China & Best Practices – Reality or Myth?

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China & Best Practices – China & Best Practices – Reality or Myth?Reality or Myth?

Paul Deis

APICS – San Diego Chapter

June 20, 2007


What We’ll Cover:What We’ll Cover:

• Best Practice Keys• China – facts, culture and context• Challenges to success – why its not

easy.• The “Lure” vs. hidden costs.• How to Succeed with China

outsourcing.• Best Practices & China business• Some fun photos (time permitting)


Best Practice KeysBest Practice Keys

• Effective Leadership & Culture

• Effective Enterprise Systems & Processes

• Continuous Improvement Processes

• Education and Training


It’s a BIG country!It’s a BIG country!SOME of the major manufacturing cities.

~3000 miles


China - Big Numbers*China - Big Numbers*

• 1.3 Billion people; growth 0.606%/yr; Median age: 33.2 yrs old.• GDP – About $2.5 Trillion USD (US is about $13 Trillion)• Internet - ISPs – 3; 100 Million Internet users.• Literacy – 90% over age 15.• Area: slightly SMALLER than the US.• GNP around 10-11%/year• Industrial production growth rate: 22.9%• Electrical generating capacity – China adds generating capacity = to

entire Australia or UK capacity each year – & it’s not enough!• Driven by:

– Rural to Urban migration – 300 Million next 15 yrs– Rural poverty, starvation, unrest.– Drive for developed nation status– Government’s desire to avoid “unrest” (revolution)– Political power – use developed country money to fund expansion,

development, political & military power growth.

* Source: CIA World Factbook & other sources.


China – Political Factors:China – Political Factors:

• Communist – yet pragmatic, realistic – “signal left, turn right”

• Divesting State Owned Enterprises rapidly; major source of unemployment

• Unclear intentions of government re: military power.

• Manipulate exchange rates for advantage• Using developed world money to develop

China, strengthen military, fund expansion ambitions.

• Trade surplus – $1 Trillion, $800 Billion in USD.

• Little/no real personal freedom as we understand it.

• 25-30 yrs ago – like No. Korea now – starvation, etc.

• Legacy of Mao – 1 party; everything subordinate to political interests.


Environment & Pollution Facts*:Environment & Pollution Facts*:

• 1998 UN/WHO report – 7 of the world’s 10 most polluted cities are in China.

• Costs – about 7-10% of GDP/yr.

• 410,000 deaths/yr.• Exempt from Kyoto• 90% of urban water

“severely polluted.”

Beijing - After rain Sunny day

• Acid rain from coal.• Separate gov’t

agencies for each area.

*Sources: Wikipedia, Washington Post


China - ChallengesChina - Challenges

• Pace of construction, change is intense• 3rd world mentality; endemic low-level

corruption • Procuring in a “boom.”• Language, culture differences.• Little respect for intellectual property.• “Its how Chinese do business.”• “Tired of Americans telling them what and

how to do things.”


Airport: getting a boarding pass…Airport: getting a boarding pass…


Cultural Factors:Cultural Factors:

• Very hard working; family loyalty, hard for westerners to understand.

• Business culture – low self-responsibility; boss-driven; varies w/age.

• Very weak commercial contract code, court enforcement.

• Product quality – inconsistent.• Honesty/integrity – pragmatic,

rather than principle-driven.• Foreigners stand out.


Unique Construction Methods:Unique Construction Methods:

Highlights:

• Floors built above excavation

• Pilings support

• Excavation during building

• 24/7 work

• Tower cranes; a growth industry.


Trade & Outsourcing OverviewTrade & Outsourcing Overview

• China - the world’s “workshop”• No meaningful pollution controls in China• Safety/HR standards not like the west• Many large corporations have been

successful with China-based production• CAN be successful - much lower-cost• Vendor sourcing – challenging, difficult• Vendor negotiations – more challenging• Quality – usually needs independent

inspection; little “process control” quality• IP – you teach them, then they own it.


Chinese Culture & PracticesChinese Culture & Practices• Communist legacy & culture

– Older workers – obedient, low initiative

– Younger folks – changing; more inclined to take initiative, responsibility

– Divesting SEOs; political connections still important.

– Lack of “rights” – includes business, not just “personal.”

• Contracts – Largely meaningless:– Language complex, opaque; due diligence

– No real enforcement, resource, court system.

– Depends on relative power, who needs what.

