What comes to mind when you think about manufacturing in China? Low-quality, low-cost goods? Sweatshop conditions for workers?
It’s time to think again. The threat to U.S. manufacturers from China is “even bigger than we may have thought,” according to John Brandt, CEO of The Manufacturing Performance Institute (MPI), a firm that recently conducted, with Industry Week, one of the first large-scale studies of manufacturers in China, with metrics directly comparable to U.S. manufacturers.
Chinese manufacturers are “younger and have a significant cost advantage across all industries,” said Brandt, who presented his findings at a workshop during the Manufacturing Matters! ’05 Conference on May 17, 2005.“ They begin with a ten percentage point gross margin advantage. If anything, the threat of manufacturing in China may be understated. We need to be aware of what’s going on.”
The study surveyed companies in China that were ISO-certified or in the process of ISO certification. These companies were selected because “they’re an elite group and more likely to export and be the competitors that people would outsource to,” said Brandt.
Among the findings of the survey:
• Plants in China planned to spend 20% of sales on capital equipment in 2004, compared to U.S. plants, which planned to spend 3%. And 72% of Chinese plants expected to increase that level of capitalequipment spending in 2005, compared to 53% of U.S. plants.
• Monthly wages in China averaged $120.80; monthly wages in the U.S. were $2,160.00.
• Three-quarters (75%) of Chinese plants expected to increase IT spending in 2005, compared to 42% of U.S. plants. As a percentage of sales, Chinese plants invested 5% in IT, compared to 1.4% for U.S. companies.
• As stated above, Chinese manufacturers begin with a ten percentage point gross margin advantage over U.S. firms.
• Materials represented 50% of Cost of Goods Sold for both U.S. and Chinese plants. Labor represented 25% of COGS for Chinese plants and 20% for U.S. plants. Overhead was 20% of COGS for Chinese plants, and 27% for U.S. plants.
• The top market objectives for Chinese plants were 1) Quality, 2) Innovation, 3) Service and 4) Total Value. For U.S. plants, the ranking was 1) Quality, 2) Service. 3) Total Value and 4) Innovation.
“Manufacturers in China are investing in information technology at a rate three times their U.S. counterparts,” Brandt said. This is in part because their plants are newer, but “look at the commitment they’re making to it.”
Overall, the survey shows that China’s manufacturing base is younger, cheaper, more heavily invested in IT and capital equipment, focused on innovation and achieving surprising quality. Also, China has recently accomplished dramatic science and technology breakthroughs in supercomputers, nanotechnology, biomedical, satellites, nuclear energy and other key fields that will likely help to further strengthen their manufacturing sector. How should U.S. manufacturers respond?
First, “U.S. firms have an advantage right now using Lean manufacturing methods,” said Brandt, especially considering their proximity to domestic customers. In China, 65% of the firms surveyed were using Total Quality Management, or TQM. Brandt recommends that U.S. companies pursue either Lean or another major improvement program such as Six Sigma.
Second, U.S. companies should focus on empowering workers. Companies that are organized around self-managed work teams have an advantage, because empowered workers are more likely to support a major improvement program and sustain the changes. Brandt noted that in China, the concept of work teams is not well known.
But while Chinese manufacturers may not be using work teams, they are providing more training to employees, even beyond U.S. manufacturers who are considered world-class. “China is training at incredible levels,” said Brandt. This is partly in response to the migration of people to cities from rural areas of China, but Brandt points to the commitment being made to training, especially cross training. “The most expensive employee is the one who only does one thing,” he said.
Third, beyond improvement methods and employee empowerment, U.S. firms need to strategically reposition themselves – in other words, “rethink what it means to be a manufacturer,” said Brandt. Key to this is avoiding the commodity trap, where, feeling squeezed by increased cost pressures and competition overseas, manufacturers cut costs, margins and innovation. World-class manufacturers have been able to avoid that trap by executing well, using Lean and best-in-class practices, embracing innovation and, more broadly, applying Strategic Repositioning in order to grow and compete.
U.S. manufacturers should think of themselves as providers of solutions, and figure out “how to package a whole set of services and products together as a total solution,” said Brandt. This is what Strategic Repositioning accomplishes, by helping companies uncover areas ripe for innovation, such as offering new technologies, products and services, rethinking distribution and processes, and discovering new markets and niches.
The firms least likely to see work go overseas are those that are most tightly integrated with their customer base, offering so many other services that the cost of the product is less of an issue, said Brandt. For example, the automotive industry, faced with declining margins, responded by bundling services with their vehicles, such as subscription roadside assistance programs like OnStar.
To think so differently about their businesses, manufacturers should “take a look at every aspect of how you’re trying to satisfy the customer,” said Brandt. “Talk to your customers. Observe how people interact with your product. Ask, ‘Who do we look like to you? Who do you compare us to?’” Establish a system of collecting and acting on Market Intelligence. This kind of customer contact should be routine, “not once every five or ten years.”
The threat from Chinese manufacturers is real, given what they’ve achieved without the use of Lean or employee empowerment, said Brandt. “It’s a huge threat, but it’s a huge opportunity as well.” Don’t think your company is immune to the threat. U.S. manufacturers can meet and overcome this challenge with positive action, but they must take action.
MPI is a research-based consulting firm focused on industry, strategy and performance information. MPI is currently working with WMEP on a statewide manufacturing study of Wisconsin.