Get Competitive, Then Get Busy

July 9, 2007
U.S. manufacturing companies discover what it takes to be competitive here and how to grow in Asia.
Dean Jablonsky, operations manager at medical device manufacturer Boston Scientific Corp., in Minneapolis, conducted an exhaustive study of business in China, and concluded, “Overall, the whole world is confused about China. They don’t understand the political and social climate, so they fail because of that.” Jablonsky talked to 12 different companies about their experiences and compiled the results. On the plus side of the China ledger is economic growth. However, that growth does not come without problems. China has nine of the 10 most polluted cities in the world. The default rate has the banking system teetering on the brink of disaster with its rate of loan defaults. China says the rate is 29 percent; the World Bank puts it at 45 percent. For comparison, the rate in the United States is 1.7 percent.

In addition, the transition from an agricultural to a manufacturing economy, along with the extremely fast growth of cities, is having a huge impact on the social fabric of the nation. One thing to watch is the financial disparity between rural peasants and urban technical people. Jablonsky calls it the largest mass migration in the world, as the country tries to create a middle class of 300 million people. It is also important to remember at all times that the country has a socialist, authoritarian government.

“China has such a huge impact on U.S. business because of its large and growing customer base. As China joined the World Trade Organization, it had to sell off its state-owned companies. Most of these became joint venture companies with U.S. or European companies. This means that to do business in China, you have to understand the social and political issues. And you have to figure out your business plan, what your strengths are, and what you want to do in China,” Jablonsky says. “For example, Logitech set up companies for manufacture and assembly, but kept design and distribution for itself. Advantages of U.S. companies are innovation, laws and licensing, and these companies need to remember that.”

Jablonsky notes that one major driver of growth in China is its development zones. “You must research and understand these zones if you’re going to go over to begin manufacturing,” he advises. While these zones have removed some barriers to open markets in China, while offering special tax incentives, each one is different, Jablonsky points out. “So you have to understand what business you’re in and then which zone is best for you.”

Another aspect of culture in China is the barter economy that has existed for more than 4,000 years. Now China is trying to become a contract society, much like the West. But if you are doing business there, you should always be aware of the differences in type of business understanding so as not to be caught unawares.

Jablonsky gleaned several takeaways from his research of the 12 companies. “Understand the culture before you enter the market,” he says. “And don’t be a cowboy. Understand your value proposition. Have a long-term strategy and expect to lose money for five to seven years. Expect to lose talent—and to pay more for talent. You also need to acknowledge that what works in the United States won’t work in China. For example, Wal-Mart is a big box store, but in China, they don’t drive cars. They also don’t have a lot of space to store stuff.”

Jablonsky notes that one company, Owens Corning, learned when it went to the Chinese market that the Chinese don’t use shingles; they use ceramic tile. Further, there has never been an energy conservation policy in China requiring insulating houses. So for Owens Corning to sell its products there would have required a huge culture shift.

“Companies setting up operations in China should expect their technology to be stolen within six months,” Jablonsky adds. “S.C. Johnson developed a new fragrance for the Chinese market. It was knocked off and launched by a Chinese company just before they launched.”

An additional lesson: Remember that relationships are more important than contracts, Jablonsky says.

Communication counts

Mary Frances Cox, senior vice president, Operations, North American Divisions, for automation and electric products vendor Schneider Electric, in Palatine, Ill., knows both sides of the competitiveness discussion—both cutting costs by manufacturing in low-cost countries and making North American manufacturing plants cost-competitive.

“Moving or starting manufacturing overseas must be a business decision, not just a manufacturing one,” states Cox. “One thing to look at is the huge size and growth in India and China. They are striving for a better life there, particularly in the industry we’re in. What better way to get a bigger slice of that pie than to locate there,” she observes.

