Tag: manufacturing

PRC govt. (China Daily) to foreign manufacturers: Time to go. Can’t you take a hint? …. Just kidding!

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Just because I in my infinite wisdom,  say rising labor costs are no big deal, and that China is still competitive for lots of manufacturing, doesn’t mean everyone agrees with me.  In fact, the PRC government, via it’s China Daily article “‘Made in China’ – but for how long“, ask the rhetorical question:

How long will companies be able to afford to manufacture in China?

The answer, it seems (at first), is “not very long”:

Manufacturing wages across China have increased by 14 percent over the past year (see inside cover story), making the prospect of producing goods in nearby Southeast Asian countries such as Vietnam or in Bangladesh, Sri Lanka and even Africa seem a viable alternative.

To paraphrase the first half of the article, China is no longer a competitive manufacturing base for foreign companies.  The second half of the article goes on to agree that labor costs are not always that significant, but this viewpoint is not introduced until the second half.  Until you get there, the article seems to be telling us foreign factories to head for the door.  If you don’t read through to the surprise ending, that’s what you are left with.  It seems to be telling us foreign manufacturers that we should  consider leaving China because…

Ann Taylor and Coach are moving out to chase cheap labor in neighboring countries:

Two large US companies, Ann Taylor Stores, the women’s clothing retailer, and Coach, the luxury handbag maker, are poised to relocate production to countries, where labor rates are cheaper.

A bunch of unnamed British manufacturers are considering moving from China back to the UK.

A recent survey by EEF, Britain’s leading manufacturing association, said one in seven of its members were looking at shifting production back to the UK, fed up with problems in countries such as China.

“Getting goods of the right quality, issues such as time to market and rising fuel costs have been driving this trend,” said Lee Hopley, EEF’s chief economist.

Reading the first half of this article makes me feel like the last guest left at a party, where the hosts are starting to yawn, stretch and grouse about how early they have to get up in the morning.  They are thinking… Just get out and leave us alone!   Go to Vietnam!   Go to Africa for all I care!  Everyone else is rushing for the door, almost gone!  You brought a great casserole which everyone (including you) enjoyed, but it’s long been finished and complimented by all.  The dishes have been done (thanks for helping).  We’ve locked the liquor cabinet– no more scotch for you.  Why are you still hanging around?

If even the China Daily says manufacturers are headed for the door who am I to disagree?

Actually, the bit about Ann Taylor and Coach are from a Wall Street Journal article  U.S. Apparel Retailers Turn Their Gaze Beyond China, which  quotes executives from Ann Taylor and Coach but also from Guess, Guess and JC Penny. Looking at the original article, here’s why I wouldn’t take it too seriously:

1.  The original article was specifically about apparel retailers, not about manufacturing in general.  Apparel manufacturing has a relatively high labor content and are particularly sensitive to labor rate fluctuations.

2. Even so, most of those mentioned already had operations in neighboring countries, and were simply considering altering the mix of products made in China with those made outside China.  They were largely (not completely) discussing adjustments in strategy, not a major transition from China to lower cost counties.

3. The original WSJ article  also contains “balancing” quotes from apparel industry experts who people who believe that, even for apparel manufacturers, China is difficult to replace.

Indeed, for the money, the quality of Chinese-made goods is tough to match, and labor is just one of the costs of production. Others include the costs of raw materials like textiles, production facilities, transportation and quality control and training.

The skills of China’s labor force and its familiarity with the ways and expectations of U.S. companies, exceed that of any other Asian country, said Mr. Rubman, the retail strategist.

Vietnam has a big labor pool, but textiles aren’t as available there as in China, meaning retailers would have to ship in fabrics, said Andrew Jassin, managing director of fashion consulting firm Jassin Consulting Group.

“The only replacement for China is China,” said Li & Fung’s Mr. Darling, adding that his firm is scouting production possibilities in northern and western China. Since those areas have played only a minor role in the country’s manufacturing boom, wages there remain relatively low.

Regarding the British manufacturers who are going home, note that labor costs are not mentioned as contributing factors.  Also, note that they are only  “looking” at moving out.   It would be interesting to know more about those British manufacturers who can’t hack it here in China.  What are their quality and delivery problems, and why are they  so intractable?

