Tag: China

OM in the News: Harada–How America Can Fight Against Low-Cost Labor in China

Norman Bodek has visited Japan 78 times to study the Japanese continuous-improvement philosophy. On his most recent trip Bodek met with Takashi Harada, who has developed the ultimate recipe for competing against low-cost labor in China and India. The Harada Method, reported in IndustryWeek (Oct.25,2011), is one part monozukuri (or product excellence) and one part hitozukuri (or people excellence), and is steeped in respect for people. The Harada Method is designed to help shop-floor workers develop their skills and capabilities–on their own.

The key, says Bodek, is “self-reliance”, where “you, the worker can make a decision for yourself and your company and for your customer that is right. This is missing in so many American corporations. You call a company and the first thing you get is ‘ This call is being recorded’ . Why are they recording it? They don’t trust their people, and they don’t empower them to be trusted”.

The Harada Method, already taught to 55,000 managers at 380 companies in Japan, is enormously popular there because Japan (like the US) is struggling to compete with low-cost labor in China and other emerging economies.

Through the method, workers are encouraged to pick a skill that they’d like to master, and to set goals to help them accomplish it. Employees write down their goals, create a step-by-step plan to attain them, measure themselves against their goals and receive feedback and guidance. To achieve hitozukuri, managers provide lifelong training and mentoring of employees. “What I’m trying to do is get American mangers to focus on their people — recognizing that developing people doesn’t even cost you anything. It doesn’t”, says Bodek.

Discussion questions:

1. Compare the Harada Method to some of the  quality improvement philosophies used in the US.

2. How can ordinary people become heroes in their own lives, and how does this apply to the factory floor?

OM in the News: China Discovers the Dangers of Reverse Engineering

It has been almost a year since we wrote a blog on how China has pulled ahead of competitors by reverse engineering many high-tech products, including bullet trains. It turns out though, that such an approach is not without dangers as The Wall Street Journal  (Oct.3, 2011) points out under the front page headline “China Bullet Trains Trip on Technology” (with a 5 min. video clip embedded in the article). As you may recall, during a July lightning storm, two of China’s bullet trains collided in Wenzhou, killing 40 and injuring 100’s. More recently, two trains collided in Shanghai, injuring 280.

 Thus arises the issue of deep international distrust over China’s questionable use of foreign technology, including weak intellectual property protections. For in fact, key components in China’s high-speed rail system come from Japan’s Hitachi Ltd. Fearful that Chinese technicians might reverse engineer and steal their signaling technology, Hitachi locked many components in a “black box” design. This approach made it harder to copy, but as a downside, made it harder to understand during testing and use. By withholding technical blueprints, known in Japanese as zumen, troubleshooting the gear was also more difficult. “Providing zumen means we completely trust the buyer of our technology”, says a Hitachi exec. He adds, we do not want  a buyer who would “become a competitive threat in other markets”.

In less than 7 years, China has built a bullet-train network larger than the ones Japan and Germany took decades to construct. According to the CFO of the company working with Hitachi on the signaling systems, China has made it a “very clear mandate of localizing the product. Basically, foreign players are not allowed to bid independently for high-speed rail projects”.

Discussion questions:

1. Why don’t all companies transferring technology to China protect their “zumen”?

2. How has corruption played a factor in China’s rail system?

OM in the News: What Do China, Mexico, and South Carolina Have in Common?

The answer to this question about Mexico, China, and S. Carolina is good news re American jobs. But specifically, it’s that The Wall Street Journal (Oct.6,2011) just ran three articles in the same issue that are all tied to the  theme of globalization coming full circle.

In the 1st, we find that Otis Elevator is moving production from its plant in Nogales, Mexico (which it opened in 1998) to Florence, S. Carolina. Otis says the move will save money. The cost of producing abroad has risen and Otis has devised more efficient ways to make the product closer to where it sells it. Since designers and engineers had stayed in the US, it meant a lot of cross-border travel. “We needed to rationalize our supply chain”, says the CEO. Net to US: 360 jobs. (Also see the 5 min.video link in the article).

