Chapter 2 – Page 17 – The OM Blog by Heizer, Render, & Munson

OM in the News: Jobs for Americans and Pink Slips for the Chinese?

Yes, you read the headline right: “Jobs for Americans and pink slips for the Chinese”, says the quote in the current issue of Businessweek. It turns out companies from China are setting up shop in the US to avoid trade barriers, to capitalize on the US government’s alternative energy push, and to pick up on some of our new technologies.

For 20 years, US manufacturers have decamped to China in search of cheaper labor and parts. Now things may be turning the other way. China’s Suntech just opened a solar panel plant near Phoenix to bring the company closer to its American customers (which means big savings on shipping costs) and into compliance with “Buy American” government contracts. Tiajin Pipe is opening a $1 billion steel pipe mill near Corpus Christi, Texas, to circumvent 63% US tariffs. Tiajin will employ 500-600 people. Beijing’s Pacific Century Motors just bought Michigan-based Nexteer Automotive, a car part manufacturer, and employs 3,600 workers in Saginaw.

Letting in Chinese companies isn’t as controversial now that the US is bleeding manufacturing jobs. With unemployment hovering near 10%, US officials have put aside concerns about unfair Chinese competition. “Chinese companies, thanks to government-backed loans, monopolies, and preferential treatment, are awash in cash and should be a source for investment in the US economy–investment that would help maintain and create jobs in the US”, wrote the US ambassador to China in a diplomatic cable on Jan.28,2010, which was recently disclosed by WikiLeaks.

How does this relate to pink slips in China? Suntech is using more advanced equipment in Arizona than in its home plant in Wuxi. Here, 30 Americans are producing the same number of solar panels as 100 Chinese. “If it works well, we can integrate the same manufacturing technology in China”, says the plant manager. “This would help Suntech China make a manpower reduction”. Perhaps this is the 1st turnabout in US-Chinese relations.

Discussion questions:

1. What are the benefits and dangers to the US of Chinese plants opening here?

2. What happened when a China oil company tried to buy Unocal for $18 billion in 2005? Why the change?

OM in the News: Terrorism and The Global Supply Chain

It’s not every day that The Wall Street Journal publishes an editorial by the US Secretary of Homeland Security, Janet Napolitano, entitled “How to Secure the Global Supply Chain” (Jan.6,2011). In it, Napolitano writes, “The complex supply chain that consumers and businesses in the US rely on every day is a target for those who seek to disrupt global commerce”. This is certainly a topic we need to consider adding to our discussions of global OM issues in Ch.2 and Ch.11.

Regardless of where a terrorist event takes place, a significant disruption of our supply chain may follow. An example was the Oct., 2010 plot to put explosives on a UPS cargo flight bound for the US from Yemen. Following that act, the Dept. of Homeland Security required all cargo on passenger planes within the US to be screened. It also screens all US-bound air cargo that is considered high risk (most likely from terror-sponsoring countries, I would surmise).

Napolitano names 3 elements to the US plan:

1. “Preventing terrorists from exploiting the supply chain to plan and execute attacks”. This means working with customs groups and shippers to keep chemicals out of the hands of terrorists.

2.”We must protect the most critical elements of the supply chain, like central transportation hubs, from attack or disruption”.

3.”We must make the global supply chain more resilient, so that in case of disruption it can recover quickly”.

Incidentally, 2 days after this article, the Journal reported that Secretary Napolitano received a small bomb in a package that exploded in her mailroom (WSJ, Jan.8-9,2011).

Discussion questions:

1. In what ways can a disruption of the global supply chain impact a business in the US, such as IBM, GE, or Boeing?

2. What other events, beside a terrorist strike, can effect the supply chain? How?

OM in the News: China’s Drive to Innovate

We have blogged several times about China’s success at reverse engineering such products as bullet trains, solar technology, drones, jet fighters, wind turbines, and computers. And, indeed, one of our strengths in the US has been the ability to stay ahead of competition through innovation (See Ch.5 and Figure 5.2). But The New York Times (Jan.2, 2011) has just reported that China has issued a new government policy aimed at increasing the number of inventions in that country. China’s goal is to have 2 million patent filings/year by 2015. (In 2009, there were 300,000 in China and 480,000 in the US).