But Cox warns too that U.S. companies should be cautious about setting up manufacturing in China for export to the United States as a way to take advantage of low labor costs. “It’s not a magic bullet. Manufacturing executives had better look at the ‘landed’ cost versus just the labor cost,” she advises. “People forget to add things such as logistics, regulatory issues, intellectual property situations, the human toll of long trips, learning new languages and cultures, and trade restrictions. So you must look for opportunities, plan carefully and do due diligence.”

On the other hand, it is possible to manufacture something in the United States successfully in the face of competition from overseas. The Schneider Electric manufacturing plant in Lincoln, Neb., makes mini-circuit breakers—the only manufacturer of the product in the country. And so far, thanks to its cost-efficient operation, the plant has been able to hold its own against foreign competition. Cox sees the quandary of consumers. “Customers appreciate something made in the United States,” she notes, “but they still buy the best value. So the challenge is continuous improvement. We look to the future to operate now in a cost-efficient manner.”

The key to being competitive, according to Cox, is communication with employees about what forces they are competing against in the global market. “The local plant manager is a key part of the communication strategy by meeting face-to-face with all the people in the plant. Vice presidents of operations and manufacturing also go there to conduct meetings. We utilize live internal television broadcasts, external communications and videos.”

Beyond communication, says Cox, Schneider also depends upon Lean Manufacturing and Six Sigma tools in a program the company calls Manufacturing Excellence. “We’ve deployed it across all our facilities. Since our top manufacturing priority is safety, we begin there, and then use tools to drive continuous improvement. Now we are going beyond Six Sigma by having some trained as Gold Belts—that’s Six Sigma Black Belt plus training in change management.”

Jim Pinto, former manufacturing company owner, angel investor and Automation World columnist, says that the Chinese accept very low gross profit margins—as low as 5-7 percent—specifically as a tactic to attract manufacturing business. Other countries offer big subsidies and tax holidays for manufacturing companies to attract employment, Pinto points out. Further, China insists on disclosure of intellectual property (IP). Americans often think that’s OK, because the IP will become obsolete.

Another problem the American manufacturers encounter in setting up operations at home, says Pinto, is “NIMBY”—not in my backyard. Americans don’t really want manufacturing plants, and factory jobs are not considered attractive compared to knowledge work. Meanwhile China (and others) are investing big-time in robotics and other advanced manufacturing technologies. America is falling behind, because manufacturing investment is not considered financially attractive, according to Pinto. So, capital shies away from manufacturing.

Mike Frichol, vice president, global industry and product marketing, at Infor, a supplier of enterprise applications, in Atlanta, reasons, “We’re seeing both threats and opportunities for U.S. manufacturers in the rise of China and India. The companies that are mostly misinformed about the international situation generally see threats. But those who are more informed and understand what’s going on in China—and India, although it is behind China in development—see only opportunities.”

Frichol notes that the companies that see threats typically deal with it reactively through practices such as low-cost outsourcing. Companies that are really getting involved are doing some exporting back to the United States, he observes. But primarily, these companies see manufacturing in Asia as an investment made to reach a vast new market.

“Another interesting trend we’re seeing is a change in some manufacturing companies toward developing value-added services in the United States and Europe that require higher skills from employees,” Frichol adds. This practice yields higher profit margins for these companies, he says, which are increasingly limiting their activities in low-labor-cost countries to only routine manufacturing

Close to customers

Dave Skelton, vice president of the Americas Business Unit for automation components vendor Phoenix Contact, in Harrisburg, Pa., notes that his company has been in China for more than 10 years. “The focus we had on expanding manufacturing there was to be close to the customer,” says Skelton. “The whole process of moving to China started with the need to get established there. You start with the customer and the need for speed to fill needs. Then you gain knowledge of the country in the entire organization. You have to learn the culture, their methods of doing business.” Skelton points out that actually working in the country provides a better fit for a U.S. manufacturer than simply having a sales channel.

An additional strategy for a company entering manufacturing in China focuses on corporate risk reduction, Skelton adds. “For example, by doing business in another currency, you can balance out your risk due to currency fluctuations in one currency.”

