Advertisement

Blog

Stop Gorging on China

Diversify, diversify, and then diversify some more. This is the cardinal principle top-rated investors and manufacturers swear by. So why have so many Western economies, industrial manufacturers, and the high-tech sector repeatedly violated this tenet by moving en masse to China starting in the 1980s and accelerating through the 1990s to now?

It's a question many in the industry are beginning to ask now, as awareness spreads that, collectively, poor and rich nations alike are paying, and will in the future pay, a hefty price for the lack of foresight and the corrupting passion for lower-cost production that drove the mad rush to move a hefty chunk of the global supply chain to China.

The recent rare earth controversy, the deepening crisis currency/debt crisis in Europe, high unemployment rates in the US, and the hollowing out of global manufacturing have brought home starkly the danger to high-tech companies. (See: The Truth About Rare Earths, Part 1.) Still, many have yet to truly realize the extent of the imminent danger to global commerce from our three-decades-long outsourcing of production and procurement to Southeast Asia.

It's time to cut back on outsourcing to China and even roll back some of the production that has shifted to the country. The withdrawal will be painful, disruptive in the first years, last perhaps a decade, and many opponents will say it either cannot be done or should not be done because China has been, or is being, integrated into the global economy. That's balderdash. In my opinion, the high-tech sector needs to wake up from its continuous search for cheaper production and implement a much more rational approach to manufacturing.

The result would be a new policy that recognizes China's role in the supply chain but that takes the utmost care to ensure balance, proper distribution of resources, and continuous assessment of the impact of foreign investment strategies on local economies. That review must start now at corporate and governmental levels globally. In the meantime, high-tech companies must begin now to sharply scale back manufacturing and component sourcing in China.

Globally, national governments and companies must cut back on investments in China, explore alternate sourcing locations, and serve a belated but still tough warning to China that its monetary policies are choking off growth in other economic regions and sowing the seeds of social upheavals we may all rue one day.

This is not a call for protective, nationalistic economic policies. Neither does it represent a violation of the principles of the capitalist system. In fact, it is a requirement in capitalism that investors and manufacturers regularly review holdings and systems, excising what's not good and taking steps to optimize and protect manufacturing, social, and economic operations.

Why is the need for change so urgent now? It has become evident that the “just-move-manufacturing-to-China” strategy was destined to hit hard against other needs of the wider society. Unemployment has moved up in Western countries, triggering protests. Although many see the recent riots in parts of Europe (Greece, Ireland, and Portugal, for instance) as national problems arising from mismanagement of the local economies, the root goes much deeper.

Similar problems exist in other parts of the world, not only in huge, developed economies like the United States, but also in smaller and developing nations.

China has become the de facto manufacturing center for most consumer products worldwide, and the social effects have not all been positive. Sure, we can now buy cheaper products, but manufacturing jobs are also vanishing. New business services have not produced enough jobs to replace the ones lost to China. There is also the lurking danger a political (or any other unanticipated) hiccup in China could freeze the global supply chain.

China, evidently, has also learned its newly toned economic muscles can be used as a diplomatic weapon to guarantee its interests at the expense of business partners. China showed this recently when it allegedly threatened to stop the supply of rare earth metals to Japan. Shipment has since resumed, but the controversy points to how economic power can be used in a military context.

It's time to purge ourselves of some of what we've been swallowing about China and realize the over-dependence on the country is having a negative effect on other economies and could potentially destroy the social fabrics of many nations.

30 comments on “Stop Gorging on China

  1. eemom
    November 29, 2010

    I couldn't agree with you more.  China seemed to be the place to be for electronics manufacturers for decades now and once one company established facilities in China, others followed suite in order to stay competitive. We saw plant after plant close here in the US and millions of jobs lots to China.  Let's imagine for one minute a world where this mass exit to China did not occur.  The consumer would be paying more for the products but there would still be competition among the manufacturers so pricing would hopefully be fair.  Maybe thre would be more jobs here in the US?? We now owe a hefty deft to China as I'm sure the rest of the world does.  They dominate because we set it up that way.  When will we wake up that this structure can no longer continue and that we must reclaim what is ours?