So can China become a prodigious inventor? The answer will play out over decades–but also shape the global economy. “The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth”‘, says the Director of US Patents. But the Chinese approach is an innovation by-the-numbers mentality, says one consultant. It is “emphasizing the quantity of innovation assets more than the quality.”

China’s strategy is guided and sponsored by the state. Should this be a source of concern for the US? Despite China’s inevitable rise, the US has a comparative advantage because it is the country most open to innovation. Our culture forgives failures, tolerates risk, and embraces uncertainty.

Discussion questions:

1. In the 1980’s, Japan was considered a similar threat to American industry. What happened?

2. Will China overtake the US one day as the world’s leader in innovation?

3. Comment on China’s use of metrics to meet the goal. What incentives are they using?

OM in the News: China Writes the Rules for Wind Power

It surely seems as though the headlines every week relate to China taking a dominant manufacturing position in another industry. What the US will do about the continuing loss of global manufacturing market share might be of concern to every student in an OM class. Today’s front page New York Times story is called “To Conquer Wind Power, China Writes the Rules”.

As we have blogged recently, the pattern is repeating: Chinese firms acquire the latest Western technology by various means, then take advantage of government policies to become the world’s dominant, low-cost suppliers. This is the case in high-speed trains, drones, jet fighters and commercial jets, solar power, nuclear reactors, cell phones, and desktop computers.

Gamesa, a Spanish firm, and a world leader in wind energy turbines, has just learned that the competing for China’s lucrative business means playing by rules stacked in Beijing’s favor. Gamesa’s share of the Chinese market dropped from a third in 2005, to 3% today. The Chinese now control half of the $45 billion global market for wind turbines, and are taking direct aim at the US, where GE has long been the leader. Sinovel, backed by $13 billion in Chinese government loans, is opening offices across the US.

How has this happened? Four reasons, according to the Times: low -interest loans, cheap land from the government, preferential contracts from state-owned companies, and dramatic “local content” laws. The latter, trade lawyers say, are direct violations of the WTO. But the Chinese government has bet–correctly–that Gamesa, GE, and other multinationals, are unwilling to risk losing a piece of the Chinese pie by complaining. Says one wind industry CEO anonymously, “Everybody was too scared”.

Discussion questions:

1. What is the US government position regarding such Chinese dominance?

2. What other industries have followed this pattern?

3. Why is China so successful with this manufacturing strategy?

OM in the News: Philippine Call Centers Overtake India

For the past decade, when you called an 800 number for customer service or a plane reservation, the chances are you would be speaking with a young person in Bangalore or Gurgaon, India. But Businessweek (Dec.6-12, 2010) reports that you are now more likely to be phoning up the Philippines. With $5.7 billion in call center work this year,vs. $5.5 billion for India, the Philippines have overcome a slow start in outsourcing. OM managers in the US may wish to take a note.

Why the move from India? (1) English is taught in all schools; (2) Filipinos have a cultural affinity for the US (with teens weaned on radio stations that play US Top 40 and hip-hop); (3) Special economic zones offer tax breaks and exemptions from import taxes on telecom gear; and (4) power is more reliable than in India, where companies often rely on diesel generators. The call center jobs are popular, as nocturnal workers can earn $6,850 a year in a country where per capita income is 1/4 of that.

This is not to say that India is giving up its dominance in outsourced work that requires a higher level of skill. Its overall outsourcing revenues are still $70 billion (vs. $9 billion in the Philippines). Indian outsourcing firms are migrating from answering phones to account management,high-tech support (it graduates 400,000 engineers annually),and financial and supply chain consulting. “In IT and software, India really doesn’t have any competition”‘, says a Wipro exec.

