China may further lose edge in manufacturing

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WITH President Barrack Obama’s pronouncement in his State of the Union Address of restoring America’s manufacturing glory through various reform programs, China, the current global manufacturing capital, may lose some more of its edge in job-creating ventures.

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The story of Mark Mckay recently posted in Forbes Brand Voice mentioned that Chinese manufacturers are now facing tough times with debts up, sales down with signs of relief followed closely by signs of trouble.

Chinese business owners are responding in different ways and most of their solutions are ineffective and mostly “analgesic prescription” for most, McKay said.

The result will be a slow fade into competitive irrelevance, with only a few savvy manufacturers able to rise above the crisis, and embracing a new Chinese business model. “These survivors will find new strategies to make them healthy, name-brand global players,” he said.

A few Chinese manufacturers are beginning to study the response of many American manufacturers to a similar crisis in the 1980s, when modern China opened itself to business that year.

Hundreds of thousands of American businesses were directly affected by China’s competition. “Some firms just died, some moved to areas with cheaper labor and some looked to their government for help, trying to build a fence around their customers,” he said.

Labor costs are not the driver of manufacturing competitiveness. The real driver is the cost tied to material flow, he said.

“Quality and efficiency are measured by the materials, not the worker’s experience. Wasted time around materials is more damaging than wasted labor time. Labor is still a factor, but it is only decisive when two firms are roughly equal in the effectiveness [or ineffectiveness]of managing the costs tied to material flow,” McKay explained.

In 1980, American companies were lousy in this regard, and they should have known it, because that is why so many of them were losing to Japanese competition. When the enormous labor pool in China opened up, Chinese factories (with low-paid workers and poor material flow) were facing off against American factories (with high-paid workers and poor material flow). Suddenly, everything was “made in China,” McKay noted.

In America, many tried ineffective strategies. But a few learned to adapt. These are the companies that the smart Chinese business owners now want to learn from. The winning strategies in many cases were a combination of concepts studied from those aforementioned Japanese companies.

The six simple lessons Americans learned were:

1) Material flow and cash flow are closely related;

2) A focus on material flow creates a natural requirement to treat quality as a number one priority;

3) Management and labor could cooperate with very similar objectives. It is no coincidence that the past 30 years have seen a decrease in the need for factory labor unions; and

4) Rapid materials flow opens up the opportunity to satisfy niche markets.

Only the few Chinese manufacturers who understand these secrets will survive the crisis, the few who incorrectly think that the American advantage is in replacing workers with automated machinery will overlook that the simplified material flow is the secret to survival, Mckay said.

The human element
The Chinese who study these methods find the human element to be the most difficult to understand, he added.

To encourage cooperation between labor and management means that both parties agree to openly point out opportunities for improvement, to act with humility and to not focus on who should take blame for problems that are hard to solve. Mistakes are expected. Finding a mistake is celebrated, not suppressed, not denied, he stressed.

These “soft” aspects of change are the most difficult for Americans, and they are even more difficult for Chinese—much, much more difficult.

The managers Mckay met do understand this challenge, but they worry about the substantial cultural barriers to getting past it. In China, the concept of “gaining face” or “losing face” is extremely important. Criticisms are almost always taken personally, even criticisms that a Westerner would never think were connected to an individual. Criticism in public therefore is not to be taken lightly. Mistakes are denied to save face, he said.
McKay said that he foresees a new phase of both competitiveness and cooperation in business relations between Chinese and American firms. American and Chinese products will be very similar in cost, engineering and quality. Smart strategists on both sides of the water will seek out a new kind of partnership, built on trust, leveraging access to brains, capital, and markets on both sides of the water.

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