Once again, the second half of the article tells us why we needn’t be rushing for the door just yet, but that that viewpoint is not evident in the articles introductory paragraphs.  Unfortunately, I think that a large percentage of the readers, having their pre-existing premise validated, won’t make it to the happy ending.

: Economy,Labor Issues,Uncategorized
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Labor rates rising, but labor is still “cheap” if you get more value.

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In a response to the much blogged and tweeted Economist article “Is the era of cheap Chinese labour over?“,  Economist guest contributor Tyler Cowen answers the question intelligently in his response “The important thing is Chinese productivity is rising“.

Anyway, the money quote comes at the end of the article:

In the question stated above, “cheap” is a misleading word. The more productive China becomes, the cheaper its labour will be, at least relative to what you get.

: Economy,Labor Issues,Southern China
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China Labor: Yes, The Times They Are A Changing but no, the sky is NOT falling.

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There was some balanced perspective  on the China labor situation from a July 1 Reuters article.

Just wanted to share some of the main points:

  • Yes, the fact that there were strikes is significant. But no, the actual effect of those strikes has not been significant because of their limited scope.   (It is, however, important to get at the underlying reasons for those strikes.)
  • Yes, workers are becoming more demanding and more vocal.
  • [My favorite] Yes labor costs are rising but no, this is not the end of China as a production base.  This is because rising labor (and other) costs are not a new phenomenon, and because labor costs constitute a fraction of overall manufacturing costs in China.  Some manufacturers may move inland or out of China, but…

“China is still an attractive option for most companies looking for an effective manufacturing base, although many companies have been pursuing a China plus one or a China plus two strategy in recent years to diversify their manufacturing operations,” said Geoffrey Crothall of the China Labour Bulletin in Hong Kong, which advocates for improved workers’ rights.

“I really don’t think we’re going to see companies suddenly leaving China en masse.”

  • Yes, in some cases supply chains may be impacted, but no,  it doesn’t look like a significant issue with regards to stocking strategies.
  • Yes,  the Chinese government will likely to play a greater role (by more stringent enforcement of labor laws,  and by encouraging collective bargaining)  in balancing the needs of a more assertive workerforce with those of industry.  But no, it will not allow independent labor unions.
: Economy,Labor Issues,Southern China,Uncategorized
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Pearl River Delta manufacturing: the reports of its death are greatly exaggerated

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The SCMP shows that chasing cheap labor may be too expensive

A pair of recent articles in the South China Morning Post offer some more perspective on the much-predicted exodus of manufacturing from the Pearl River Delta and why, for the most part, it just ain’t gonna happen. (a paid subscription is required to access SCMP articles, but a 14-day free trial is available).

One article, Minimum wage rise doesn’t worry all China plants, is mainly about how minimum wage hikes don’t affect those who aren’t complying with the minimum wage law.  It also also discusses the how two manufacturing groups well established in the PRD,  garments and toys, are likely to react to rising labor costs.

First, according to the article, garment makers (40% labor content) gotta hit the highway…

Willy Lin Sun-mo, vice-chairman of the Hong Kong Textile Council, said: ‘Now, setting up a factory 500km from Hong Kong is okay, but several years ago, most Hong Kong factories were in a 100km radius from Hong Kong. The only way is to move further away. There is nothing much we can do. Rules are rules, so Hong Kong manufacturers have to pay.’

Hong Kong garment factories had difficulty paying ever increasing wages, as labour accounted for 40 per cent of the cost of a garment, he said. ‘If all garment factories have to raise salaries by double digits overnight, how can they compete?’

but toy makers  (20% labor content) ain’t going nowhere…

A Hong Kong toy executive said he knew of a handful of toy factories that moved from Dongguan to more remote cities in Guangdong this year, namely Heyuan, Shaoguan and Qingyuan.

Toys are among Hong Kong’s biggest export industries and most toy factories are in Guangdong.

The impact of the minimum wage increase had not been too severe on Hong Kong’s toy industry, said the executive. Labour accounted for 20 per cent of the cost of making a toy, he estimated.

The toy industry was informed of the wage rise months ago, so they factored it into the cost of their products, said the executive. ‘We will raise the prices of our toys by about 5 per cent. Customers have to accept the higher prices because all toy factories in China are affected.’  [Note from DJL:  I wonder how much of that 5% increase could be offset by gaining efficiencies in the manufacturing processes.]