  2. bolaji ojo
    November 29, 2010

    What I worry about is the perception we can continue outsourcing to a single region of the world without some negative impact on the rest of the world. It's good to seek lower production costs but putting all your eggs in one basket?

  3. eemom
    November 29, 2010

    I agree.  Maybe with China's labor costs going up, the US manufacturers will start to diversify to other countries.  The continued dependency on China – or to your point any one country – is starting to hurt, and companies need to rethink their strategies for their long term success.

  4. Barbara Jorgensen
    November 29, 2010

    Well said, Bolaji. I've been a longtime skeptic of the mass exodus to China (or to any single nation, for that matter).  Much of it was done for the wrong reasons– the “me too” strategy many companies adopted; and the excuse of low-cost labor. I say excuse because the real reason many companies wanted in to China was to sell there–a reasonable goal in a capitalist society–but not so much in China. Red tape was one way of discouraging foreign sales; now, the political moves you mention are another. 

    I'd be equally cautious of any region tagged as “the next China.” India was in that category not too long ago (and may still be).  Let's hope that geographic or market balance is one consideration as the electronics industry moves forward.

  5. AnalyzeThis
    November 29, 2010

    While I personally totally agree with you, recently I've heard other people bristle at the notion of diversifying or reducing the tech sector's relative dependency on China.

    While China certainly has its issues (especially recently, as you mention), their argument is that there are relatively few issues in terms of the quality of their products, plus at this point they've built up the infrastructure and have the skilled workers necessary to produce complicated components cheaply. Thus, any alternatives automatically seem less attractive because due to the amount of time and effort needed to get a new region/location up to speed.

    Anyhow, I agree that we've gorged on China. But I wonder if now if we're addicted to it, and perhaps it's too late to turn back. In all honesty, I think it would take some sort of dramatic disruption in the supply chain to dramatically reduce the amount of outsourcing we do within the next decade or so.

  6. bolaji ojo
    November 29, 2010

    DennisQ, It's true the industry has sunk too deep into China to pull out now and it's not advisable anyway. There were very good reasons for outsourcing to China and the country — and region — have delivered on the potentials many see at the beginning. However, I also believe the outsourcing has been carried way too far and also that the system has tilted precariously towards one region of the world at the expense of the rest of the globe.

    I also agree with your observation that reversing this will take years and that it will be disruptive. It's taken upward of 30 years for the industry to establish this imbalance and correction will not happen overnight. Yet it must and the time to start is now.

  7. Backorder
    November 30, 2010

    I think a right attitude would be to increasingly look at other regions which are promising and might actually not need a lot of ramping up as against China. India is a case in point. It has a huge skilled workforce and infrastructure has started to look up too! Investing in manufacturing there might prove to be a stabilising factor and hedge us against any upheavels in the supply chain based in China.

  8. Mydesign
    November 30, 2010

        The growth rate of Chinese electronics industry is very high, especially for the last couple of years. This is due to high economic growth of the country, supporting by pool of skilled manpower and availability of raw materials. Even though the quality of Chinese products are low, it forced the competitor to fix their product cost in a justifiable way. Here we have to think, is it good for the industry that one nation is keeping the monopoly?. If they are going to maintain the monopoly, what happens to the similar industry running from other nations?. In my opinion, surely china's monopoly is very dangerous, if they again exhibited similar attitude, which had done with japan for rare earth metal supply.