Second, the Journal reports that German tire maker Continental AG is building a new $500 million plant in S. Carolina, bolstering  a major turnaround in the US tire industry. Eventually, 8 million tires will roll out annually, creating 1,600 jobs. The strategic shift comes amid reduced labor costs (partly from new 2-tiered wage plans) and a supply of highly-skilled workers, making the US competitive  globally. As a bonus, Japan’s Bridgestone Corp, also announced a $1.1 billion expansion of its existing tire plant. Where? Why S. Carolina, of course!

 “China is Getting Too Expensive”, talks about a S. Carolina furniture maker who moved production  to China a few years back, only to be bumped aside by his Chinese partners who started selling directly to the US market. The Journal writes: “But with labor, materials and shipping costs rising, the advantage will tip (back) to the US in 4 years” in 7 major industries. Among the forces: rising costs in China, more flexible American unions, state subsidies, higher productivity here, and shorter turnaround times, meaning shorter supply chains. Automation, however, means a furniture maker can accomplish with 135 employees what took 250 to do in the past.

Discussion questions:

1. Why are some US companies  abandoning Mexican production?

2. What factors are working against China?

OM in the News: Is What’s Good for GE Good for America?

Remember the famous 1953 quote before Congress–actually it was a misquote– by the president of General Motors: “What’s good for GM is good for the country”? That remark was just rephrased to GE’s CEO, Jeff Immelt, in a question by a Wall Street Journal (Sept. 30,2011) reporter under the headline “China Venture is Good for GE but Is It Good for U.S.?”  Immelt’s edgy response: “I’m done”.

The basic question is whether the U.S. can compete in China without giving away the store.  The Journal asks: “What’s to keep GE’s new avionics joint venture with China from transferring the best of U.S. technology abroad, empowering a new set of Chinese companies to challenge U.S. aircraft makers?” After all, avionics–the “brains” on an airplane–are at the pinnacle of American know-how. It’s where the U.S. is still highly competitive and it’s technology that China covets.

GE says it has built protection into the transfer of technology. But one Congressman says: “To suggest there are going to be firewalls that will stop this technology from going to the Chinese military is approaching laughable”. This is not, of course, the first case of industrial companies striking difficult bargains with Chinese state-owned  firms in exchange for access to the growing market. Siemens earlier joint venture in high-speed rail resulted in direct competition from Chinese firms that borrowed its technology.  China’s industrial strategy has been explicit about “metabolizing” foreign technology and making it China’s own.

“We’ve been passive in deciding how to deal with China’s aggressive industrial policies”, says a former Commerce Department official. Adds a China expert: “It’s unclear whether anyone in the U.S. government took a look at the GE deal in terms of U.S. competitiveness–the future of the aviation industry 10 or 20 years out”.

Discussion questions:

1. Make the case for and against GE’s joint venture.

2. Should the government play a more active role  to protect  Boeing from China’s planned passenger jet that will use GE avionics?

Teaching Tip: Challenging the Theory of Comparative Advantage

An interesting article in The Wall Street Journal (Sept.27,2011), about the toll China is taking on US manufacturing, challenges the long-held Theory of Comparative Advantage which we discuss in Supp.11, Outsourcing as a Supply Chain Strategy. The theory, framed two centuries ago by a British economist, says that nations prosper by focusing on what they do best and trading with other countries that have different strengths. For years, economists have stated that  the benefits of trade with China far outweigh its costs. But in 2004,  Nobel Laureate Paul Samuelson argued that while  such “trade may benefit some Americans, it does so by ‘decimating’ the wages of blue-collar factory workers”.  So when you teach the topic of outsourcing, how should the Theory of Comparative Advantage be described?

A new MIT study of US-China trade suggests the damage to the US is even deeper than these economists like Samuelson have supposed. “A big portion of the ways trade with China has helped the US–such as inexpensive Chinese goods to consumers–has been wiped out”, reports the Journal. This is because increased government payments to unemployment insurance, food stamps, disability payments, and other benefits amount to 1/3 to 2/3 of the gains from trade. And these estimates don’t include the economic losses experienced by those who lost their jobs.