Harsh Chitale, vice president of marketing and strategy at Honeywell Process Solutions, the Phoenix-based automation vendor, was an executive at an Indian company, and was based in India prior to accepting his present position earlier this year. His analysis of China and India is that India is lagging China’s economic development by about ten years. Personal income in China, at least in urban areas, grew enough in the 1990s to generate a large amount of savings. These savings generated investment, which in turn, generated the tremendous economic development that is now seen. Only in this decade are savings and investments in India beginning to grow.

Large companies, according to Chitale, see only opportunities in China. “Most global multinational companies already have a global perspective with many plants distributed globally. They have huge supply chain leverage, if they play it right. Small, single-plant operators without a global supply chain in place, on the other hand, see China and India as a threat.”

Chitale says that large companies are moving quickly to optimize their global supply chains by analyzing cost equations of different areas, determining availability of resources, and then determining where to make their products, how to move them and other manufacturing and distribution requirements. “In the past, optimization efforts focused on a plant or a line; now companies must work on global optimization.”

There are essentially two types of organization structures—centralized and decentralized. Chitale has seen that centralized, traditional global organizations have moved more quickly to establish a presence in China. Decentralized companies tend to be closer to the customer and able to see their needs more quickly. While they have tended to move more slowly into China, it is too soon to tell what their success will eventually be.

“Anyone moving to China for cheap labor is following a flawed strategy,” opines John McDermott, senior vice president at controls vendor Rockwell Automation Inc., in
Milwaukee. “You should move to China to be close to your customers. Large, global manufacturers based in North America see the Chinese market as an opportunity. By putting people and factories there, they’re trying to drive market share. Some consumer packaged goods manufacturers began moving to China by looking at lower cost structures, but then they developed a large set of customers there.”

Cultural awareness

Mike Train, president, Asia/Pacific, for process automation vendor Emerson Process Management, reveals discoveries about Chinese people that may be surprising to North American readers. “The people coming to work for us and our customers in China are young—but very sharp. They speak pretty decent English. They are willing to adopt new ways of doing things and are thirsty to learn. They are also hard workers,” Train says. “Turnover is a small challenge, and you have to constantly look for new people, as well as provide for growth opportunities for those who work for you now.”

Train notes that many Chinese employees are getting their first experience in this sort of work, so training is a key human resource tool. “Sometimes, companies take people offshore for up to six months to learn the process,” he says. “We are asked for a lot of hands-on training in addition to the usual academic-type training. Fortunately, process automation is pretty standardized with technologies and business practices around the world.”

Train adds, “One thing that amazes me is the speed of building things. They’ve gone from bare ground to a 10-plant ethylene cracker complex in 27 months, three months ahead of schedule—including the downstream part. When they decide to mobilize, they do.”

Phoenix Contact’s Skelton points out that training is also important for a company’s American employees. “We have cultural training so that our people understand different cultures. You need, for example, to know how to say ‘no’ to people, or how to talk about problems. In some cultures you do not talk bluntly about problems. You’ve got to make sure everyone understands the communications expected.”

“It’s a culturally amazing thing to watch how people react,” adds Dave Brackenwagen, Boston-based vice president for industrial business development at contract manufacturer Solectron, which has numerous overseas operations. “The process has become very culturally embracing—friendships blossom and trust builds. Five years ago. Americans would have seen a threat from the Chinese. Now we’re seeing ourselves as the incubator on the cycle,” Brackwagen says.

But he points out that this requires a new skill set—especially in project management. “People also need to develop cultural sensitivity to succeed in this environment, particularly when it comes to communication,” he says. “The people who learn to cross the cultural barriers are the ones who are advancing.”