• Other - – Hard working people; well educated

– Strong desire to do better, succeed

– Willing to learn from foreigners

– IP – not respected, though improving some

• Developing country – its not like the US, Europe; our assumptions trip us up.


The Low-Cost “Lure”The Low-Cost “Lure”

More factors:• Subsidized exports - VAT refund

– VAT is 15%– Exported products get 11% VAT refund

• Subsidized industries (SEO’s)• Intense export focus by provincial governments. • Abundant reasonably skilled labor; good education.• Sheer numbers keep labor costs low• Little/no effective regulation• Continual in-flow from rural areas

Key: Tilted exchange rate • Artificially kept low – 15% to 40% less than “real” value• 100 RMB (Renmenbi) = $US 13.1148


Hidden Costs of China OutsourcingHidden Costs of China Outsourcing

• Quality – biggest problem; must have on-site inspection

• Inconsistent agreement compliance

• Communication – engineering docs, specs, standards, quality, etc.• Transportation & logistics; customs, risk of

damage, loss; 2-4 weeks on ocean, port time.

• Increased inventory & carrying costs.

• Slower response time to demand changes.

• China sourcing bias – hard to import stuff into China; may force substandard materials


Hidden Costs – cont’dHidden Costs – cont’d

• Technology transfer - you invested in its development, now you’re giving it to them; make sure payoff is there.

• Travel to/from for: communication, coordination – often substantial.• Chinese capabilities for your products:

– May be very advanced, – May be primitive– Best Plan: “To teach them everything.”


How To Succeed in ChinaHow To Succeed in China

• Face and resolve trust issue up front; get a China based partner who works FOR YOU who is independent of your proposed suppliers:

– Not a family member or relative

– Not part of the company

– Best – works for a US-based company; led by US-citizens living and working in China.

– Must be FLUENT in multiple Chinese dialects – Mandarin at least; both written and spoken;

– Fluency in business practices and YOUR technology – in both languages.

• Plan on heavy involvement, communication, travel up front and for a long time.

• Don’t make a unit-cost only decision – hidden costs are all indirect, overhead costs


How to Succeed in China – Cont’dHow to Succeed in China – Cont’d

Prospective contract manufacturing suppliers:

• Perform an in-depth Due Diligence. • Realize that financial statements may be worthless.

• Use an experienced professional, on site analysis, familiar with at least similar industries.

• Try to review detailed, auditable financial information – the check or “cash” book.

• Interviews of key managers, supervisors – with an industry knowledgeable translator.

• Reviews of process control practices & quality management methods.


China – Best Practice SummaryChina – Best Practice Summary

• Best Practices – not “natural” to China; just like here or anywhere.

• Asia not = to perfect quality: (Japanese quality came from Deming, and was not originally “native” there either.)

• True Best Practices – depend on integrity, effective leadership, individual ownership of work; these may be at odds with your prospective Chinese supplier’s way of doing business.

• Best Practices – may not be a business issue; you may be completely

successful without them – IF cost, quality, dependability are present.

Most likely if:• Company is composed of younger people.• Have had heavy exposure to Western business practices, manufacturing methods.• Company is/was, a successful joint venture with a western company.


Paul Deis(818) 706-0160www.pauldeis.com [email protected]

Best Practices

= Growth & Profit

Thanks! … and Good Luck!Thanks! … and Good Luck!

http://www.pauldeis.com/

mailto:[email protected]


Appendix – Appendix – Working in ChinaWorking in China

• These are some photos I took while working in China.

• Intention – give you a flavor of what it looks like – as I saw it.

NanjingNanjing• 1990 –2 million

people• 2006 – 6 million

people

(Where I worked)

Some Fun Photos - NanjingSome Fun Photos - Nanjing

Going to work: the YangtzeGoing to work: the Yangtze Bridge: Bridge:

Nanjing – From 32d Floor:Nanjing – From 32d Floor:

Nanjing – Hunan St.- KFCNanjing – Hunan St.- KFC

Traditional Chinese shops:Traditional Chinese shops:

Typical Street/Traffic:Typical Street/Traffic:

The Sofitel: $70/nite: 5 star:*The Sofitel: $70/nite: 5 star:*

* Thanks to the manipulated exchange rate; which makes everything cheap in $US.

Nanjing - theNanjing - theSofitel – Sofitel – 5 Star hotel:5 Star hotel:

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China & Best Practices – Reality or Myth?