As a sidebar/update, on Jan.10,2011, USA Today devoted a cover story article to the Philippines call centers.

Discussion questions:

1. Why are the Philippines a popular call center alternative for US, European, and Australian firms?

2. How has the call center industry matured in the past decade and what has been its impact on India?

3. Identify other outsourcing industries that have migrated from one country to another in the past 20 years.

OM in the News: Mission Statements that Need Some Work

One of our topics in Ch. 2 is mission statements, and we give examples of three of them we think are good : Merck, Hard Rock Cafe, and Arnold Palmer Hospital. When I cover this material, I usually ask students to each find a concise one of their own to share with the class.

The Wall Street Journal’s (Nov.26,2010) front page article provides a few mission statements that might be a bit clearer. Let me share these with you:

Ingersoll-Rand: “World leader in creating and sustaining safe, comfortable and efficient environments”. Translation: the company makes locks, A/C equipment, and battery-powered golf cars. The chair of the Center for Plain Language responds, “I picture a large swath of Amazonian jungle under the gentle and effective care of Ingersoll-Rand”.

Parker Hannifin: “The global leader in motion and control technologies”. Their main products are pumps and valves. The Journal writes, “the description might equally apply to a maker of lingerie”.

TRW Automative Holdings: “The global leader in active and passive safety”. The rest of us call these brakes and seat belts.

DXP Enterprises: “A leading products and service distributor focused on adding value and total cost savings solutions to MRO and OEM customers in virtually every industry since 1908”. In plainer language, a VP says we distibute “pumps, tools, nuts, bolts and safety supplies such as hard hats”.

Finally, my favorite, Sykes Enterprises: “A global leader in providing customer contact management solutions and services in the business processing outsourcing arena”. Translation: they operate call centers and help desks.

Discussion questions:

1. Why is it so hard to write a good mission statement?

2. What do you do when you are a company like 3M, which makes about 55,000 diverse products?

3. Why is the Arnold Palmer Hospital statement (see Ch.2) so well written?

Teaching Tip: Global Trade, Deficits, and Logistics

If the trade deficit is a topic that arises in your OM class, a visual image of the Port of New York and New Jersey is worth 1,000 words. Fortune (Nov.15,2010,pp.14-15) discusses the “Container City” one passes in driving on the NJ Turnpike.

In the first 8 months of 2010, 70,000 more full cargo containers entered the Port than left it. In other terms, 45% of the containers exported from the Port are empty, a reflection of the US trade imbalance. Yet a 3rd statistic: 1.80 to 1 is the ratio of imports to exports, up from 1.75 to 1 last year.

Six of the world’s largest ports are now in China, up from two just a decade ago. The largest port in the US in the Port of Los Angeles, the world’s 16th biggest, down from 8th ranked a decade ago.

What all of this means, of course, is that we are running a huge trade deficit, of which the logistics imbalance is one surrogate measure. Who benefits? My cousin Bob is the only one I know. He ships scrap metal to China for recycling and pays only a fraction of the shipping charges he would if he were sending from China to the US.

OM in the News: Where Should Starbucks Open More Stores?

Under pressure to increase sales and share prices, Starbucks needs to add new stores in the right locations. The trouble is, the US market is saturated. So far, Starbucks has done very well in a handful of overseas markets. About 55% of its sales are in Canada, Japan, the UK, and China. But now even the UK and Canada are near capacity. Toronto, Vancouver, and London already have more Starbucks per person than NY or Philadelphia.

So the title of The Wall Street Journal article (Nov.4,2010) on the subject tells it all: “Starbucks Must Open More Stores–Overseas“. The Journal suggests Starbucks follows the McDonald’s international expansion. Where will the growth be? Germany and France are two prime candidates, as Starbucks has relatively few locations in each.

While McDonald’s draws about half its operating profit from overseas, Starbucks gets only 15% abroad. The Journal concludes: “Whether dry or wet, tall or grande, Starbucks needs to find a combination for similar overseas success”.