 Once these skills are mastered, says Brackwagen, there is no shortage of work for Americans employed by globally oriented U.S. companies, says Brackenwagen. “In Asia, proximity to the customer is the key. Typically, products are developed and production is worked out in North America. The people involved in this development are then sent to China to train the local population. Once production is established in China, then, like a DO Loop, the developers return home and start the process all over again.”

The major automation suppliers have had a presence in Asia for many years. They are positioned to help their customers make the leap to manufacturing in the region. Says Veli-Matti Reinikkala, head of supplier ABB’s Process Automation Division, “Our customers see the rise of Asian manufacturing as both a challenge and an opportunity. The opportunity lies in the dynamic market forces that arise when a billion new Asian consumers suddenly open their wallets.”

Reinikkala says that ABB is aggressively engaged with its customers in addressing both the challenge and the opportunity that China presents. “We are helping our own customers to think ‘out of the box’ in terms of value chain decisions that integrate components and skills from multiple countries. We are also helping many customers evolve their own global footprint to serve the Asian markets.” Reinikkala says that being a global company is no longer just a matter of moving some assets to Asia, but it is also building new resources close to new consumers. “With operations in more than 100 countries, ABB is positioned to help Western manufacturers become multinational players.”

“If you’re establishing a presence in China in order to sell to the growing middle class,” advises Honeywell’s Chitale, “it’s good to be local. You’ll have a stronger base and understand the customers better. Make it with local costs and quality, but with global technology. You can also leverage your automation supplier for assistance in establishing a China or India presence,” he says. According to Chitale, Honeywell has operations in a hundred odd countries, with project engineers, sales and support capabilities. “We can help you use standard global approaches to set up plants quickly, reliably and safely.”

Agile and flexible

Raj Batra, vice president and general manager of the Automation Division of Siemens
Energy & Automation Inc., in Alpharetta, Ga., says, “Manufacturing competitiveness in the United States is still high, but there is always concern about exports from low-wage countries coming into the country. But the use of technology here is still higher. It is critical to be agile and flexible. From my background in the automotive business, I’ve worked with companies that are global—jumping into countries with large middle classes when the market is ready. But there are technologies here that can’t be used in some countries, yet.”

“I’ve spent time in both India and China,” says Batra, “and they are not the same. Each has its own sweet spot. Doing business in either region, though, requires a lot of ‘face time.’ A lot of business is done on relationships and trust. If you want to transact business in those countries, you are forced to spend time building relationships. The people that will win in the region are those who take it very seriously.”

 “We’ve worked closely with many companies who are coming to Asia,” adds Train, of Emerson Process Management. “Some are adventurous, making big, bold investments. Others are slower, perhaps due to other investments. The ones who came first and invested were quite satisfied and now we’re seeing a second round of business from them.”

Train notes that many companies originally came into China with joint ventures with Chinese companies. But recently, he says, more companies are coming in with complete ownership of the Chinese facility. “When a company comes in as part of a joint venture, it must learn how to collaborate with its Chinese partner,” says Train. “Emerson has been in China with a supporting infrastructure to help them get started.”

“If you are starting to do business in China, the first thing you should do is build an infrastructure,” adds Rockwell’s McDermott. “You’ll need to hire some employees and sign up channel partners. Then you’ll need a supply base.”

The important thing is to build relationships, says McDermott. “Rockwell has been in China and the rest of Asia for a while. We can help customers find partners, original equipment manufacturers and distributors. Dealing multi-nationally requires a lot of collaboration between the automation supplier and customer for success.”

Kevin Bolen, chief marketing officer of Waltham, Mass.-based globalization and outsourcing supplier Lionbridge, figures India is an easier place for American companies to do business than is China, because so many people in India speak English. “China also has more bureaucracy,” he adds, “and you need joint ventures with Chinese companies to succeed there.”

Another problem in both countries is turnover, Bolen says. “A company looking to locate a small office there may have trouble retaining people. Skilled people are looking for advancement, so Lionbridge’s 350 employees in China and 1,200 in India provide a critical mass that helps retain employees.” 

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