         Lets think how we can compete this monopoly. The first way is say all company & products go globally Secondely make all the products with justifiable cost and quality. Marketing team also can play a vital role by making sure the availability of products at the right place at right time

  9. Anna Young
    November 30, 2010

     

    Bolaji, I reconcile with your comments and the issues you have raised. Political and economic factors made it possible for the market moving to China as you rightly put it. After all it's a capitalist world and companies do what's in their best interest. However, I hope that the high tech industry, other corporate bodies and governments worldwide can step back and review what's happening to their economies and society as China's share of commerce surge. If this trend should continue we may see the return of protectionism in some parts of the world.

     

  10. screenwriter
    November 30, 2010

    Fantastic article; well written-well positioned and very gutsy. American businesses have flocked to China over the last decade. like drug addicts to a newer, cheaper supplier. I agree with your position thats it's time for the US to start weening itself from this process and start bringing manufacturing and design back to this country before its too late. Its time to re-invent ourselves. We need a champion…a captain of business to lead the way. Which company will put its stake in the ground and lead the way? IBM? Intel? TI?

    It will take guts, vision and leadership but I'm not sure  if those are components of the resumes of most CEO's anymore. Hopefully, I'm wrong

     

  11. Backorder
    November 30, 2010

    Talking of CEOs with vision, what has the government done for these companies in particular? I would like to see a report on how exactly the big tech firms have benefitted from the stimulus package rolled out by the govt.

  12. kmullins
    November 30, 2010

    Consider what goes into the manufacture of a component.  In my case, a circuit board.  You have components, labor and overhead (building, etc.).  Being a global market, components are not too much different around the world.  Labor is probably the biggest cost difference, correct?

    Labor can be hand placing components, manual soldering of connectors, etc.  If one designs their circuit board properly in the first place, the amount of hands that need to touch it during build are at a minimum.  An automated assembly line in the US gets to be not much more expensive than one in another part of the world.

    My point is that a properly designed circuit board will not have that much more advantage being built overseas as to being built in the US.  The relative cheap labor rates overseas have allowed design engineers to do sloppy work and still come out with a product.

     

  13. bolaji ojo
    November 30, 2010

    Kmullins, Interesting take on the topic and one I hope to comment upon in a subsequent column. But you are absolutely correct that so far we've taken the easy way out and design engineers have been in some way complicit with executives desperate for a labor cost advantage. I guess what you are saying is that the West can be competitive, right? If that's the case, I would like to know further your thoughts on how we can rival south east Asia outside of design — where we have the edge still — but primarily in manufacturing, the area where we've trussed up now like chicken headed for the dinner table.

  14. screenwriter
    November 30, 2010

    I completely agree with you; we took the easy way out. Fixing this will be hard but nonetheless needs to be done because bringing design and manufacturing back to the US will help spur the economy, employ people and help reduce the deficit and reduce  our dependency on other countries. People in the C-Suite and The Supply Chain need to realize that shipping our manufacturing around the world is just as costly/cheap as making it here once you've factored in shipping costs/logistics/manpower/security/fuel etc to say nothing of the environmental impact and the loss of control 

    …and to “backorder's” point- Part of the stimulus package should have had provisions for companies keeping the design and manufacturing in the US or bringing it back here to the US.

    Whether a carrot or a stick, companies should either be rewarded for raising their  domestic mfg or penalized/taxed more for increasing their % of  international manufacturing

    The US car industry faced a similar challenge in the 80's over the quality of its manufacturing. The president got involved, government got involved, US citizens got involved and we resurrected an industry.

    Why not do the same in Hi Tech…Why not NOW?

  15. Steve Saunders
    November 30, 2010

    terrific blog Bolaji. There but for the grace of god goes every industry!

  16. Ms. Daisy
    November 30, 2010

    Bola, Yes, I believe the West can still be competive and rival south east Asia outside of design. I do believe the we still have a lot of untapped resources in information technology than we care to give credit for. Take the RFID (radio frequency identification technology) that provides tons of data about the products beyond barcode that simply identifies the product. It is the same technology in the EZpass transponder, it came from LOS ALAMOS defense lab. 

