Chinese Manufacturning Productivity

I recently made a two-week trip to China visiting a variety of businesses and universities. This was my fourth trip to China but my first to the mainland in about 15 years. To say the least, the contrast was dramatic.  Even in Shanghai, which appeared to be on steroids when I last visited, had exploded in the interim—gigantic skyscrapers had sprouted from open fields and the infrastructure of elevated highways had become ubiquitous. It was clear that the amazement and praise that we hear about the Chinese economy is well deserved. I was excited to find opportunities to build partnerships that will send our logistics/supply chain students and faculty members to study at a university in Beijing and bring students from China to Massachusetts to study alongside our students and with our faculty members.

My observations, however, were not completely positive. We visited a Hyundai plant outside of Beijing.  It was a marvel of automation and production.  Thousands of cars rolled off a precise and pristine assembly line while we visited.  This was not my first visit to an auto assembly plant.  I’ve visited plants in Japan, Germany, the Czech Republic and India as well as the Ford plant in Dearborn.  All of these plants were every bit as automated and impressive as was this plant.  And to paraphrase Henry Ford, you could have had any color Hyundai that you wanted as long as it was white.  Actually, the notable difference was in the number of workers on the assembly line—the difference was huge.  Activities that I have seen two or three workers performing in Dearborn or Eastern Europe were being performed by six or seven workers in Beijing.   “Just in time” delivery of parts was clearly the driving force for production, but “lean manufacturing” did not appear to be present.

I quickly headed to the library on my return. I confirmed my questions about Chinese productivity.  An excellent summary of what I discovered is in Schumpeter’s article in the June 25th Economist: (www.economist.com/news/business/21701151-china-inc-needs-better-management-become-more-productive-sleepy-giant)   Schumpeter confirms the suspicions from my observations:

• Half of China’s 20 largest industries operate at a loss;
• Chinese productivity is growing but gross productivity is just 15-30% of OECD averages; and
• Six Sigma and Lean Manufacturing do not dominate Chinese management.

It’s not that different, in some respects, from what I saw 10 years ago in apparel production—quality control was happening at Long Beach because the Chinese manufacturers did not have middle managers with sufficient skills in quality control to execute the processes at the plants. Dramatic improvements in the sophistication of manufacturing have been made, but it is clear that Chinese manufacturing still has a long way to go.

Thus, the recent Chinese “slowdown” should not be surprising. And as Schumpeter suggests, a more important focus for Chinese “corporate chiefs” might be concentrating “on the nuts and bolts of management” as opposed to shifting to “innovation and technology.”  On the other hand, how powerful will Chinese companies be when they get around to Six Sigma and Lean Manufacturing? I suspect this emphasizes the need for Western “corporate chiefs” to concentrate even more on “innovation and technology.”

 

Perspectives on Foreign Trade and China

The conflict between global business and the general public is raging.   The establishment political parties in the United States have been challenged on the Left by a presidential candidate who says that there has never been a single trade agreement that he’s been comfortable with and on the Right by a candidate who doesn’t think that it would be a big deal if a global trade war erupted.  The success of the Brexit vote is a frightening illustration of the breadth and depth of the anger in the public.   The idea of bringing jobs back from Asia (today from China, tomorrow from Vietnam, and yesterday from Japan) sounds very appealing to a factory worker in Ohio or Michigan.  It does not, however, recognize the interwoven nature of global business.  Over the past 50 years, we have become a global economy—the evolution of transportation and communication initiated the change and the development of global supply chains has cemented global interdependence in our DNA.

There is no better source for understanding where we are and where we are going than Parag Khanna’s new book Connectography (https://www.amazon.com/Connectography-Mapping-Future-Global-Civilization/dp/0812988558/ref=sr_1_1?ie=UTF8&qid=1467288779&sr=8-1&keywords=connectography).   Khanna holds a Ph.D. from the London School of Economics and is a CNN Global Contributor.  Formerly, he was a fellow at the Brookings Institution and senior geopolitical advisor to U.S. Special Operations Forces in Iraq and Afghanistan.  He brings a unique geographical and supply chain perspective to an understanding of globalization. 

Khanna’s basic argument is that supply chains, not political boundaries, define how the world economy works.  He argues:

• that connectivity has replaced division (infrastructure connections are more important than political boundaries),
• that devolution and aggregation are the most significant dynamics of the world economy (shifting economic activity to regions of countries and the world where they never were before and creating alliances that no one would have imagined even 5 years ago), and
• that the current “war of the world” is over connectivity not territory.

He uses his perspective as a geographer to overlay maps of the world with various sorts of supply chain data to illustrate how dramatically the functioning of the world economy is becoming less and less defined by political boundaries.

I was reading this book during a recent trip to China where I visited the traditional cities of Shanghai and Beijing as well as Wenzhou, one of the smaller Chinese cities (only 12 million inhabitants).  Wenzhou has experienced a “super nova” existence going from the bright light of entrepreneurial expansion to near collapse from corruption and inability to sustain growth (http://www.economist.com/news/china/21700451-city-renowned-its-business-acumen-battles-recover-financial-crisis-it-once-was-lost).   Nevertheless, it has developed a focus and a footing in several growth industries including the development of general aviation in China.  This is exemplary of the economic liberalization that Khanna describes in China where power and money are shifting away from the centralized government in Beijing to a federation of mega-cities with surprising authority to define their own futures.  And the tax structure in China now gives these mayors the money to move forward with such initiatives in at least a somewhat autonomous fashion.  While it would be foolish to assume that the Chinese Party has been replaced by entrepreneurial mayors, China is no longer a monolith that be understood through a single lens aimed at Beijing or Shanghai.