At least someone is getting the message. With quality a given, pundits have been proclaiming for several years now that "innovation" is the flag manufacturers must follow in their fight with low-cost global competitors. When IW asked Chinese manufacturers to identify the focus of their market strategy, lo and behold, "innovation" was the No. 2 response. It was preceded by "high quality" and followed by "service and support." What many outsiders would regard as Chinese manufacturers' No. 1 competitive strength, "low cost," came in fourth on their priority list. When we asked U.S. manufacturers the same question, innovation straggled in a distant seventh.
Xenophobic cultural stereotypes aside, no country or its people has a monopoly on innovation, or quality, or responsiveness, or any of the other factors that bring in new orders, boost a company's market share and drive revenue growth. Sure, as trade barriers fall, some manufacturers are capitalizing on labor cost advantages. But the struggle for market dominance around the globe hinges on many issues other than who offers the lowest price at the shipping dock.
Recognizing that many U.S. manufacturers have fixated on China as both Public Enemy No. 1 and the Land of Opportunity, IndustryWeek and our partner, the Manufacturing Performance Institute (MPI), commissioned a special study -- the first of its kind -- to look at the current state of manufacturing in the Middle Kingdom. This report compares the responses of a select group of Chinese manufacturers to the results of the 2004 IW/MPI Census of Manufacturers, our annual survey that examines the operational practices and performance of U.S. manufacturers.
The comparison underscores how competitive Chinese manufacturers have become over the past decade. In terms of management practices and performance metrics, manufacturers in China measure up better than many might think.
Reflecting the current slope of the global economic cycle, the hiring outlook for manufacturers in both countries is similar. In China, 68% of manufacturers surveyed expect to add people to the payroll in 2005, compared with 64% of manufacturers in the United States.
The anticipated employment growth in both countries coincides with the 84% of Chinese and 87% of U.S. manufacturers that anticipate revenue increases next year. As the country's GDP growth projections attest, the upside is better in China. Over half of survey respondents in that country anticipate annual revenue growth of over 10%. In contrast, only about a third of U.S. companies are similarly bullish.
When comparing U.S. plants to those in "low-cost countries," wages are the most common point of comparison. The Chinese manufacturers in our study report median wages of $1,450 per year, which is less than three weeks' pay in the U.S. ($13.50 per hour, 40 hours per week).
In addition to customer proximity, many U.S. manufacturing executives believe that they can make up some of the labor-cost difference with superior skill levels and greater teamwork, which contribute to higher productivity. Indeed, although far from a majority, one of every four plants in the United States has organized 50% or more of its employees into self-directed or empowered work teams. This compares with one of every nine Chinese manufacturers reporting a similar team-based work organization.
When it comes to upgrading worker skills, Chinese manufacturers appear to be rising to the challenge. Over half of Chinese respondents provide over 20 hours of training per employee per year. In the United States, a little more than one third of manufacturers offer a comparative level of employee training. Most Chinese respondents also spend 5% of their annual labor budget on training, compared with the 2% of labor costs allocated to training by most U.S. manufacturers.
The study did not attempt to reconcile the differences in cost of living and the value of output to arrive at a raw productivity comparison between countries. Given the vastly different starting points however, manufacturers in the United States and China report surprisingly similar progress. Just over 70% of plant managers in both countries chalked up productivity increases over the past year, and around 40% of managers in both countries report annual productivity growth of 5% or higher. While the top three contributors to productivity improvement are the same -- process improvements, sales increases, and new equipment -- Chinese managers single out sales growth as the primary factor. U.S. managers rely more on process improvements for productivity gains.
Employee turnover is another area where manufacturers in the two countries report similar performance. In much of the developing world, low-skill jobs, minimum benefits and worker mobility contribute to high factory turnover as people switch jobs for a few pennies more an hour. This does not appear to be the case among the Chinese manufacturers that we surveyed. Median annual labor turnover of Chinese respondents is 5%, compared with 6% for U.S. manufacturers.