    RFIDs are currently being used for the tactical level of the supply chain management at this time, it is basically computing the inventories, quantity, location etc. Its adoption into operational and strategic management are still untapped.  These two areas are where the US had been masters in the past and still have some competetive edge.

  17. kmullins
    November 30, 2010

    A case in point :

    I was told by an offshore contract manufacturer (CM) that I should not worry about the time intensity to do something since labor rates are so cheap.  They said the raw materials were more costly to them.

    I have seen that some things that raise domestic costs more than overseas costs are involved with hand placement of components and hand soldering.  My latest designs I had the ability to use enough board space to limit all components to one side.  This allowed for a single pass thru the reflow oven.  I had to have some through-hole parts, but since all components were on the top side, the CM could place and wave solder those parts after reflow.

    Previous designs (before my watch) had fine pitch components on both sides with a mix of through-hole parts on both sides too.  It forced two passes through the reflow oven plus hand soldering the through hole components.

    As I said.  if you can design things to lessen human contact through the processes, you will see the costs between domestic and overseas start to converge.  Not all the way due to other overhead costs, but it can get close enough that the logistics nightmares with overseas procurements can outweigh the costs.  (I personally like to have CMs at arm's length and no more…)

  18. Parser
    November 30, 2010

    This is an important subject and very controversial. Despite all the problems of moving production to China there is a bottom line – return on investment. Our tax structure is favoring companies to go outside the U.S.A.  If you want to stay in business you have to do what others do and go to China.

    Almost every tool in the U.S. is made in China and I really don’t understand how we could survive Chinese embargo or the worst a war. They can direct all production towards its own needs and they have done it so many years ago when China became a communist state. By now they have the fastest super computer in the word, which used to be our domain and their military spending is not public. In peaceful times the economical exchange was beneficial to both countries under free trade agreement, but our prosperity has ended and we cannot afford cheap things from China without local employment. 

  19. Hardcore
    November 30, 2010

     

    I would not worry about them having the 'fastest' super computer, becasue actually it is not, it was all just publicity.

    specifically they have utilized GPU's in the design, which are great for the 'wow' factor but unfortunately do not produce a sustained processing stream,  a bit like running a marathon, but only capable of completing the first 100m in 8 seconds, then falling behind the rest of the pack.

    What many people fail to recognize about China,  is the lack of 'innovation'  anyone can copy someone else's product cheaply, but until you can innovate independently your not going to make much progress , and i'm afraid that by definition of its nature communism does not exactly instill people with innovative skills, in fact  in the 1950's they went out and ensured they completely destroyed all innovative methology it has taken nearly 70 years for even a spark to be seen.

    I'm afraid that cheap labour by lines of mindless production staff does not and never will equate to  innovation no matter how cheaply they can produce the goods.

  20. Lyeal
    November 30, 2010

    I agree with you that the outsourcing to China should be curtailed for the reasons you stated.

    There are other factors, too.  The quality of things coming from China varies from barely acceptable to terrible.  Have you bought one of the leather belts made in China?  You will be lucky to get two months service out of it before it disintegrates and looks terrible.  This was not true of U. S. made leather belts for years.  Or the much advocated compact fluorescent lamps made in China to replace incandescent lamps have serious power supply design or component problems—far too many of them fail within seconds or a few hours, unlike the original such lamps made elsewhere a few years ago.  HP printers made in China are unreliable from my viewpoint, too, unlike the original HP printers of say ten years ago.

  21. palyndrhome
    November 30, 2010

    Excellent and accurate assessment, Bolaji!  I agree with you down the line.  Logic demonstrates that imbalance in any system ultimately results in a breakdown.

    My greatest reservation is who will be first to risk losing their competitive position by exiting China?  We are a competitive society and business is no exception.  I loathe the thought of the government incurring upon yet another business issue, but I have just as little confidence in an 'honor system' where companies would voluntarily mitigate their production in China.