The second article, Factories likely to stay in Pearl River Delta,  shows why  moving factories out of the PRD just to chase cheaper labor probably doesn’t make economic sense.  Among the economists cited are Paul Krugman.

US economics Nobel Prize winner Paul Krugman, in his book Geography and Trade, says it is often uneconomical to move manufacturing from costly but established manufacturing coastal areas to lower-cost distant locations.

It is more profitable for manufacturers to keep factories in places like the Pearl River Delta than to relocate to cheaper but more remote places. The reason: convenient and cheap transport infrastructure, a large pool of migrant workers and a network of small to medium-sized manufacturers. Thus, the cost of setting up a new factory in Xinjiang is higher than keeping one in southern China.

It goes on to to quote Willy Lin Sun-mo, as did the previous article. This time, however, it quotes him to illustrate that  even for labor intensive industries that need to move, moving out to chase cheap labor may incur hidden or at least less obvious costs:

Knitwear maker Willy Lin Sun-mo, chairman of the Textile Council of Hong Kong said: “A sophisticated supply chain takes decades to develop, just like the Pearl River Delta, which took some 25 years to come to what it is today.”

Lin set up a knitwear plant in Jiangxi province about 18 months ago to take advantage of the labour market but said he had managed to employ only half the 3,000 staff needed. “Labour shortage is not just a problem in Guangdong,” he said. “Insufficient labourers mean higher wages, a big threat to manufacturers.”

Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said relocation made sense theoretically but doubted that many firms would make such a costly move…

Yes, labor costs have increased, and it will mean readjustments for many factories.  I’m still guessing, though,  that relatively few will move from the PRD’s  mature manufacturing infrastructure to “cheaper”  places with questionable transportation facilities and without the extensive network of integrated parts, materials and service providers to which they are accustomed.

By the way, a related SinoFactory posts from the past may be of interest: Coming to China, but NOT for cheap labor!

: Economy,Labor Issues,Southern China,Uncategorized
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US Cleantech jobs gone to China: Stop bitching & start competing

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American politicians and pundits should stop complaining about successful Chinese competition for greentech and other “good”  jobs.  Rather than complain, they should get off their soapboxes and work towards incentivizing and encouraging US industry.  They should be asking following question:  ”The Chinese have their plan, what’s ours?”

This article from yesterday’s Industry Week cites a congressional panel which concludes that China’s government is aggressively encouraging the foreign investment in, and development of, key industries– this to the detriment of those industries in the US.  From that article:

China employs a variety of incentives, including subsidized land, energy and water, to foreign companies that relocate their operations there. China uses tax incentives and preferential loans, the report notes, to further reduce the cost of investing in China.

The report says China is selectively targeting industries such as auto parts, machine tools, information technology, optics, photonics and clean renewable energy. This policy, it warns, is contributing to the loss of jobs in the upstate New York area even as the state seeks to become a global leader in the renewable energy field.

The report adds that it is not just manufacturing jobs that are moving to China. “Advanced technology companies in the region that have been moving their manufacturing operations to China are now relocating their research, development and innovation operations there as well,” it finds.

The Chinese have been doing what they should do by building a platform for development by private companies, both local and foreign.  They invest in the development of the industries and they get the jobs associated with those industries.

And here’s an example of the Chinese government’s “can do” approach to clean energy from a report by Reuters posted on November 15th:

China selects 294 solar power plants for subsidy

(Reuters) – China has identified 294 solar power projects with total generating capacity of 642 megawatts (MW) in its first pilot program.

Beijing has said it will subsidies  [sic] at least half of the investment cost.

The capacity will be nearly 30 percent more than the minimum target Beijing set in July when it launched the unprecedented “golden sun” plan, which was part of China’s drive to catch up in a global race to find alternatives to fossil fuels.

One would expect that the Chinese solar panel manufacturer Suntech, or it’s Chinese competitors will get a lot of orders out of this initiative.  Speaking of Suntech,  two days before the above-mentioned article appeared, Reuters ran an article about China’s solar rooftop program:

Suntech to develop 20 pct of China’s Solar rooftop plan

Nov 13 (Reuters) – Chinese Solar panel maker Suntech Power Holdings Co Ltd (STP.N) said it expects to develop about 20 percent of the 91 megawatts of solar projects under China’s solar rooftop program.