The reason? The breakneck pace of China’s development overwhelmed American communities that produced goods such as small appliances. Factory jobs were quickly lost without a long window to create replacement wages.  And with fewer high-paying factory jobs supporting the local economy, non-manufacturing wages were depressed as well. The research found that in communities that had industries such as heavy machinery production, Chinese competition was slower to enter and the US had more time to recover. The normal process of adaptation simply had more time to take place.

OM in the News: Why GE and Toyota Operations Managers Worry About “Rare Earths”

Here are 4 increasingly important manufacturing components you probably never heard of: (1) neodymium–used in magnets in wind turbines and Toyota Prius engines; (2) yttrium–used in wind-turbine blades and flourescent lamps; (3) lanthanum–used in batteries in hybrid cars and as a catalyst in gas and jet fuel;  and (4) europium–makes the color red in TV, laptop, and iPhone screens.

 As The Wall Street Journal (Sept. 12,2011) writes: “Manufacturers of high-tech products rely on a steady stream of metals–some of them scarce–to make their goods”. These “rare earth” metals, a collective name for 17 minerals used in products like these, have skyrocketed in price in the past 2 years as China (which controls 90% of global production) slashed exports to tighten control over the sector. Lanthanum, for example, jumped from $10/kg in 2009 to $160/kg today. Neodymium surged from $20/kg to $455/kg.

As a result, mining companies around the world, shut down by 20 years of cheap supply from China, are reopening. And companies like GE and Toyota are trying desperately to reduce or eliminate the need for the metals. GE, for example uses rhenium in engine blades. It has started experimenting with other hardening additives that are cheaper and more abundant. It has also started a global recycling program–pulling out old engines from scrap piles and dissolving them in acid baths to retrieve the scarce metal. Toyota is working with Tesla Motors to develop a new electric motor that does not use neodymium magnets.

Yet scientists have had little success in finding a replacement for the europium found in dozens of products from light bulbs to computer screens. This rare earth generates the color red, while terbium provides your iPhone’s green color.

Discussion questions:

1. Why are rare earths so important and now so rare?

2. How does an operations manager respond to changes in the supply chain such as these?

OM in the News: Making Chopsticks for China in Georgia!

The shortage of chopsticks in China has become so acute that a firm in Americus, Georgia has begun exporting millions of pairs daily to the country, reports China Daily (Aug.22,2011).  Georgia Chopsticks, founded by Korean-American Jae Lee, is operating around the clock to meet demand. It currently puts out 2 million sets per day with 60 employees, but has plans to expand to 150 workers and 10 million pairs of chopsticks a day by year’s end.

Amid a shortage of wood in China, the abundant polar and sweet gum trees in Georgia were found to be ideal for chopsticks, producing straight, pliable, and light-colored implements. Being sold in supermarkets in China, they cost less than a penny each to make. In China, manufacturers produce 63 billion sets per year. But in some areas of that country  and Japan, they have simply run out of wood.

Says Jae Lee,”When I opened this business the reaction from my family and friends was ‘Are you crazy?’ But we’ve shown you can make something happen”. One of his workers adds: “Everywhere you see in America it says ‘Made in China’ and you wonder if in China they ever see ‘Made in America’ “. Each Box shipped has Made in USA in very large print to drive the point home.

Low-tech manufactured goods being shipped from high-tech America to China? Here is a 2 minute MSNBC video link you can use in class to make the point.

Discussion questions:

1. If the US can make chopsticks for export, why can’t the Amazon Kindle be made here?

2. Why did GE recently move its HQ for x-ray and MRI devices from Wisconsin to China?

OM in the News: US Solar Jobs Falling to the Chinese

Despite a doubling in demand for solar power cells (from 12 gigawatts in 2009 to 24 gw last year) and US government support for “green” jobs as the future economic engine, The Wall Street Journal (Aug.17,2011) headline bears the bad news : “Overrun by Chinese Rivals, U.S. Solar Company Falters”. Amid bruising competition across the globe, the green manufacturing jobs in the US are losing out in the cut-throat cost battle.

The Journal reports that Evergreen Solar, once the darling of the industry, filed for bankruptcy this week. Earlier this year, the firm closed its Massachusetts factory, a $450 million facility that opened in 2007 with state and local subsidies. Its 800 employees lost their jobs. Evergreen began making solar panels in Wuhan, China in 2010. Likewise, other US-based solar companies have already moved their production overseas: Sunpower went to the Philippines and First Solar to Malaysia.