    We are a very competitive society.  We all want to win.  But at what cost?

  22. bolaji ojo
    November 30, 2010

    Tactically, the West must incorporate design for manufacturability strategies like the one you mentioned. This could eventually be our saving grace. If production requires fewer and fewer handling by humans then the competitive edge moves to the design function,which can happen anywhere. However, as some have noted, other countries are also becoming competitive in the design area. This means that as we move up the food chain, someone is also aggressively moving in the same direction. Fewer-touch production (built in at the design stage) can neutralize some of the low-wage advantage China has but will it be enough? Secondly, by the time we finally achieve this, won't the last manufacturing plant in the West be shutting its doors, never to return?

  23. bolaji ojo
    November 30, 2010

    Great questions. Who will volunteer to not move manufacturing to China? No executives who wants to keep their jobs will do this to help save the West. So, the decision cannot be based on altruistic reasons. It must have profit grounding. I don't believe this is impossible, though. Incentives lured companies to China. Some forms of incentives can keep what we have here. Additionally, companies are already having second thoughts about the shift to China. Some want to hedge their bets and others simply don't think it is completely cost-effective for them. Governments can help make sure the first companies to retain plants here get some benefits for doing so. It must become an objective for local and national governments as well as for corporations.

  24. palyndrhome
    November 30, 2010

    You're right – in fact, I am purchased a studded leather belt about three months ago and it's almost shot.  I have about 5 belts so it only gets about 20% duty, or a couple days a week max.  

    Plating and tolerances are still problems there.  And we've all read the horror stories about consumables.  Hershey moving to China was not only sad but absolutely ridiculous.  My guess is that most consumers don't know the standard Hershey chocolate is made there, if they did, I think Hershey would have to move back to PA or be gobbled up (NPI) by Nestle.  I won't eat it any more, nor would I give my cat food made in China.

    Some of that is the mfg learning curve.  If you're old enough to remember, products out of Japan in the early 60s weren't very good, but look at them now.  Some of it is cultural, certainly the Japanese have an almost cultural attention to detail and stalwart commitment to quality.

    Our company has successfully relocated a portion of our production out of China into Japan in the last year, and quality concerns drove the decisions.  Yes, your input is right-on.

  25. kumar1863
    November 30, 2010

    It's evident that unemployment is increasing over the rest of the world as the investments are moving to china, if there is no competition there is always a chance for reduction of quality.  It's time to divert the investments to rest of world by increasing the employment opportunities and product quality.

  26. Clarinox
    December 1, 2010

    I have come to this discussion late and found reading through the comments very interesting. I have also thought for a long time that China was very smart to play to western greed, to, as you put it, allow the west (and the rest) to gorge on china. As a nation they took a very long term view, provided state funding for ventures, designed practices to reduce costs and produced the environment to facilitate very competitive pricing – not quite a level playing field for the rest of the world. The Chinese however are also very smart with understanding balance and know that if there is too much “yin” the “yang” will work to find balance. I think we can try to learn from this understanding. I understand wages have gone up significantly in China due to their high demand for skilled labour, compliance with practices enforced elsewhere are being pushed, I believe such factors, factors and forces that go beyond the power of an individual company, will eventually drive towards balance.  

  27. DonaldSmith
    December 1, 2010

    Many great comments on a great article. First, I want to assure everyone I am an optimist. Everything will eventually work out for the best, but the US and other law abiding countries must start demanding fair trade, and encourage (and possibly whip) rogue states, the main offender being China, to take positive steps toward fair trade practices. The sooner the West demands truly fair trade, the sooner it will happen.

    Here is a summary of the “sins” China and other rogue nations are committing, mainly based on two books:

    Peter Navarro, PhD, “The Coming China Wars” (Upper Saddle River, New Jersey: FT Press, 2008 [Pearson Education, Inc.]).

      and

      Elizabeth C. Economy, “The River Runs Black” (Cornell University Press, 2010).

