Tag: China

OM in the News: GE’s Dangerous Game in China

It was just 2 months ago that our blog  Planes, Trains, and Drones–China’s Reverse Engineering Controversy  pointed out the costs and dangers of  sharing technology and trade secrets with China.  American, European, and Israeli firms have all learned that the short-term profits from chasing the lucrative markets in China have longer-term negative implications when Chinese companies beat them at their own game by making the same products cheaper, if not better. But as one who has served on the board of a publicly- traded (NASDAQ) manufacturer, I am well aware of the quarterly and annual pressures from shareholders who want immediate returns and profits. What US firm takes a 20- or 50-year view of  global strategy?

With the Chinese President touring the US this week, the risk and reward strategy has no better example than GEs decision to share its  airplane electronics and engines with a state-owned Chinese partner, Avic, for the new C919 jetliner. (See Ch.5’s discussion of  joint ventures and alliances).  The New York Times (Jan.18,2011) reports, “As China strives for leadership in the world’s most advanced technologies, it sees commercial jetliners…as a top prize. The Times adds, “GE will be sharing its most sophisticated airplane electronics, including some of the same technology  used in Boeing’s new state-of-the-art 787 Dreamliner”.

Neither Boeing nor Airbus are thrilled to see GE, one of their major suppliers, helping the Chinese so much. But both firms have already opened their own joint plane and parts factories in China. “Boeing has opted to accept the reality of both partnering and competing with China”, says the firm’s CEO.

 The VP of another aviation firm, Rockwell Collins, adds, “his employees often ask whether the company is trading its future for immediate sales in China… It comes down to who can innovate faster”.

Discussion questions:

1.What are the benefits and dangers of joint technology ventures with Chinese firms?

2. Where does China view itself  in 20 years in terms of manufacturing?

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: 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: Locating in China and Avoiding Mexico

Chapter 8 opens with a list of key success factors companies use in making location decisions, and Table 8.1 ranks the global competitiveness of 133 countries. China comes out #29 and Mexico #60. Back-to-back headlines in The Wall Street Journal (Dec.16 and 17, 2010) deal with two very different location strategies. The 1st involves US firms opening outlets in China.

We may be losing manufacturing  jobs to China by the hundreds of thousands, and outsourcing engineering jobs to India and call center jobs to the Philippines by the 10,000s. But US companies are making very successful inroads in China in one field—fast food! McDonald’s is opening  200 new stores in China next year, adding to the 1,100 locations it already has. (KFC, by the way, leads with 3,200 outlets, including many in lesser-developed cities where there is less competition). California Pizza Kitchen  plans to expand, while Starbucks is tripling its stores to 1,500 in the next 5 years. Half of the new McDonald’s will have drive-thrus and 550 will include delivery service. Currently, the firm just does not have the supply chain to allow it to expand beyond the 150 cities it is already in.

On a less favorable location note, the Journal headline declares,”Companies Shun Violent Mexico”. Electrolux just announced it had chosen Memphis over locations in Mexico for a $190 million appliance factory sporting 1,200 jobs. The decision involved factors such as proximity to suppliers,but Mexico’s deteriorating security and spiraling drug-related violence played more than a minor role. “We won’t put a factory in Mexico until some of this violence gets addressed”, says the CEO of Terex,  a heavy equipment maker. Whirlpool’s concern about safety was also a factor in building an oven plant in Tennessee, rather than Mexico. Toyota’s approach was to build a plant deeper inside the country, in a relatively safer area.

Discussion questions:

1. What is the long-term danger to Mexico in terms of foreign investment?

2. Why are US fast-food chains trying to penetrate Chinese markets?

3. Discuss the difficulty McDonald’s faces in  a rapid expansion abroad.

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: Planes, Trains, and Drones–China’s Reverse Engineering Controversy

When the Japanese and European high-speed rail companies signed on to build trains for China, they eyed the $ multibillion contracts in the booming new market. What they got was competition from Chinese firms who took their technology and turned it against them within a few short years. Chinese companies, fueled by technology transfer, reverse engineering, and process redesign (Ch.7), are now selling trains even faster than foreign rivals Kawasaki, Bombardier, and Siemens. The national  strategy of boosting state-owned firms and obtaining advanced technology at the expense of foreign powers is challenging the US and other powers doing business in China.

Yesterday’s Wall Street Journal (Nov.18,2010) quotes a China rail official who says they are “learning and systematically compiling and re-innovating foreign …technology” and now have trains that go 37 miles an hour faster (236 mph) than European and Japanese rivals. Kawasaki’s view: a  few tweaks to exterior paint scheme…and a beefed up propulsion system is not a new technology. “Its nothing but deceitful propaganda”, says an exec.  Kawasaki had set up production facilities in China, trained Chinese engineers, and developed a supply chain for components.

Today, the Journal’s  headline addressed China’s advances in pilotless drones— putting the US and Israel at risk in their worldwide dominance. Same story: technology transfer by Israel propelled the 25 different models of unmanned aircraft…a major advance in only 2 years. And last week’s lead story was the unveiling of China’s C919 commercial jet, a direct threat to the Boeing 737.

So how is this different from post-war Japan (and Korea as well) transforming their economies by reverse-engineering foreign technologies in steel, autos, ship building, and computers? China’s share of manufacturing advanced  equipment could climb from 8% today to 30%  of global exports within the decade, writes the Journal.

Discussion questions:

1. Discuss the ethical issues that arise from these articles.

2. What is China’s long-term manufacturing strategy, and how is it changing?

3. How did companies like Kawasaki end up losing their dominance in the Chinese market?

Good OM Reading: The Spread of Industrial Engineering in China…By an American

Most all of us know the story about how Dr. Edwards Deming became the father of quality control in Japan. With their factories and infrastructure destroyed, Deming  helped rebuild post-war Japan into the industrial powerhouse we know. Deming’s reputation is so strong in Japan that the awarding of the annual Deming Prize for quality is broadcast live on TV.

Most of don’t know, however, the story of how China’s productivity revolution began some nine years ago. The improbable tale, written in a fascinating Wall Street Journal article (Nov.6-7,2010), describes Gavriel Salvendy, a 72 year old Hungarian-Israeli-American  professor who is the father of Industrial Engineering in China. Dividing his time  between China’s MIT (Tsinghua University in Beijing) and Purdue, Salvendy tore up the traditional Chinese academic hierarchy. Now more than 200 IE programs have sprung up around China mimicking that at Tsinghua.

I hope you can take 5 minutes to click on the link to the WSJ article and enjoy it as much as I did.

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: 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:

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