“Quite frankly, as a solar manufacturer, it is better to pay workers $1 an hour in China than workers $15 an hour in Massachusetts”, says a solar analyst.  Adds an industry exec, “Chinese solar manufacturers benefit from inexpensive capital, low-cost electricity and real estate, as well as less expensive labor”.

Another solar-products maker, California-based Solyndra, also announced plans in 2010 to shutter a plant and lay off the workers, just a year after receiving a $535 million federal loan guarantee. A big problem has been the plummeting of raw material costs (polysilicon has dropped from $400/kilo to $55 in the past 3 years). This stripped the competitive edge of firms like Evergreen and left them with a higher-cost production process.

Discussion questions:

1. Why are American manufacturers having trouble competing in the global solar energy market?

2. What are the dangers of state, local, and federal government incentive programs?

OM in the News: Trouble on the China Express

The title of the lead article in today’s Wall Street Journal (July 30-31, 2011) , “Trouble on the China Express“, ironically may answer the question my dinner companions had for me last night. They asked, “Do you think China has overtaken the US and moved us into the 2nd place among nations”? The Journal‘s use of the bullet train crash last week (plummeting off a viaduct after a lightning strike,  killing 40 people and injuring 190 more) is, as the paper writes, “an apt metaphor for the country’s hurtling economy over the past decade: a colossal investment project, born of the state, steeped in corruption, built for maximum velocity, and imposed paternalistically on a public”.

“Do not be desirous to have things done quickly”, said Confucius 25 centuries ago. It ” prevents their being done thoroughly”. But the Chinese leaders have hyped high-speed rail with abandon. Using imported technology, they have modified the designs and sold them as their own. A few weeks ago, the Railways Minister bragged that its technology was so superior to Japan’s that “they cannot be mentioned in the same breath”.

And it’s not just the technological glitches. The bullet train project (planned to stretch 10,000 miles at a $300 billion cost by 2020), appears to be riddled by corruption. One Chinese blogger (and there are 485 million Chinese using the Internet) wrote: “When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted”.

The Journal concludes: The crash “has transformed a symbol of Beijing’s pride into an emblem of incompetence and imperious governance”. Does that answer my dinner companions’ question?

Discussion questions:

1. What impact can corruption have on efficient OM?

2. What are the concerns about such rapid expansion?

3. What other quality crises has China faced recently?

OM in the News: GE Moves X-Ray Headquarters to China

In Ch.8, we list seven reasons why companies select one country in which to locate  over another. One of the seven, proximity to markets, leads to a disturbing headline in yesterday’s paper. The Wall Street Journal (July 26,2011) reports the General Electric is moving  its 115 year-old x-ray business headquarters unit from Wisconsin to China–its first business unit to be based there.  The move, to be completed this year, includes the chief executive and members of the executive team. It is the latest sign of China’s growing importance to GE, which GE CEO Jeff Immelt calls the company’s “second home market”. Earlier this year, Immelt finalized a deal with the state-owned Aviation Industry Corp. to inject GE’s avionics business with a 50-50 joint venture based in China.

GE sees accelerated sales in China’s fast-growing health-care market, with that country’s central government increasing its public health budget by 16% this year, to $26 billion. “As the company grows more global, it’s increasingly important for us to be close to our customers”, says the head of  GE Healthcare Global X-Ray. The company wants to develop more medical equipment specifically for the Chinese market. In China, GE Healthcare already employs 700 engineers  who are focusing on developing more affordable products for rural health clinics.

Last year, GE launched the Brivo CT, a scaled down CT scanner for less-developed hospitals, and in 2009 it rolled out a low-cost digital x-ray machine for the Chinese market. The company declines to say how many new employees will be added at the Beijing HQ, but adds it does not expect job losses in Wisconsin.

Discussion questions:

1. What are the implications of GE moving an entire multi-billion dollar business unit abroad?

2. What are the dangers to GE in partnering in high-tech areas like avionics and medical imaging with China?

3. What are the other location decision factors, and how do they come into play here?

OM in the News: If China is Too Expensive, Should We Locate in Vietnam ?