Discussion questions:

1. Why was McDonald’s so successful in its expansion abroad, and why will it be harder for Starbucks?

2. How can Starbucks increase profits without going overseas?

OM in the News: Hospitals Fear Outsourcing Records to India

Whenever I blog on the subject of outsourcing (see Chapter 2), I find myself using the word “controversial” (as on 10/12/10). And, indeed, this week’s Wall Street Journal article (Nov.2,2010) describes the contentious issue of outsourcing digitizing of hospital medical records to India. Overseas providers, it is commonly feared, do not have the security and privacy controls that US hospitals require. “As soon as it leaves the confines of the US, its not subject to the same rigorous laws as we are”, says the CIO of a Texas chain of 40 hospitals.

Every company in IT wants to cash in on the lucrative $50 billion US health care market fueled by a federal mandate for hospitals to convert to electronic records by 2017. Amazingly, only 20% of US hospitals currently have electronic health records. Its a carrot and stick approach, with $6 million grants to an average sized hospital (I wonder where all this money comes from!) and penalties for missing the deadline. Its “like another Y2K opportunity” for software firms, says the head of New Delhi’s HCL Technologies.

So the real question is, who should get the contracts? Its not so simple. HCL has about 2,400 American employees in N.C. Then again, Cognizant Technology Solutions is a US firm in N.J., but has most of its staff in India. Indian tech giants Infosys, Wipro, and Tata are all lined up with bids. But so are IBM, Xerox, and Dell in the US.

Discussion questions:

1. How do students feel about sending medical records abroad for automation?

2. Can this impact relations with India, which sees this as protectionist? (President Obama visits India in 2 days).

3. Why was Y2K such a boon to the IT industry? (Some of your students may not remember the drama that year).

OM in the News: Japan’s Offshoring is Restructuring Its Economy

If you think outsourcing (transferring in-house processes to another company) and offshoring (which we define in Chapter 2 as moving business processes to another country, but retaining control) are a problem only in the US, think twice. Today’s Wall Street Journal (Oct.25,2010) reports that more and more Japanese companies are transferring their manufacturing abroad, creating a major restructuring of that country’s economy.

The reasons: too strong a yen and high wages, both of which make their goods more costly and less competitive in the global economy.

Toyota, for example, will make 57% of its cars abroad this year, including its flagship hybrid, the Prius, which it starts producing at a Bangkok plant. Nissan will hit 71% offshoring this year. And Sony is skyrocketing from 20% abroad in 2010 to 50% in the next fiscal year.

As Nissan CEO Carlos Ghosn recently stated: “sourcing more and more products outside Japan–there is no other way to compete”. Only 10.3 million Japanese now work in manufacturing, down from over 12 million in 2002.

Discussion questions:

1. Although controversial, why is Japan not fighting outsourcing/offshoring as much as the US does? (See our blog of Oct. 12th for some background on the battle against outsourcing in the US).

2. Why is Japan finding it necessary to go abroad?

3. Japanese are consumers are reluctant to spend. Why?

OM in the News: Solar–Will the U.S. Lose Out to China?

A few days ago, our blog gave the good news that BMW and Mercedes were expanding their manufacturing in the US. For our nation’s standard of living to rise, we indeed need to make things. And such jobs pay well and provide a path for middle class success.

But the New York Times headline (Oct.13,2010), “In the Future, Already Behind” brought me back to reality with a thud. The story is about Silicon Valley and its commitment to transforming the economics of solar panel production. Firms like Solyndra, Nanasolar, and MiaSole bet the farm that their “thin film” technology would make them the Intels and Apples of the exploding global solar industry.

But just as Solyndra flipped the switch on its new $733 million California factory last month, everything changed. The Chinese, using vast economies of scale and government subsidies, sent the price of panels plunging 40% and grabbed 40% of the vast California market. They also took the bulk of the European market. What looked like a chance for US manufacturing to dominate a critical growing market has crumbled to the realities of globalization.