The solar rooftop program was launched in March to increase the efficiency of buildings through photovoltaic (PV) solar systems.

Once again it seems that Chinese pols are actually doing something about encouraging clean energy and developing the industries to support it.  (Suntech, by the way, is plowing some of it’s gains into job creation in the USA– t is building a solar power panel factory in Arizona.  Everything’s connected!)

It reminds me of Taiwan in the 90′s. The government targeted computer manufacturing as key industry for development.   They created research institutes devoted to technical and market development, and helped steer local companies into the field.  They gave development loans to the 4 key players and Taiwan’s computer industry developed quite nicely.

Now I know it’s not that simple. There are trade agreements which need to be taken into account, and it might be desirable to establish job-creation metrics which would be tied to government incentives or assistance.

All of which leads me to Charles Schumer and his rant about Shenyang Power Group getting the lion’s share of the jobs associated with a huge wind power project in Texas.  Schumer’s rant fails to mention that:

  • Shenyang Power got the lion’s share of the jobs, but it also invested the lion’s share of the money for the project.  (Yes, there is an application for stimulus money made by the American side, but it’s only for a pretty small minority shareholding).
  • The turbines which will be made by Shenyang will all use a key component made by GE.  I’m guessing it will use other imported (maybe from the US?) components as well, but I don’t know.

So the Chinese government invested and encouraged the turbine industry, and invested in a project in the States that uses turbines.  They are putting up the money and taking risk, and stand to make money and get jobs out of it.   Also,hundreds of thousands of US homes will get cleaner electric power.  GE will get orders for their components.  See how everything’s connected?

Yes, the Chinese government have  focused on being competitive in key industries.  That’s called leadership and that’s what they should be doing. It’s what the US should have been doing as well.

Stop complaining and start competing!

: Economy,Labor Issues,Politics
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Gobal Times: China still in play for outsourced manufacturing

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Consider the source, but according to an article in today’s Global Times (a fairly new English-language paper published in the PRC) western manufacturers are increasing their outsourcing activities in China:

Foreign countries have started outsourcing to China again after a brief slowdown last year.

The first nine months of the year saw 3,287 new enterprises providing services that have been outsourced to China launched, offering 585,000 new jobs. International service contracts won by Chinese enterprises in the first nine months are valued at $12.7 billion, up 212 percent from the same period last year, according to Ministry of Commerce (MOFCOM) figures released Tuesday.

As of the end of September, there were 8,060 enterprises with 1.4 million employees operating in the outsourcing industry.

The rest of the article cites the existing and potential threats to China’s outsourcing business, namely India with it’s large English speaking population, but others as well.

For those of us operating the the Pearl River Delta, where most of this outsourcing is being performed, it might mean that the PRD is still an attractive place to set up export-oriented manufacturing.  At the very least, since we assume that the GT writes what Beijing wants written, it means that the authorities are still interested in making China an attractive destination for western export manufacturing.

: ALL,Labor Issues,Southern China
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CNN: Mexico is the new go-to place for manufacturing U.S. bound products

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According to a CNN report,  NAFTA, proximity to the U.S. market, and lower costs (largely the results of inverse currency fluctuations of the peso and yuan)  have tipped the scales in favor of Mexico (and against China) as the new manufacturing destination of choice for U.S.- bound products.

: ALL,Labor Issues,Southern China
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Guangdong Manufacturing 2.0 – if you’re low-tech, don’t get too comfy

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This China Daily article quotes Guangdong governor Huang HuaHua and Guangdong Party Chief, Wang Yang making it very clear that the pre-downturn initiatives aimed at moving the province’s manufacturing base up the value chain will continue.

With the outline of the reform plan for the Pearl River Delta formally approved by the central government at the end of last year, the delta scheme has now been adopted as part of the nation’s overall development strategy. This will see the nine cities in southern China’s Guangdong province transformed into advanced manufacturing and modern service centers.

