April 2006 – The Future of Chinese Manufacturing

We recently returned from ten days visiting suppliers in China, and what we discovered might surprise you. Overwhelming, we saw companies that were more technologically sophisticated than one would imagine in a developing economy. But while many Chinese suppliers often appeared advanced on the surface from a machinery and process perspective, many lacked some basic capabilities that can create unanticipated inconveniences (and added costs); one’s we would usually take for granted.

One example we saw involved a very sophisticated and high quality textile supplier that lacked the ability to palletize shipments because they did not have forklifts to stack and load goods from their warehouse onto trucks. Despite spending millions of dollars on modern production equipment, they did not have what is considered an absolutely core packing and loading capability. Though this problem can be addressed by “adding more labor” if a global customer wants his goods on pallets, he ends up paying for it. In the West, there would be no excuse for this shortcoming, but given the unit cost advantage that Chinese suppliers like this can offer, they get number of “get out of jail free” cards which they can cash in when questions like this come up.

Our head-scratching was not isolated to this one supplier. At an industrial manufacturer, we saw a surprisingly good production process―a clean shop floor, organized production cells and, though not automated, a means for evaluating quality on each and every good. But production was done in two facilities less than three hundred meters apart, requiring that the partially finished parts be transported via truck from one facility to the other (this is an area where fuel and transportation are at a premium and land and labor is inexpensive). Each facility we saw presented at last one production anomaly that would drive a U.S. plant manager to a state of madness. Our conclusion was that small and medium sized Chinese manufacturers are surprisingly sophisticated in many ways, but not quite ready for prime time on an overall basis.

Perhaps the best metaphor for the future of Chinese manufacturing is the Shanghai Maglev. The train races to a Shanghai subway station from the airport in less than it takes the shuttle service to go from most U.S. airports t the parking lot. But despite reaching the speeds in excess of 420KPH, the Maglev presents its own unique set of complications. For example, the Maglev is inconvenient―it only runs to a distant Shanghai subway station, not the city center. It is then necessary to transfer to a subway line to ride downtown, which can take another twenty minutes or longer, including waiting time (not to mention taking luggage up and down many flights of escalators and stairs).

Like the Maglev’s it’s clear that many Chinese small and medium sized manufacturers are incredibly sophisticated by developing economy standards―and sometimes even world standards—but there are still some big areas for improvement. The Maglev metaphor is even more telling when one considers how China has prioritized its transportation investments. How a country can invest over a billion U.S. dollars on twenty miles of train track before building out a modern countrywide highway system (at least linking all of the major cities) is telling. But clearly, the Maglev is a sign of things to come. And it also shows than in culture, China will depend just as much on the latest technology and advanced production systems to stay competitive, as the low labor costs which it currently enjoys. One wonders in a country where in one city (Shanghai) it’s rumored that 1/5th of the world’s building cranes reside, how fast the capabilities of Chinese suppliers will rise in the next ten years.