by W.J. Peterson , Foxconn, Inc.

ABSTRACT

There is mounting evidence that the ability for large contract manufacturers (CM's) to exist in their present form in the United States is being put to the test by the recent surge in operations to overseas facilities. This paper will address China, in particular as a choice for many CM companies.

As with any shift overseas, companies that have considered themselves "best practice" are suddenly confronted with issues of culture and management that are completely unique to a particular country. In this respect, China certainly presents obstacles that require delicate maneuvering and careful consideration. Understanding what will work here; and not, what has worked elsewhere is key.

I will make a very strong attempt at avoiding racial and cultural stereotypes. Remarks of that nature degrade and demean vast groups of people without merit. However, having said that, it would be equally harmful to dismiss differences in culture as inconsequential to doing business in another country. China, defies definition in many respects. As a country feeling its way through global economic markets, many issues will surface which cannot even be predicted. What is predictable, however, is that China represents a vast, largely untapped pool of resources and opportunities. Recent attempts by dozens of countries on several continents to normalize trade relations with China support the assertion that opportunity for investment exists.

Why China?

A typical hourly floor employee makes about $12-14 dollars per hour in Silicon Valley. In other concentrated areas of electronics manufacturing, the hourly wages are slightly less. In China, however, a typical SMT engineer (a person tasked with operating, programming and trouble-shooting machines worth a half a million to one million dollars) the wage is about 2-3 dollars per DAY! Obviously, advanced skills in profit/loss projections are not needed to understand the difference in profit margins. The term "pennies on the dollar" certainly applies in China. What's more, with a population of 1.3 billion people, and a strong push by the Chinese government towards movement away from dependence on an agrarian lifestyle, there are plenty of workers eager to work in the industry. Many, in fact have college degrees and have discovered that paying their dues at this level is the only way to some day make use of their advanced degrees.

To encourage investment and growth, the Chinese government decided to create Special Enterprise Zones (SEZ). These areas (of which there are now 5) are vast areas granting tremendous benefits to businesses if they decide to locate within the boundaries. The concept began in 1980 and has produced enormous industrial cities seemingly overnight (See "The Shift" Below).

We'll get back to the incentives later, right now though; let's look at some of the obstacles and other unique characteristics associated with China.

Language

This seems like a very obvious obstacle. Operating in any foreign country is difficult when the issue of translating between languages becomes a daily task. China is no different in this respect. Translating between Chinese and English is difficult in the most basic of social and business scenarios. Communicating about issues related to manufacturing is even more tedious. Sometimes the subtleties inherent to both languages create interesting dialogues when each party is trying to use the others' language. I had an operations manager tell me once that he had been trying to determine the cause for a particular process defect on the floor. He would show the part to various people on the floor and ask, "How?" What he did not realize was that the word how means "good" in Chinese. Earlier he had been teaching acceptability and had used the words good and bad. Now, when he said how, they either agreed with him and said yes or disagreed and said no. Neither answer satisfied his quest to discover the cause of the problem, however! This same operations manager told me that his test manager had become enraged when he received an e-mail from his Chinese counterpart suggesting that he had "ignored" certain test requirements during a product test. What the e-mail intended, however, was to note that he had "forgot" to perform the tests.

Compounding the language problem is the internal factor. China is a vast country and each of the provinces uses a different dialect, frequently not understood by neighboring provinces. As a result, vendor issues become more complex as clarification is often difficult to ascertain by voice communication.

Chain of Command

Understanding the function and importance of the chain of command is important in every company. In China, understanding the chain of command can be difficult. Chinese managers and supervisors often find themselves stuck in the middle especially if directives are coming from US counterparts. A quality manager once told me that he found that any sort of directive or change was always tested by subordinates to ensure that it did not conflict with what their supervisor directed. This same quality manager once made the mistake of asking a question to his Chinese counterpart in front of some of his subordinates. He told me that he thought that the answer was so obvious that it would give the Chinese manager a chance to shine in front of his people. To his horror, the manager gave the wrong answer. He was now faced with awkwardly trying to correct the guy's mistake without any loss of face.

So discretion seems like the proper course of action when faced with changes in policy and procedure. Understanding how your directives will be received is also important. If your position carries special power or prestige because you are seen as an expert consultant be careful to use the authority judiciously. This does not mean that you must soft step when it comes to issues that have a direct bearing on a product's manufacturability. If you have to be tough because the consequences demand it, be tough! Just understand that the resistance (if any) is not personal. It is far more complex.