The article doesn’t talk about what they plan to do about the low-value exporting factories currently operating here, but Huang was quoted by People Daily in April saying:

…the province will step up efforts to achieve a change in development pattern by evolving self-innovative industry and upgrading industrial structure, while boosting the transfer of labor-intensive industries in the delta region to less developed regions and transferring labor forces from the agricultural to the manufacturing sector as well as from the rural area to the delta region.  [italics mine]

For me it raises the following questions:

  • How will they encourage/force the transfer of labor-intensive industries out of the province?
  • How will they define “labor intensive”?
  • How fast will they move?
  • How will they deal with the most local government and semi government bureaucracies who are still benefiting from those labor-intensive industries operating in their villages and industrial zones?


: ALL,Labor Issues,Southern China
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Dumping your waste upstream isn’t LEAN — another view

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Last month I wrote a post, “Dumping your waste upstream isn’t LEAN“, giving an example of how one large American company I know (and have left unnamed) has been bullying it’s vendors into accepting the costs of wasteful stocking in order to lower it’s own costs and leadtimes, while actually raising their own costs in less obvious but more significant ways.

This month, Bill Waddell of Evolving Excellence gives another example– none other than General Motors. Anyway, for another (more skillfully written) take on a similar issue, go to his post here.

: ALL,Change Leadership
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“Good” reasons to be wasteful!!!

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Yesterday I visited a small factory owned by a friend of mine. I had visited the facility once before, when times were good and they had more orders than they could keep up with.  As I said, business was good, but the harder they worked the more they had issues with delivery, quality and cash flow.

During that first tour, I was chatting with my friend’s production manager. Pointing at the mountains of semi-finished goods on the factory floor, I explained that in those mounds were hiding defects (later to be discovered by customers), clogging the production cycle (impacting delivery), and tying up his boss’s cash (needed for sales, marketing and other investmens).  Reducing the WIP, I argued,  would be a solid first-step in turning the place around.

To my surprise, the production manager seemed well versed in LEAN. He understood how to balance the production on both sides of the bottleneck, and how to eliminate non value-added steps in the process.  He understood the value of JIT and Jidoka.

“All good stuff”, he said.  “But we can’t implement it here.”

Why? Because they were too busy for LEAN or JIT.   If they tried he explained, it would slow the process flow, resulting in even more delivery problems.  Yes, in principle it’s a good idea.  But not here.  Not now.

That was during the good times. Yesterday’s visit showed a much slower factory, with much fewer workers and lots fewer orders. Some things, however, haven’t changed. There are still piles of WIP on the factory floor, and (not surprisingly) they are still having quality, delivery and cash-flow issues. Once again, I broached the subject of LEANing the production flow, and once again there was a “good reason” not to. Whereas before they were “too busy” for LEAN, now there was “not enough work” to go LEAN. Now the thinking, it seems, is that if they go LEAN and utilize their labor (and other resources) efficiently then some people wouldn’t have enough work to be kept busy.   (I mentioned to him that the workers who were idled by balancing the line could be employed in his factory’s 5S efforts, but that didn’t go over too well).

This I’ve heard before.  LEAN makes sense.  It’s good stuff.  But not here.  Not now!  Here are some lame excuses to maintain waste in the production cycle:

  • People need to be kept as busy as possible. That’s the only way to be efficient. (Actually, processes need to be efficient– not people)
  • It works for Japanese and westerners, but for cultural reasons, Chinese can’t understand/implement/accept it. (Total bullshit.  LEAN works just fine in China)
  • LEAN production looks less busy and active, and people will think they don’t have to work hard. (Not really.  People are smarter than that– especially the workers who can see first hand how productive their team has become).
  • You will need to hire lots of additional people to do the clerical work required for LEAN. (Not true.  And if there were “extra work” to do, it could be done by some of the people made temporarily redundant by balancing the line).
  • People want to do the same repetitive tasks over and over all day.  It makes them feel like experts. And the longer they perform that one task, the quicker and better they become.  (I doubt it.  But even if it did make them faster, it wouldn’t make production faster or any better.)
  • LEAN is great if you have large production runs, or if all of your items utilize similar process steps. But our low-volume/high-mix model can’t be LEAN. (100% wrong.  LEAN is great for low-volume/high-mix production.  LEAN makes your facility flexible and agile).
: ALL,Change Leadership,Labor Issues
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