With China’s minimum wage at $170 a month, and rising steadily, the decision where to locate a manufacturing plant is not as clear as it was a decade ago. We discuss this issue in Chapter 8, Location Strategies, and see that low labor cost is a major factor in country selection.  The latest Businessweek (June 23-30, 2011) reports that Vietnam, until recently the low-cost alternative to China (with a minimum wage of $85 a month), was a very attractive choice. But with 20% inflation, stoked by fuel and electricity costs, multinationals are beginning to turn away in search of yet cheaper outsourcing sites. The problem is labor strikes–336 in the 1st four months of 2011–due to Vietnamese workers who say they can’t afford the higher cost of living.

Multinationals do not have to look far away–and they are turning in increasing numbers to Laos and Cambodia, the new Vietnams of cheap manufacturing. Last month, Japan’s Minebea  broke ground for a new 5,000 worker motor production plant in  Phnom Penh. “Labor is the key focus for us in choosing Cambodia”, says the company spokesman. And Srithai Superware, a Thai tableware maker, just suspended plans for an expansion of its Vietnam plant because of  economic instability. “Production costs have gone up after two salary increase this year”, says the GM.

The strikes have dented Vietnam’s 25-year-old policy of offering foreign firms a stable and low-cost workforce . “The nation is at a crossroads”, says the World Bank’s director for the country. “Vietnam can’t assume that foreign direct investment will continue. Money can go elsewhere”.

Discussion questions:

1. If manufacturers decide China is too expensive and Vietnam is in danger of following suit, how can they predict where to outsource to?

2. What other  critical factors influence the country location decision?

OM in the News: China’s Newest Exports–Bridges for California and Workers for the Bahamas

China’s role as an exporter is not exactly a news item, but two articles caught my eye this week that are worth discussing in your OM class. In the first, The New York Times (June 26, 2011) tells of how California decided to by-pass the U.S. “Buy American” program to have the new San Francisco-Oakland Bay Bridge built in China and shipped here in massive pieces. The Times writes: “The project is part of China’s continual move up the global economic value chain–from cheap toys to Apple iPads to commercials jets–as it aims to become the world’s civil engineer”.  Based on the reputation of showcase projects like the Beijing Olympic-sized airport terminal and the mammoth hydroelectric Three Gorges Dam, Chinese companies have been hired to build copper mines in the Congo, high-speed rail lines in Brazil, and huge apartment complexes in Saudi Arabia.

So it shouldn’t have come as a big surprise to find out that China is about to build the largest resort in the Caribbean, in Nassau, Bahamas, to challenge the huge Atlantis Hotel head-on. The surprise, however, was the uniformly negative  reaction from every Bahamian I met, 3 weeks ago while on vacation, to the project’s construction. The Miami Herald’s report  that China would be sending 5,000 of its own workers to build the $3.4 billion, 2,250 room Baha Mar hotel and casino resort did not please locals –or the U.S. government. Hotel execs are cognizant of the negative message they will send to tourists, as well as the Bahamian citizens, by maintaining a work camp for thousands of Chinese laborers in a highly visible and affluent section of town. But the Chinese government insisted on Chinese workers– or there would be no financing. The Bahamas wanted another tourist draw and reluctantly agreed.

Discussion questions:

1. “He who has the gold, makes the rules” seems to apply in the hotel case. Do students agree?

2. Why did California opt for a Chinese bridge?

OM in the News: High-Speed Rail in China and the U.S.

Why is high-speed rail an important topic in OM?  The New York Times (June 23,2011) writes of  “the very real economic benefits that the world’s most advanced fast rail system is bringing to China–and the competitive challenges it poses for the U.S. and Europe”.  Just as the interstate highway system Eisenhower built out 60 years ago made modern, national commerce more feasible in the U.S., China’s ambitious rollout of  high-speed rail is integrating that sprawling nation–though on a faster timetable at much higher speeds than anything we envisioned here.