Less Lean, More Quality
Chinese respondents differ dramatically from U.S. manufacturing managers when asked to identify their primary operational improvement methodology. Almost two-thirds of the Chinese manufacturers say they follow a "total quality management" philosophy, possibly reflecting the quality orientation of the Chinese manufacturers surveyed (or a jargon translation issue). Less than 20% singled out some version of "lean manufacturing," which is the driving force behind operational improvement for 55% of U.S. manufacturers.
The inventory turn rates of Chinese respondents support this lack of focus on lean manufacturing's waste-elimination methodology. Their median turn rates are considerably lower for all types of inventory. A majority of Chinese managers report four or fewer total inventory turns (calculated as annual cost of goods sold divided by the average value of total inventory). Material flows almost twice as fast through facilities in the U.S., which report a median of seven inventory turns.
Responding to increasingly stringent customer demands, Chinese respondents report a median first-pass quality yield of 98% (versus 97% for all U.S. manufacturers). This is up sharply from a 90% quality yield that these manufacturers say was typical three years ago. They also report a very competitive on-time delivery rate of 99% (versus a median on-time rate of 96% for U.S. manufacturers), and a 100% on-time rate for the upper quartile of respondents. This is especially impressive considering the vagaries of an extended supply chain in the still-developing country. (It should be noted here, as explained in the "Methodology," that most of the output of these manufacturers is not exported but is destined for domestic customers.)
When asked to evaluate their operations, more than one out of four Chinese respondents believe they have made significant progress toward or have attained world-class performance. This is only a few points less than the portion of American manufacturers with such a positive self-assessment of their operations.
Where any operation really stands is difficult to judge without point-by-point comparisons with competitors. But even though raw cycle times and order lead times are not comparable across industries, the study also looked at how much progress is being made. For example, almost 40% of Chinese manufacturers surveyed say they have reduced per-unit manufacturing costs over the past three years. This compares with 55% of U.S. manufacturers reporting cost reductions. One possible explanation for the difference is that factories in the United States are older, and may offer more opportunities for savings from new technology and processes.
Chinese respondents are also getting orders to customers faster. Some 60% have decreased customer order lead times over the past three years. A solid two-thirds of U.S. manufacturers have done likewise, cutting the time from order-entry to shipment, most by a wider margin than their counterparts in China. Manufacturing cycle-time reductions have contributed to more rapid shipments in both countries. Half of the Chinese manufacturers surveyed reduced cycle times over the same time period. This compares with 71% of U.S. manufacturers that have shortened production times.
Such process improvements are critical for manufacturers, no matter what country they are located in, if they are going to have any chance of maintaining profit margins. Competitive pressures in both China and the United States have put a stranglehold on customer prices. Over three quarters of U.S. manufacturers experienced raw material and component cost increases over the past year. Only half managed to pass along some of these cost increases by raising customer prices. While a smaller portion of Chinese companies surveyed reported material price increases (51%), only 29% of respondents increased prices.
Equipment & Technology
In such a go-go economy, it's no surprise that Chinese respondents reported a healthy 80% capacity utilization rate (verses a median of 70% in the United States). In line with the country's quest to become the "factory of the world," most of the Chinese manufacturers surveyed will spend a whopping 20% or more of sales on capital expenditures in 2004. This compares with a median capital expense budget of just 3% of sales for U.S. manufacturers.
Not only is capital-equipment spending high, but 72% of Chinese respondents expect to spend even more in 2005. This compares with about half of American companies that expect to increase such spending.
Information technology accounts for part of that investment outlay. Here again, a majority of Chinese managers that we surveyed say they will spend 5% or more of sales on IT in 2004, and three of every four expect to increase IT spending in 2005. American plant managers only plan to spend 1.4% of sales on IT, and well over half will keep spending constant or decrease the IT budget next year.
When it comes to how that IT allocation will be invested, the Chinese companies won't be playing catch up. In most IT categories, the select group of China-based manufacturers participating in the study report higher degrees of implementation than U.S. manufacturers as a whole. Again, this might be explained by the relatively young age of the Chinese factories.