Issues of Logistics

The procurement of supplies, equipment, specialized tools, etc. can be difficult due to several issues. First, the mere fact that most of what you are ordering is being shipped great distances increases the possible of loss, damage, misrouting, etc. One company I am familiar with waited weeks for a testing unit to arrive from Texas. When it reached the facility, the large wooden crate looked as though it had been dropped, dragged, pushed, pulled and kicked for the entire 8000-mile distance. The outside of the crate had been opened using an axe (Customs agents, apparently) but the real damage was to the precision, half million-dollar machine, which was bent and twisted. The company or the manufacturer that shipped the machine could not even imagine the force necessary to accomplish such damage. The machine had to be re-crated and shipped back to Texas, delaying production for weeks. To make matters worse, it was impossible to trace the blame for the damage. If it had occurred during the Customs' inspection the company was told, "too bad." The resulting insurance investigation eventually settled, but it was an expensive lesson. As a precaution, the company required all future shipments of that nature to have "viewing" holes for the Customs to see through. They also recommended a more rigorous pre-shipping procedure to ensure shipments would survive the distance and rough ride often encountered.

There is also the adding dimension of accuracy when shipping or receiving in China. It is often necessary to weigh individual components of an assembly. If the combined individual weight does not match the total, be prepared for major problems with Chinese Customs!

Supply-chain issues are further complicated when both US and foreign vendors are used. Problems with specific dimensional and packaging data can stop a project dead in its tracks. Trying to establish mutually beneficial supplier relationships is always desirable. However, when language and cultural barriers exist, this is often not possible. As a result, material planning and logistics become more difficult to forecast and manage.

So WHY China?

With all the negatives mentioned so far, one might conclude that operating a manufacturing facility in China isn't worth the enormous effort. However, there are still many significant benefits associated with operations which outweigh the negatives.

First, as previously mentioned, the labor rate is a fraction of the cost of similar US-based operations. In fact, even countries with extremely low labor costs (Mexico, Hungary, Philippines, et al) cannot compete with China. Secondly, the quality of the work is typically equal to or superior to that which is produced elsewhere. Chinese SMT workers are fast learners and most show a dedication to quality that is unparalleled. From a simple labor perspective, China is able to assign large numbers of employees to a project when the 11th hour arrives. Overtime is usually a negligible factor to consider since the labor rate is already less expensive. The fact that China has long been noted for its ability to "reverse engineer" allows for further savings with tooling and other machine-related issues. Often parts can be fabricated on site (or at least in-country) saving thousands of dollars.

The current political climate in China appears uncertain in many respects. Troubles with Taiwan (many "Chinese" companies are actually Taiwanese-owned) could certainly spell trouble in the future. However, it appears that the Chinese government recognizes the necessity of foreign investment and generally speaking, the government supports a strong business development strategy that has not even scratched the surface in terms of potential growth and profit for investors.

The Shift

In the 1980's China's leaders began addressing the problem of too many agrarian based occupations. Though vast, China's fertile lands are conservatively estimated to comprise less than 15% of the total land area. Much of the country is desert, barren, cold and incapable of sustaining agricultural activities. It was decided that there should be a concerted effort aimed at moving people to the cities. To many, this seemed implausible. How could a country that has difficulty feeding its people move large numbers of the workforce away from the food producing areas? Surprisingly, the plan has been successful on several fronts. Farmers, once relegated to handing over their crops are now permitted a certain degree of free enterprise. The result has been a slow increase in a middle class. Post-secondary education also became more available. As a result, many Chinese citizens possess degrees. This bloom in education has facilitated the transition to a more technologically focused generation.

Cities such as Shenzen (located about an hour and a half from Hong Kong) have seemingly appeared over night. Huge downtown areas lined with skyscrapers and US-based companies like McDonald's, Pizza Hut and Kentucky Fried Chicken are located throughout the city. Large-scale manufacturing areas are generally located in industrial "towns" in the vicinity of Shenzen. Many companies offer dormitory living for their employees. Sometimes these facilities house several thousand workers as part of vast industrial parks (reminiscent of Guadalajara, Mexico). The obvious advantage for companies with a wide range of manufacturing abilities (tooling, plastic injection, fabrication, etc) is apparent when one notes the success of these industrial parks in other countries.