Do we have a problem in the U.S.? After I spent 4 1/2 hours driving 90 miles from Orlando to Tampa on  a jammed interstate last week , I think we do. The last Amtrak run between the 2 cities died a decade ago. The high-speed rail proposed by the present administration (offered with a full $2 billion-plus incentive) was turned down by our new governor who feared the trains would draw few riders.

Meanwhile the new Beijing-to-Shanghai line will run at 190 miles per hour (going to 220 mph next year) and take 5 hours –while a comparable trip, say from Atlanta-to-New York– takes 18 hours on Amtrak. The Chinese railroad plans to run 180 trains a day on the route.

Work crews of  100,000 per line have built about half of the 10,000 mile network in China so far, often ahead of schedule. As the 200 mph trains link China’s provinces and cities that were previously 24 trips by road or rail, the country’s “manufacturing might and global export machine are likely to grow more powerful”, writes the Times. This makes it more convenient to base businesses in places like Hunan Province, previously isolated from the economic mainstream, but where land, electricity, and labor are cheaper.The other plus of high-speed passenger travel: older rail lines are freed up for freight. This has allowed coal mines and shippers to switch to rail from trucks.

Discussion questions:

1. Do we need bullet trains in the U.S.?

2. What are the implications of the Chinese rail plan for Europe and the U.S.?

OM in the News: “Frugal Engineering” Helps India Challenge Chinese Manufacturing

The Financial Times (May 20,2011) just published an interesting article on India becoming the world leader in what is known as “frugal engineering”.  Always behind China as the world’s low-cost manufacturer, India  has chosen the path of producing low-cost products that are resistant to tough environments such as Indian or African roads and weather–and have robust quality standards. India,  already known as the IT back office of the world, is now creating hubs for global manufacturing of small cars, wireless telecomm equipment, and low-cost innovative products  for emerging markets ( as well as such items as small decentralized power plants for areas of the world with no electricity).

“The story of India’s rise as a key contributor to the global supply chain is very different from the one that elevated China to ‘factory of the world’ status. India is putting less emphasis on hard-core manufacturing , but it’s taking a leadership position in research and product development”, writes the Times. Products developed by “frugal engineering” for Indian markets  fit well in other developing world markets in African and Latin America.

Ford, which has invested over $1 billion in a 200,000 auto/year state-of-the-art plant in Southern India, is making cars for emerging markets, where manufacturing costs are often higher than in India. “We now recognize it as a hub for small and fuel-efficient cars”, says the head of Ford-India.

India is also becoming a more popular destination for global manufacturers who want to decouple and de-risk from China, whose wages are rising, whose markets are highly regulated, and where intellectual property rights are often infringed.

Discussion questions:

1. What is India’s strategic advantage over China and what is China’s advantage over India as a global manufacturer?

2. Why is India a world center for frugal manufacturing?

OM in the News: China’s Solar Overcapacity

In our last blog about China and its solar industry, we noted that vast economies of scale and government subsidies were sending solar panel prices down sharply. China was also grabbing market share not only in the US, but controlled the bulk of the European market. With global demand up, Chinese firms like Yingli Green Energy, Suntech, and LDK Solar were ramping up production capacity–doubling it and running factories 24/7, 365 days  a year in some cases. According to today’s Businessweek (Feb. 9, 2011), “all of the major Chinese producers are engaged in massive, very aggressive capacity-expansion programs.”

But their timing may be off. As the Chinese ramp up, austerity-minded European governments are scaling down their solar subsidies. Germany, France, Spain, the Czech Republic, and others, are reducing support for solar power producers dramatically as they face record-high deficits. This leaves China with capacity way ahead of what the market can take.

It’s not just subsidy cuts, though. The French Environmental Minister says most new solar panels “were made in China with a highly questionable carbon footprint”. She adds:  the policy must “create jobs in France, not subsidize Chinese industry”. Since Yingli made 60% of its income off of Germany last year, and Suntech’s European sales were 74% of total revenue in 2009, the Chinese are learning a painful lesson in capacity management. Their internal market is one alternative, but total Chinese demand is only one-twentieth of what Germany spends on solar in one year. This article ties in well with the discussion of capacity planning in Supp.7.

Discussion questions:

1. Do politics play a role in the solar industries in China? In the US? In Europe?

2. How can overcapacity be avoided?