<img height="1" width="1" src="https://www.facebook.com/tr?id=163851757554412&amp;ev=PageView &amp;noscript=1">

Chinese manufacturers are starting to show an interest in the Lean approach. Western Lean manufacturing consulting firms are viewing this as an opportunity and are positioning themselves as leaders on the topic. The potential is very high but many cultural obstacles have to be overcome. Let's explore the case for lean manufacturing consulting firms in China in this blog post...

Chinese manufacturers can be formidable competitors. They make the world’s cheapest phones and, at the same time, the most advanced smart phones. They have a seemingly unlimited labor supply and benefit from excellent logistical infrastructures. And yet, it is becoming harder for them to make a profit. Half of them might collapse in the coming 10 years. They are at the turning point taken by Japan in the 1980s and South Korea in the 1990s, where most poorly-managed operations went bankrupt.

 

The urgent need for change in China

urgent need for change in chinese industry

Three trends are making it harder every year for China-based factories to make a profit:

  1. China’s demographic policy and the development of inner provinces are progressively reducing the pool of migrant workers who are willing to work in exporting factories. As a consequence, salaries have gone up by nearly 20 percent a year, and some areas suffer serious labor shortages.
  2. Many importers are working on implementing a “China Plus One” strategy, and are slowly developing alternative sources in other countries. Multinationals often pave the way, with examples like Samsung in Vietnam or Chinese phone maker Oppo in Indonesia. Once component suppliers also set up production facilities in these countries, conditions are met for other companies to also purchase products there.
  3. Systemic overcapacity in nearly all sectors – from aluminum foundries to fabric mills, and from cars to furniture – drives fierce competition on price. A 3 percent price move can be the difference between life and death for many factories.

 

As the graph below shows, neighboring countries Vietnam and Cambodia are much cheaper than China, and the gap is widening. China’s minimum wage is now on par with that of Indonesia, the Philippines, and Thailand:

average monthly minimum wage in asia

This trend is also playing on a global scale. The Boston Consulting Group calculated that China’s direct manufacturing costs are now lower than those of Mexico [1]. It means that, on average, a company that sells products in the United States can manufacture them for a lower cost in Mexico rather than China – not to mention the much shorter transportation lead times. (It should be noted, though, that many components and materials still need to be purchased from China, however, this situation should change over time and make Mexico a more attractive place.)

In other words, China is becoming an expensive place to manufacture. Unfortunately, labor productivity has risen more slowly than wages, and competitiveness has gone down. On average it still takes four Chinese workers to produce as much as one American worker.

On a macro scale, Accenture warns that China’s growth has been built on the twin pillars of millions of new workers and heavy capital investment, and that neither will be enough to maintain high growth [2].

 

Reconfiguration Of The Chinese Manufacturing Sector

chinese production relocating to south east asia

As I wrote above, many poorly performing factories will disappear. This will take several forms.

First, production is relocating in lower-wage countries. For example, apparel and shoe factories left Japan in the 1960s, Taiwan and Korea in the 1970s and 1980s, and are leaving China at the moment – only much more slowly [3].

Second, most industries will consolidate. In some cases, a large group will acquire competitors and reorganize them to be more efficient. This will certainly be true in the automotive sector. McKinsey estimates that consolidation of this industry could boost productivity by up to 50 percent [4]. Another driver of consolidation is bankruptcies. In many cases, the owner suddenly disappears and leaves suppliers and employees at a loss. This phenomenon will probably become more frequent.

Third, Chinese factories are automating their processes. China has been the largest market in the world for industrial robots since 2014, and Beijing’s 12th Five-Year Plan and “China 2025” Initiative are encouraging the growth of domestic robot manufacturers.

Unfortunately, many factories find out that breakdowns are frequent and costly once robots are in place, and that quality issues don’t disappear. As David Collins, COO of China Manufacturing Consultants, says, “factories in China have no culture of maintenance and it hampers their automation efforts”. Some are actually failing, just like General Motors’ "Lights out" factories did in the 1980s.

