As a global manufacturer with modern, China-based manufacturing facilities and more than 25 years of experience manufacturing in China, SB&W is in a unique position to understand the past, present, and future of China manufacturing.
In this Q&A, Mike Hotchkiss, SB&W Director of Sales, talks about how China manufacturing has changed over the years, how to navigate the current China manufacturing situation, and what U.S.-based businesses need to know about manufacturing in China.
SB&W has been involved with manufacturing in China for more than a quarter of a century. How has China’s manufacturing industry changed over that time?
The changes are enormous: the development of infrastructure, more modern factories and the understanding of the requirements of a global market have all emerged. Most of the traditional Communist ideologies have disappeared or been swallowed up in the movement to a more open economy. When that happened, the China market exploded. Everyone in the West was looking to get in, and we were no different.
Can you give a specific example that illustrates the change?
When I first went to China in 1991, Pudong was not much more than a bunch of warehouses. I visited Shanghai Petrochemical, a part of Sinopec, which was the government-run petroleum company. The facility was the size of other enormous plants I had seen along the Gulf Coast of the United States, but had more than 100,000 employees as compared to 2,000-3,000 at the similarly sized Dow chemical plant in Texas. There were four people with full-time jobs sweeping the lobby and two people per elevator; presumably, one to press the up button and one to go down. That type of structure has vanished—companies are now focused on maximizing employee productivity, and the government has responded with ways to make the new model easier to achieve.
How have these changes affected the current state of Chinese manufacturing?
There’s been a clear shift from the old guard to the new, as older, less modern factories are closing and newer, more sophisticated facilities are being built in development zones. New environmental regulations from the government can be expensive and can cause smaller companies to shut down. On the other hand, the factories that have remained up to date, as well as the newer and more efficient factories, have become more prevalent.
Has that shift changed the types of manufacturing being done in China?
Definitely. China’s manufacturing capabilities have evolved and become more sophisticated— we’re seeing higher value-added components and more complex assemblies with a higher level of quality requirements. Meanwhile, traditionally lower-cost, high-volume consumer goods like textiles and consumer products with relatively low-end quality control requirements have moved on to other countries like Vietnam, Bangladesh, and Africa.
China’s leaders have said that China faces “critical battles” including domestic debt, poverty and pollution, as well as trade war threats from the U.S. How are those challenges affecting Chinese manufacturing?
Uncertainty about these “critical battles” has led to stagnation. Places hold off on capital expenditures fearing that business will decline, but without the capital expenditures, they risk closure due to compliance issues. In some cases, the little guys can’t deal with the critical battles and have been forced to shut down. Also, the government has been building infrastructure to facilitate urban expansion as a result of a burgeoning middle class. This, in turn, generates a shortage of factory workers in the vicinity of the old factories. In short, the little guys that grew up in what was the shadow of larger cities are being pushed out.
What are the upsides to Chinese manufacturing in the current climate?
The advantage remains lower cost. China still is still a place to produce cheaper products, even with the 25% tariffs. This used to be at the sacrifice of quality, but that has changed. The global market in general, especially in an industrial supply chain, has established a new expectation of quality. ISO certification was a big deal 10 years ago, but ISO 9000 is commonplace now, and even stricter systems like TS 16949 or AS 9100 are becoming more the norm.
What are the downsides?
Risk and lead times. Long-term planning or commitment at this stage is riskier than it was 20 years ago, and the current trade tensions do not help at all. It is important to factor in added time to make and ship goods. In general, goods made in China will need 45 to 60 days more time to deliver than a domestic supplier. This requires a shift in selling to help customers plan the buying schedule.
If you’re a small to medium-sized company, you should be involved in a way that allows you to move if you have to. You can pitch a tent but don’t build a building.
What cultural, government or economic issues do American companies need to keep in mind when using China-based manufacturing?
They need to understand that things are just different, and they shouldn’t assume anything. What might be considered normal or commonplace in the U.S. may not be in China—even something simple, like having to request a packing slip on shipments.
One significant cultural difference to understand the value of time. For Western companies, especially U.S. based industries, there is usually a sense of urgency. In China, things can take a bit longer. China operates on an 11-month manufacturing cycle because the annual Lunar New Year festival shuts China down for the better part of a month. They will try to meet obligations but sometimes they are not able to meet deadline requirements due to a combination of things. Sometimes things just take longer there.
How do you think Chinese manufacturing will change, both in the short term and the long term?
At this point it’s wait-and-see. The trade spat could fizzle into a blip in history or it could be a significant turning point in the future of business relationships between the U.S. and China. My guess, it will be somewhere in between.
What is the best approach to dealing with the challenges presented by tariffs?
Be honest with your customers and maintain an open line of communication. It is best to assume a lead role in this regard. It also has created a scenario where everyone is looking for alternatives. The savvy companies will turn this into an opportunity to take business away from competitors that may not be so informed or open about what is happening.