started on a shoestring budget, grew to take in all previously outsourced production, and grew an R&D function which was intened as a “back office” to the US R&D facility.  In the end that too became the driver of our company’s R&D capablity.

So we came to China and paid our workers too much, spent too much on their benefits and too much on ensuring their comfort and safety.  And all we got for all this “cost” was LEAN, flexible, and otherwise value-added production.  The value, added by this flexible and stable workforce, was not lost on the market, and as  we added Fortune 500 companies to our customer list, our value and stature grew.  Finally the operation was finally purchased by a competitor.

I left that company in 2005, but I still talk to people in that company fairly often; I’ve never heard anyone mention moving out of southern China to chase cheap labor.