“How do you fight against enormous subsidies, low-interest loans, cheap labor and scale, and a government strategy to make you no.1 in solar?”, asks an American CEO.

New technologies (see Ch.7), meant to be cheaper, must get there faster is one lesson we learn here.

Discussion questions:

1. What are the dangers of ceding this industry to the Chinese?

2. How can the US firms counter this threat (see Ch.2 for a strategy discussion)?

3. Should the US provide the same benefits that China does to new companies?

OM in the News: The Outsourcing Controversy

Outsourcing has been a controversial topic and a political football for well over a decade now. We have tried to maintain a balanced view of the pros and cons. But with the elections nearing in a month, many Congressional candidates and the AFL-CIO have been unveiling an anti-outsourcing campaign. And the Senate fell just 7 votes shy of passing the “Creating American Jobs and Ending Offshoring Act”.

If you teach this topic and plan to cover Chapter 2, today’s Wall Street Journal (Oct.12, 2010)carries an interesting editorial piece by William Cohen, former Defense Secretary. He states, “Most people treat outsourcing as a zero-sum game–one foreign worker replaces one American worker. But this is not how the dynamic global economy works…The fact is that that for every job outsourced to Bangalore, nearly two jobs are created in …American cities”.

Discussion questions:

1. If anyone in your class has seen the new NBC comedy “Outsourced”, ask them to comment on this issue.

2. Should the government raise taxes on companies that move operations abroad (the Senate voted 53-45 last month to do so)?

3. Should we discourage skilled workers from India and other countries from coming to the U.S. to work?

OM in the News: China’s Massive Foxconn Facing Wage Increases

Foxconn, the giant Chinese manufacturer employing 920,000 workers,may not have been a household name a year ago. But that is rapidly changing. Business Week’s cover story recently highlighted Foxconn (see our Blog dated 9/21/10) where we learned that the firm’s products include iPads, Nokia phones, Dell computers, and HP printers.

The thrust of this WSJ article, though, is wages. Foxconn’s chairman Terry Gou is rapidly moving manufacturing inland, to 2nd tier cities where wages are only 2/3 of the more -developed coastal areas. Gou intends to expand to 1.5 million workers, with the majority inland, in the next 5 years.

And Gou plans to keep plowing billions into China. “I think in the next 20 years China won’t have a competitor” as the world’s manufacturing center, he states.

As the BusinessWeek article detailed, 11 employee suicides have caused Gou to accelerate his plans to move jobs closer to inland towns where he recruits employees.The long hours of overtime in the coastal factories, living in Gou’s dorms, and eating at his cafeterias, may have contributed to the bleak lifestyle.

Gou also raised the minimum pay for assembly line workers to about $295, more than double, starting this month.

Discussion Questions:

1. Will China still dominate the world manufacturing scene in 20 years? Where will the US lie?

2. Why isn’t Gou afraid of Vietnam, India, Brazil, or Russia?

3. How does managing wages by moving inland affect Apple, Nokia, and HP?

OM in the News: BW Cover Article on Foxconn

Business Week’s cover story on September 9, 2010, provides a detailed look at one of the largest manufacturing companies in the world, that few students have heard of. But they will know the products it produces under contract – iPhones, Sony Playstations, and Dell computers. With 920,000 workers at its 20 Chinese factories, Chairmen Terry Gou was thrown into the spotlight after eleven Foxconn employees committed suicide last year. Although Apple pressured Foxconn to eliminate its triple-decker bunk beds and excessive overtime, Steve Jobs was not about to sever ties with the iPhone being produced at the rate of 137,000 per day.

Possible class discussion questions:

How diversified is the Foxconn supply chain?
How did Gou get into the business of making the chassis of Compaq computers?
What was Flextronics reaction to the Gou supply chain?
Why do workers stay at a company known for it “suicide cluster”?