Those who underestimate China's ability to innovate and develop technology products are making a serious mistake.
China has been known as the manufacturer to the world, but now it's doing much more. With the government's encouragement, permits for new facilities must be for more than just basic manufacturing; they must create high-technology jobs including research and design.I just returned from a quick trip to Shenzhen, and was once again reminded of how fast things change. There's a new city library, the largest I've ever seen, with connected computers at every seat. Next door was the largest bookstore in the world, and next to that was one of the world's biggest and most modern city halls.But you would never know from some of our media, who portray the Chinese as just low-paid laborers working under terrible conditions in a third-world country. This could not be further from the truth, at least in the high-tech sector. And they do this country a disservice by hiding the reality from us.
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James Fallows wrote a terrific article in the June issue of Atlantic that featured Liam Casey, referring to him as Mr. China. Liam a good friend of mine, has just won the prestigious Ernst and Young Entrepreneuur of the Year Award for Ireland and is a finalist for the world title in June. You can read more on James Fallow's blog here or read some excerpts below the fold. Also see my earlier postings here and here.
Continue reading "China makes, the world takes and Mr. China." »
First it was poison in dog food and toothpaste, and then defective tires and toys with lead paint. Should products from China be avoided? Can Chinese manufacturers be trusted?
These events have created a frenzy of responses from politicians and instant talk show experts suggesting everything from banning China imports altogether to having the government inspect every toy entering the country. From my own experience in developing dozens of products and working with all sorts of factories in China, these comments miss the point and some are demagoguery.
Factories in China range from some of the most modern in the world to small ram shackled facilities. It's no different from other developing countries except that China has the broadest and most comprehensive manufacturing infrastructure in the world. Generalizing that products from China are good or bad, safe or dangerous means nothing. To lay blame on China alone for the poor quality of its exported products is simplistic and misleading. In fact, there's plenty of blame to go around.
Nearly every product being sold in the United States that comes from China has a U.S. partner or customer. Few Chinese manufacturers have the ability or interest to market and distribute their own products. These U.S. customers play the major role throughout the products' lifecycle. They specify the design and requirements for the product, and select, manage and oversee the development with their Chinese partners.
Then they import, inspect and distribute the products under their brand names. These companies include Apple, Sony, Mattel, GE, HP, Palm, and virtually every consumer company you can think of. When a defective product reaches the market, it's usually because the U.S. company let it happen, failing to perform adequate inspection and testing or not doing a sufficient job selecting and managing their suppliers.
Most reputable U.S. companies have testing labs and quality control organizations to ensure that only good product reaches their customers. While they don't inspect each and every product, they do statistical sampling to make certain that only good merchandise passes.
But sometimes shortcuts are taken, allowing the Chinese companies to ship products directly to their end customers. That lowers costs and gets the products to us sooner. Often it's done once the Chinese manufacturer has proven its reliability.
Of course, the Chinese also bear some responsibility. Once production begins, some unethical manufacturers substitute lower cost ingredients, materials or finishes to improve their profit. That's no different than an occasional homebuilder here using substandard building materials that jeopardize the homeowners' health and safety.
Often it's more than greed. It's the pressure to maintain profits while simultaneously being pushed to lower prices. WalMart and Dell, for example, are well known for relentlessly pressuring their manufacturers to constantly reduce costs, and many other companies emulate them. Dell requires the suppliers of some products to provide a 1.8 percent cost reduction every month! Doing that brings kudos from stock analysts and the stock market. I suspect the analysts and company executives rarely consider these unintended consequences.
Some Chinese manufacturers are just plain greedy, driven by profits at the expense of safety, and need to be exposed and driven out of business by better regulation from the Chinese government. They're not only endangering us but their own citizens even more.
There are two other issues also at work here. It's becoming easier for small U.S. companies and even individuals to import Chinese-made products and sell them here. Many don't have the knowledge or the resources to test and inspect, and they just sell what they get, acting as middlemen.
Lastly companies are frantically turning out new models as often as every 3 months. That means there's little time to adequately test and qualify new products, further lowering quality.