And finally, more and more manufacturers are starting a continuous improvement journey based on the Lean Manufacturing approach (a way to improve continuously based on the Toyota Production System). Many of these companies are the leaders of tomorrow. They are hearing about Lean from their customers, from high-profile cases (e.g. GE relocated a lot of production in their Appliance Park in the USA and generated cost savings by using Lean tools), from trade publications [5], and/or from their local competitors.

 

Cultural Obstacles To Lean Manufacturing

chinese cultural barriers

KPMG predicts that a fully implemented Lean approach in China could attain the level of productivity as that of the best American and European factories. Yet it has proven “difficult to implement in China to date, owing to cultural barriers” [6]. I listed some of these obstacles below, from our experiences.

  • Many Chinese factory owners have not seen operations in the West and don’t understand the need to improve the way they work.
  • When they decide they need to improve, they tend to focus on a “magic bullet” to fix their problems – usually automation.
  • They want to show something impressive to their peers, and large-scale automation fits that purpose.
  • They are very reluctant to spend money on improving people. They do not believe that good people are a resource they can count on. Yet Lean Manufacturing without training of the operators and supervisors does not really work.
  • Chinese people in general don't like to pay for consulting services. They are used to making money by buying and selling products. The culture of professional services is still emerging in mainland China. American and European companies, in contrast, place a value on intangible assets such as branding or technical innovation.

Manufacturing managers are generally more inclined to pay for a technical expertise in molding, extrusion, tool making, automation, design, etc. They expect an expert to come in, implement changes quickly, and show tangible results. After that phase, the expert should leave – and count on the remaining staff to ensure the changes stick.

In our experience, this approach seldom works for two reasons. First, that technical expert often lacks the soft skills that are necessary to persuade people to apply his program. Some operators, technicians, and managers can resist and make the whole plan fail miserably. Second, as David Collins points out, unless the management system supports positive changes in an organization, those hard skills factory managers are looking for do not bring benefits. Chinese companies generally make no effort at maintaining progress through internal audits, incentives, visual boards, etc. It means the changes seldom stick, as people tend to revert back to what they were doing previously.

 

The Lean Movement In China

the lean movement in china

More and more factories have heard of the way Lean can help cut their costs and they want those savings. Lean manufacturing consulting firms are trying to capitalize on this. However, they need to put in place the foundation for continuous improvement before starting to apply Lean tools.

More than 95% of Chinese factories employing less than 600 workers lack four critical skills:

  • HR management (involving managers and operators to work toward performance indicators, and retaining talent without resort to monetary incentives)
  • Equipment maintenance (keeping machinery up, available for production, and making good pieces)
  • Industrial engineering (planning and setting workstations and assembly lines to increase the number of pieces made per labor hour)
  • Quality engineering (reducing defects and scrap through a problem solving approach)

Not surprisingly, American- or European-owned factories that are based in China have taken the lead in applying Lean. They tend to have much better management systems, which make a Lean turnaround success much easier to pull off. More and more Chinese manufacturers are trying to catch up, though. They use consultants and/or they hire a high-level manager and they keep at it for a few years – the time to ensure the whole organization has embraced the new way of doing business.

This has been the case since the 1990s in the automotive sector (which includes not only metal suppliers but also plastic, rubber, textile, leather, electronics, and many other types of factories) but it has only really gained momentum over the past couple of years. The new generation of manufacturing managers is taking control, is more open minded, and is ready for a change.

Manufacturers in the West should pay attention to this important trend.


 

22 signs of good factory management presentation download

Share with your networks:

cmc_logo_white.png

Subscribe to the China Manufacturing Improvement Blog

for weekly manufacturing , factory management, and technical tips

Renaud Anjoran

10 years experience in China.
President, China Manufacturing Consultants.
Audited and/or consulted for hundreds of factories in China.
Author of well-read blog, Quality Inspection Tips.

More Articles by Renaud Anjoran

Recent Posts