China Looks to U.S. for New Manufacturing Model

Chinese manufacturers are facing hard times. Debt is up, sales are down. Signs of relief are followed by signs of trouble.

Last week, I wrote about the responses and solutions that most Chinese business owners are employing. These solutions will be ineffective, and they will be the analgesic prescription for most. The result will be a slow fade into competitive irrelevance.

There will be a few savvy manufacturers though, that rise above the crisis and embrace a new Chinese business model. These survivors will find new strategies that make them healthy, name-brand global players.

A few Chinese manufacturers are beginning to study the response of many American manufacturers to a similar crisis in the 1980’s. Modern China opened for business in the year 1980. Hundreds of thousands of American businesses were directly affected by China’s competition. What was the response of these American firms? Some of them just died. Some moved for the cheaper labor. Some looked for help from the American government, trying to build a fence around their customers.

Many of those companies just don’t exist anymore. But the smartest—the best firms you do business with today—dug deep and discovered the open secret of modern manufacturing: Labor costs are not a driver of manufacturing competitiveness.

The real driver in manufacturing is the cost tied to material flow. Quality and efficiency are measured by the materials, not the worker’s experience. Wasted time around materials is more damaging than wasted labor time. Labor is still a factor, but it is only decisive when two firms are roughly equal in the effectiveness (or ineffectiveness) of managing the costs tied to material flow.

In 1980, American companies were lousy in this regard, and they should have known it, because that is why so many of them were losing to Japanese competition. When the enormous labor pool in China opened up, Chinese factories (with low-paid workers and poor material flow) were facing off against American factories (with high-paid workers and poor material flow). Suddenly everything was “made in China”.

In America, of course, the many tried ineffective strategies. But a few learned to adapt. These are the companies that the smart Chinese business owner wants to study. The winning strategies in many cases were a combination of concepts studied from those aforementioned Japanese companies. American companies learned that:

  1. Material flow and cash flow are closely related.
  2. A focus on material flow creates a natural requirement to treat quality as a number one priority.
  3. Management and labor could cooperate with very similar objectives. It is no coincidence that the past 30 years have seen a decrease in the need for factory labor unions.
  4. Rapid materials flow opens up the opportunity to satisfy niche markets.

Only a few Chinese manufacturers understand these secrets. Twenty years from now, those firms will be the survivors. Other Chinese manufacturers know that they are falling behind, but they usually think (incorrectly) that the American advantage is in replacing workers with automated machinery. Again, they just cannot get themselves away from thinking about labor cost. Automated machines can reduce labor, but they will only create an advantage when they first of all support a simplified material flow.

The Chinese who study these methods find the human element to be the most difficult to understand. The methods I describe cannot be successfully put into place just by repeating some Japanese words and sketching out some diagrams. The attitude of managers needs to change.

To encourage cooperation between labor and management means that both parties agree to openly point out opportunities for improvement, to act with humility, and to not focus on who should take blame for problems that are hard to solve. Mistakes are expected. Finding a mistake is celebrated, not suppressed, not denied.

These “soft” aspects of change are the most difficult for Americans, and they are even more difficult for Chinese—much, much more difficult.

The managers I’ve meet do understand this challenge, but they worry about the substantial cultural barriers to getting past it. In China, the concept of “gaining face” or “losing face” is extremely important. Criticisms are almost always taken personally, even criticisms that a Westerner would never think were connected to an individual. Criticism in public therefore is not to be taken lightly. Mistakes are denied, to save face.

Nevertheless, the few will persevere. I foresee a new phase of both competitiveness and cooperation in business relations between Chinese and American firms. American and Chinese products will be very similar in cost, engineering, and quality. Smart strategists on both sides of the water will seek out a new kind of partnership, built on trust, leveraging access to brains, capital, and markets on both side of the water.

The new reality will come within a generation, I think in twenty years, but perhaps even within ten.

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