What can the consumer do about this? Of course, we can boycott all products made in China. This would pressure the Chinese companies and the Chinese government to correct their deficiencies. However, it would also eliminate the vast majority of all those good and safe products currently being manufactured and designed in China and would penalize the Chinese companies that make them and the American companies that spend the time and money to ensure that their products are safe.
Then how do consumers avoid buying unsafe products? Stick with a brandname that has a strong company behind it. Don't look for the cheapest products, look for quality instead. While it wouldn't have prevented buying Mattel products that were recently recalled, it improves the odds.
I think most of us would be willing to pay a little more if it meant the product was better tested and came from a better factory. Business' obsession with squeezing the last penny out of every product has gotten out of hand, and is one of the biggest causes of defects.
Do you think the Chinese are stripping America of its profits and jobs? Read this excerpt from James Fallows' cover story from The Atlantic. It shreds to pieces the simplistic explanations we're used to hearing. Then go buy the magazine and read the entire article.
"Has the move to China been good for American companies? The answer would seemingly have to be yes—otherwise, why would they go there? It is conceivable that bad partnerships, stolen intellectual property, dilution of brand name, logistics nightmares, or other difficulties have given many companies a sour view of outsourcing; I have heard examples in each category from foreign executives. But the more interesting theme I have heard from them, which explains why they are willing to surmount the inconveniences, involves something called the “smiley curve.”
The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product’s creation and sale. At the beginning is the company’s brand: HP, Siemens, Dell, Nokia, Apple. Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design—the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.
The significance is that China’s activity is in the middle stages—manufacturing, plus some component supply and engineering design—but America’s is at the two ends, and those are where the money is. The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this—that the real money is in brand name, plus retail—may sound obvious, but its implications are illuminating.
At each factory I visited, I asked managers to estimate how much of a product’s sales price ended up in whose hands. The strength of the brand name was the most important variable. If a product is unusual enough and its brand name attractive enough, it could command so high a price that the retailer might keep half the revenue. (Think: an Armani suit, a Starbucks latte.) Most electronics products are now subject to much fiercer price competition, since it is so easy for shoppers to find bargains on the Internet. Therefore the generic Windows-style laptops I saw in one modern factory might go for around $1,000 in the United States, with the retailer keeping less than $50.
Where does the rest of the money go? The manager of that factory guessed that Intel and Microsoft together would collect about $300, and that the makers of the display screen, the disk-storage devices, and other electronic components might get $150 or so apiece. The keyboard makers would get $15 or $20; FedEx or UPS would get slightly less. When all other costs were accounted for, perhaps $30 to $40—3 to 4 percent of the total—would stay in China with the factory owners and the young women on the assembly lines."
- James Fallows, The Atlantic magazine
View this short slide show that accompanies this article. It's terrific!
This is the title of one of the best articles I've ever read on what's going on in China related to product development and manufacturing. It's written by noted author James Fallows of The Atlantic Magazine and is the cover story of the July issue just out on the newstands. If you have anything to do with or interest in product development, manufacturing, or the economics of building products in China, this is a must read. James is able to translate into words so well what I've observed, yet have had difficulty conveying to others.
Here is a short excerpt about how a consumer products company delivers products to its customers.
"The other facility that intrigued me, one of Liam Casey’s in Shenzhen, handled online orders for a different well-known American company. I was there around dawn, which was crunch time. Because of the 12-hour time difference from the U.S. East Coast, orders Americans place in the late afternoon arrive in China in the dead of night. As I watched, a customer in Palatine, Illinois, perhaps shopping from his office, clicked on the American company’s Web site to order two $25 accessories. A few seconds later, the order appeared on the screen 7,800 miles away in Shenzhen. It automatically generated a packing and address slip and several bar-code labels. One young woman put the address label on a brown cardboard shipping box and the packing slip inside. The box moved down a conveyer belt to another woman working a “pick to light” system: She stood in front of a kind of cupboard with a separate open-fronted bin for each item customers might order from the Web site; a light turned on over each bin holding a part specified in the latest order. She picked the item out of that bin, ran it past a scanner that checked its number (and signaled the light to go off), and put it in the box. More check- weighing and rescanning followed, and when the box was sealed, young men added it to a shipping pallet."
