Made In China

Strategic growth makes this the time to be manufacturing in the People's Republic.

China is made for manufacturing. And to meet and beat their competition, the world's market-smart manufacturers are putting plants into the People's Republic. They are attracted by remarkable economic growth, an abundant and increasingly skilled workforce and the implementation of world-class manufacturing practices. Corning Inc., for example, now has six plants in China, up from a single facility only two years ago. Nestl SA, a Swiss-based foods firm, has 13 factories in the People's Republic. IBM Corp. is in Beijing, Shenzhen and Shanghai. And the list goes on. Finland's Nokia Corp., the world's largest mobile-phone maker, has seven factories in China, two producing mobile phones and five producing network equipment. Ford Motor Co. is building passenger vans at a joint venture in Nanchang and is slated to begin making passenger cars late this year at a jointly owned facility in Chongqing. Solectron Corp., a Milpitas, Calif.-based contract manufacturer, is producing electronic goods for brand-name OEMs at plants in Shanghai, Suzhou and Shenzhen. Singapore-based Flextronics International Ltd., a Solectron rival, has four production sites in China, including regional manufacturing operations in Beijing, Shanghai and Xixiang. With demand being driven by an emerging Chinese middle class, Buick sedans and GL8 executive wagons are coming off the assembly line at General Motors Corp.'s joint venture in Shanghai. Lincoln Electric Corp. is systematically welding contracts in place, in part by manufacturing in the People's Republic (See Feeding The Dragon). Diebold Inc. is cashing in on Chinese financial institutions' demand for automated teller machines (ATMs). Royal Philips Electronics NV is doing much more than looking at the mobile display market, with the number of manufacturing people at its Mobile Display Systems Group in Shanghai alone growing from zero three years ago to about 5,500 at the end of 2001. And the Boeing Co. is one of the more than 200 North American companies belonging to the Manufacturers Alliance/ MAPI that are producing goods in China. Meanwhile, QAD Inc.'s software sales provide another impressive measure of manufacturing activity in China. The Carpinteria, Calif.-based company claims more than 300 customers in the People's Republic are using its ERP and other application software, with about 60% of the ERP packages being put to work by such multinationals as Ford, the Unilever Group, Johnson & Johnson, and Gillette Co., says Pam Lopker, QAD's founder and president. QAD is manufacturing in China, too, localizing its software to meet the special needs of the market. Significantly, China is not just for companies that count their revenues in the tens of billions of U.S. dollars. For example, privately held BMI Corporate Inc., a Palatine, Ill.-based producer of board-level electronic shielding and contacts, expects to make its manufacturing debut in China soon. "All of the cell phone makers are moving to China, and we have to follow our customers," explains Melvin W. Boldt, BMI's founder, chairman and CEO. Indeed, both of his company's two largest customers, whom Boldt declines to name, have in effect told BMI that if it wants to continue doing business with them, BMI, too, must be manufacturing in China. 'Best Business Climate' It's difficult to exaggerate the dynamism that surrounds the investments in production facilities that U.S. and other foreign manufacturers are making in the People's Republic. Some, like BMI's, are small -- or modest. Others are big and bold. For example, BASF-YPC Co. Ltd., a 50-50 joint venture between Germany's BASF Group and China's SINOPEC, is building a US$2.9 billion petrochemical complex in Nanjing that's slated to come online in 2005. "Right now, [China is] probably the best business climate in the world," states BMI's Boldt. And the near future looks fine as well. For instance, within two to five years, Boldt's company calculates, 60% to 70% of all the world's cell-phone handsets will be manufactured in China. "The fundamentals in China are still strong, which is an interesting comparison with the more mature markets in North America, Europe and Japan," stresses Simon J. MacKinnon, the Shanghai-based president of Corning China. His New York State-based company has invested more than $200 million in China, and the People's Republic's rate of economic growth is one reason. For several years, China has been producing year-to-year GDP increases of 8% or better, more than five times the 1.4% advance the 15-nation European Union expects to post this year and more than eight times the 0.9% increase in GDP that Merrill Lynch & Co. forecasts for the U.S. in 2002. In China, says MacKinnon, "there are all sorts of things that are feeding off each other": economic growth, deregulation that is spurring competition in such sectors as telecommunications, and foreign investment that is attracting additional manufacturers and generating export earnings. China is "the only country in the world that is growing very well," asserts Yorgos Papatheodorou, manager of strategic development at Lockwood Greene, the Spartanburg, S.C.