Many of the Chinese respondents have installed ERP systems (47% versus 35% of U.S. factories), manufacturing execution systems (45% versus 16% of U.S. factories) asset management systems (53% versus 37%), transportation management systems (47% versus 26%), and customer relationship management software (64% versus 33%). The Chinese manufacturers surveyed trail U.S. manufacturers in their implementation of software-based financial management systems (49% versus 76% of U.S. factories), computer-aided design software (64% versus 79% of U.S. factories) and online purchasing (35% versus 54%).
IW/MPI China Manufacturing Study Excerpts
Chinese plants participating in this survey:
Are most likely owned by Chinese ...
China Private -- 41%
Joint Venture -- 25%
State-Owned -- 25%
Foreign Enterprise -- 9%
Are most likely discrete producers ...
Discrete -- 54%
Process -- 20%
Both or Hybrid -- 26%
Are younger than plants in the U.S. ...
|Less than 5 years||29%||2%|
|More than 20 years||24%||75%|
Work Worlds At Odds
Chinese manufacturers . . .
Pay much less than U.S. counterparts . . .
|Average Monthly Wage, $||China||U.S.|
Train more than U.S. counterparts . . .
|Training Hours, Per Employee %||China||U.S.|
|Less than 8||13.4%||21.5%|
|More than 40||26.8%||10.8%|
Spend relatively more on training . . .
|Training as a % of annual budget||China||U.S.|
While both Chinese and U.S. manufacturers say "high quality" is their No. 1 objective, the value they place on other objectives* varies greatly. *(% ranked as one of Top Three)
High quality -- 69.6
Service and support -- 53.4
Total value -- 36.9
Fast delivery -- 34.7
Low cost -- 28.3
Customization -- 26.7
Innovation -- 26.3
Product variety -- 15.4
High quality -- 72.9
Innovation -- 54.2
Service and support -- 40.9
Low cost -- 27.6
Product variety -- 24.9
Fast delivery -- 20.2
Total value -- 16.5
Customization -- 11.8
Working in partnership with the Manufacturing Performance Institute (MPI), BNC Resources Co. Ltd., a quality system registrar based in Beijing, contacted 1,000 of its domestic clients, factories that are ISO 9001:2000 certified or in the process of becoming certified. From mid-April through the end of June 2004, managers from 406 facilities responded by fax or via in-person interviews to the questionnaire, which asked virtually identical questions (translated into Chinese) to the survey sent to U.S. manufacturers for the annual IW/MPI Census of Manufacturers. The final cut-off date was June 30, 2004, for the IW/MPI China
Manufacturing Study and May 31, 2004, for U.S. Census of Manufacturers respondents (681).
While the results of this study should not be viewed as representative of Chinese industry, they do represent the positions of Chinese manufacturing operations pursuing ISO 9001:2000 certification. Although certification of a company's quality management system is no guarantee of quality products, certified operations tend to pay closer attention to meeting customers' specifications. Because such a certification is a frequent prerequisite for companies marketing their products abroad, one can surmise that these Chinese manufacturers are more likely to be competing on a global level.
It's not surprising therefore that almost two-thirds of respondents to the China manufacturing study export some portion of production, with some 43% exporting products to the United States. For the significant majority of these exporters, however, foreign product shipments represent 20% or less of total output.
Compared with respondents to the U.S. Census of Manufacturers, respondents to the China study are more likely to make computers and electronics, chemicals, machinery and electrical equipment. They are less likely to produce automobiles or auto parts, construction-related products, and consumer packaged goods. Chinese respondents are more focused on high volume products, while U.S. manufacturers have a greater tendency to describe their operations as more low volume with a high product mix. Compared with the United States, where just over half of manufacturers report annual corporate revenues of less than $100 million, nine out of ten Chinese respondents report total revenues of less than an equal value (829 million renminbi), most less than $10 million (83 million RMB). Despite the dramatically lower revenues, the Chinese manufacturers surveyed tend to employ more people (38% report total employment of 250 or more vs. 29% with a similar headcount in the U.S.). Factories responding to this study in this rapidly industrializing country are much newer than is generally the case in the United States. Over half are 10 years old or younger. Only 10% of plants Stateside are of a similar age. Of those Chinese plants that are over 20 years old, 71% are owned by the government.