"By the time the night shift was ready to leave—8 a.m. China time, 7 p.m. in Palatine, 8 p.m. on the U.S. East Coast—the volume of orders from America was tapering off. More important, the FedEx pickup time was drawing near. At 9 a.m. couriers would arrive and rush the pallets to the Hong Kong airport. The FedEx flight to Anchorage would leave by 6 p.m., and when it got there, the goods on this company’s pallets would be combined with other Chinese exports and re-sorted for destinations in America. Forty-eight hours after the man in Palatine clicked “Buy it now!” on his computer, the item showed up at his door. Its return address was a company warehouse in the United States; a small Made in China label was on the bottom of the box."
(Copyright The Atlantic Magazine)
I'm writing this column from a 747 on the way to Shanghai for a business meeting. I've been visiting Asia for more than 20 years, ever since I started developing cameras in Japan for Polaroid and then notebooks in Taiwan for Apple. But the progress occurring in China's technology sector is beyond anything I could have anticipated.
Shanghai in particular has undergone huge changes, with hundreds of new skyscrapers going up each year that, unfortunately, have spawned an increase in pollution. But nowhere is the city's progress more significant in the technology area than in notebook computers.
Notebooks are one of the most complex consumer products to design and build. There's continuing market pressure to make them smaller and lighter, packing more parts into less space, while being rugged enough to endure the rigors of travel.
Yet beginning about 10 years ago, a half-dozen of the world's largest computer notebook manufacturers, all Taiwanese companies, began relocating to Shanghai, even though it was far behind Taiwan in technology.
Now, if you follow the politics between the two countries, you know there's been an ongoing war of words for years. China doesn't recognize Taiwan as an independent country and wants to bring it back into its fold as it has done with Hong Kong. In fact, there are no direct flights allowed between Taipei and Shanghai. What would otherwise be an hour-and-a-half flight takes nearly a day because of the need to fly through Hong Kong or Macau.
Why did these companies move to China?
Shanghai, with its huge supply of well-educated factory workers, enabled about a $20 savings on each notebook. In addition, Shanghai provided tax and land incentives, and new engineering graduates to fill its research and development centers.
The companies invested tens of billions of dollars to build huge campuses, with groups of buildings larger and more modern than most factory complexes anywhere else in the world. Some even built dormitories, movie theaters, restaurants and gymnasiums for their employees. They also asked their Taiwanese suppliers to set up nearby factories to avoid shipping delays and warehousing. Then Japanese suppliers built factories nearby to supply LCD screens and other components, creating this huge notebook infrastructure.
Inside the air-conditioned factories are thousands of feet of conveyer belts stretching as far as the eye can see. The belts rise in several locations, delivering freshly made notebooks to overhead tracks for testing to weed out failures.
All told, about 40 million notebooks were built in the Shanghai region last year, representing more than 75 percent of the world's production.
Today, few of the notebook brands such as HP, Dell, Gateway, Sony, Acer et cetera design their own products other than the appearance. It's all outsourced to these manufacturers.
New ways have been found to save more money by changing how the products are built. The conventional way of making products is to build a large volume of identical units and ship them by sea to customers' warehouses around the world. That, however, ties up millions of dollars in inventory and makes it difficult to phase out a model quickly because the product pipeline is so long.
Some manufacturers now build to order and ship directly to the end customer. Here's how it works: The customer orders a computer from the brand company, configured exactly as he wants. The order goes directly to the factory in Shanghai and into its computer system, where it's scheduled to be built based on the availability of parts.
Each computer being assembled on the line is built to a specific order. One might have a 120 GB hard drive, 2 GB of memory and Windows Vista Business, while the unit next to it has an 80 GB drive, 1 GB memory and Windows XP.
Once the computer is built and tested, it's packaged and sent via FedEx or another shipper directly to the customer, often arriving just a couple of days after the order is placed.
With these practices, the average selling price of a notebook has gone from about $2,000 in 1998 to $900 today.
This example shows borders no longer mean much when it comes to technology. Common economic interests drive countries to work more closely together. So while the words continue to fly between Taiwanese and Chinese politicians, they each know how dependent they are on one another, and how dependent both are on U.S. companies to market the products to the rest of the world.
(c) San Diego Transcript