-based engineering and construction based unit of J.A. Jones Co. And even in this economically weak year, Papatheodorou anticipates GDP growth of 7% in China, with "probably" a 10% advance in industrial production. To be fair, not everyone enthuses about manufacturing in China. Managers and production workers are sometimes faulted for a perceived lack of manufacturing knowledge and discipline. And China is occasionally put down as a place that can produce goods only at the level of the cheap tin toys that Japan turned out in the 1950s. What's more, for foreign manufacturers there are two Chinas: the China of the new factories and the China of the old factories. The factories in China that multinational manufacturers have built from scratch are similar in appearance and manufacturing practices to their counterparts in the U.S. and Europe, observes Shanghai-based Jimmy Ng, QAD's general manager for greater China and director of sales in Asia. These modern factories are well organized, have relatively few workers on the shop floor, and in these plants "JIT, Six Sigma, and lean do mean something," says Ng. In contrast, when multinationals enter into joint ventures and inherit old factories, including those plants in western China that are emerging from a culture of state ownership and central planning, the situation is markedly different, stresses Ng. "There will be factories with a lot of employees running around on the shop floor," he says. And while JIT has now made its debut, Six Sigma quality-assurance programs and lean manufacturing remain pretty much in these factories' futures, Ng indicates. However, there must be some very fast learners in management and on the production lines in the People's Republic, because more common than put downs these days are stories of world-class manufacturing achievements in China. Particularly along the coastal arc of enterprise that starts in Shanghai and swings southwestward to Guandong province, "you can visit companies where you would not see a difference in terms of quality and productivity" from the best plants in other places of the world, emphasizes Pedro Nueno, a professor at the University of Navarra's IESE Business School in Barcelona. An example is Motorola Inc.'s mobile-phone plant in Tianjin, near Shanghai. It's turning out products "that can be sold anywhere in the world," reports Nueno, who also teaches at the China-Europe International Business School in Shanghai. A supply of good technical talent promises to help Philips Mobile Display Systems as it consolidates its production in China into Shanghai and continues the transition from what have been basically component assembly operations to process-driven manufacturing. "One of the reasons we picked Shanghai is that around the Shanghai area there are many excellent technical universities," says Hong Kong-based Peter Hopper, CEO of Philips Mobile Display Systems and a senior vice president of U.S.-based Philips Components. "It is possible to attract good technical talent in China; there is certainly no shortage of it." The availability of high-quality labor also was one of the reasons Shanghai became the manufacturing location of choice in China for Diebold, North Canton, Ohio, a producer of ATMs, says Shanghai-based Kevin Ku. His company has had a joint venture in China since 1993. Corning's MacKinnon, too, is keen on the quality of manufacturing talent in China. "The level of optical and optoelectronics engineering skills . . . is one of the best-kept secrets of China," he asserts. MacKinnon is similarly positive about the quality of Corning's production workers in China. They are, he says, "as good as anywhere else in the world." In China, Corning employs a "set of disciplines and processes which help train new workers and then provide them with the incentives and the support to produce the sort of quality we expect worldwide," explains MacKinnon. Remarkably, in less than a year from the time production began in January 2001, workers at the Corning plant in Shanghai were manufacturing honeycombed ceramic substrates for catalytic converters at the company's world quality levels, MacKinnon notes. In addition to talented workers, constantly improving quality levels of local suppliers are boosting the fortunes of foreign manufacturers in China. Diebold, for example, now counts more than 20 local suppliers that meet its exacting quality standards. "China is starting to emerge as a major raw materials supplier," adds Corning's MacKinnon. For example, Corning is now able to source in China the small crystals it once imported for a frequency control device that it makes in the People's Republic. Two suppliers in China provide crystals of "the same world quality for a price that is considerably less than we can buy in North America," says MacKinnon. Proceed With Caution Despite all the evidence that China is working well for many U.S. and other foreign-based manufacturers -- and with the promise of greater success as companies such as Diebold increasingly use China as a production platform for other markets -- there is a healthy and reassuring degree of caution among the foreign companies that are producing goods in China. "The companies that tend to succeed [in China] are those that do their homework and those who do not overestimate the market size in China," stresses Corning's MacKinnon. "In terms of the potential demand for product, one has to be realistic. It's still a developing country, with average income, [for example], in Shanghai of US$4,000," he cautions. Success in manufacturing has tended to come to those companies that have entered China small, focused on key markets and then scaled up, says MacKinnon. Taking extra care to maintain the quality and integrity of value chains, continuing to invest time in developing business relationships, and making conscious strategic decisions about the form of their manufacturing investments also are critical to making manufacturing work in the People's Republic, insist executives at several companies. Finally, BMI's Boldt observes that the People's Republic has only a short history of being entrepreneur-friendly. And, frankly, he wonders what the climate will be in three, five or 10 years. "Just as a little guy, I am leery of too large a stake," says Boldt. "I don't know how much of my children's inheritance I want to invest in China." Significantly, such expressions of caution reflect a business realism that was absent following the then-Soviet Union's opening-up to Western trade and foreign investment some 30 years ago. Despite such phenomena as a 1974 machine tool show in Moscow that took on cultural status, the level of manufacturing investment never came close to matching the initial hype. Boldt's children's inheritance seems more wisely invested in manufacturing in China.

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