    + A main conclusion of Navarro's book, is rogue nations (not only China, but obviously China is probably the largest offender) have cost the US economy about 1 million jobs per year, and about 10 million jobs over the last ten years. My primary thought after reading Navarro's book is 'why does the United States have the worst trade negotiators on the planet?' Nearly all of the issues he raises are trade issues.

    + China and other rogue nations have little regard for their environment. Therefore, buying goods manufactured in rogue states is an implicit export of pollution. Law abiding nations should be allowed to put a “pollution tax” on goods coming from such countries, and keep the tax until the rogue state proves it no longer pollutes. If implemented, the tax revenue must be used to stimulate the US economy, preferably in areas such as manufacturing. Navarro points out, that when US companies are given a level playing field, they are among the most competitive companies in the world.

    + Quite a few nations engage in cyber-terrorism. Same solution as above, a “cyber-terrorism” tax (or tariff) should be implemented and used to improve computer / IT security in the US, and other law abiding countries. Some of the revenue from the tax might be used for intervention, but this might prove as difficult as drug intervention.

    + Many nations, especially China, engage in IP (Intellectual Property) theft. Slap another tariff on them! It has been estimated that if US companies were paid for all IP that is stolen annually, the US would not have a trade deficit.

    + CEO's should be aware that rogue states not only manufacture what is authorized, but also keep the factory running and ship “out the back door”. In this way completely authentic products are manufactured illegally, and then sold to benefit the rogue company. It is estimated that between 5% and 10% of Cisco's networking gear manufactured in China is unauthorized. The same is probably true of many other products made in China, ranging from high end running shoes, pharmaceuticals, handbags and Polo shirts.

    + Human rights abuse: Rogue states treat workers and their citizens in general very poorly. So buying from rogue states is implicit support of human rights abuse. The only way, in my opinion, to stop the abuse is to put a tariff on goods from such countries. We need to be very clear that the tariff will be reduced as they improve their human rights record. The main “sins” are not allowing workers to organize (anti-union tactics), not allowing workers to voice complaints about working conditions, low wages and little or no health care benefits.

    + Support of corrupt regimes: Buying goods from rogue states is implicit support of tyrants. China and other rogue nations buy raw materials from nations run by tyrants. Navarro gives several examples, including Mugabe, President of Zimbabwe, and others.

    + Buying goods from rogue nations is implicit support of imperialism. Again, Navarro gives examples of specific countries. Imperialism is one of the tactics China uses to buy raw materials at a huge discount. They go to poor nations, and to nations run by corrupt leaders, and offer to build roads, ports, railroads and other infrastructure. The only problem is the roads go straight to areas where there are raw materials the rogue nation needs. The host country gets very little benefit, since the imperialist “infrastructure” provider staffs the mines with its own managers. The imperialist country's managers have been known to have complete disregard and disdain for the workers they employ. And the contract allows China and other rogue imperialists to buy the raw materials at 50% off the market price. Further impoverishing the poor country.

    + And as Obama and the US Congress have mentioned recently, the Chinese currency is about 20 to 40 percent under-valued. This makes Chinese goods artificially cheap, and is a blatant unfair trade practice. My opinion is law abiding nations must be allowed to put a tariff on goods from countries where it can easily be shown (via “equivalent baskets of goods” and other similar proven economic methods) that a nation is artificially undervaluing its currency. It baffles me that the G20 did not vote to allow such a tariff at their recent meeting (in Seoul, South Korea, Nov 11 – 12).

    + “The River Runs Black” is mainly about pollution in China, and I will leave it as 'an exercise for another reader' to summarize it!

    So why doesn't Obama, Congress and the US trade representative mention all the other “sins” of rogue nations? And why don't they mention all the nations that engage in unfair trade practices? Why pick on China, and only for one issue?

    My answer: We (the United States) have the worst government money can buy!

    Again, I want to close by repeating that I am an optimist. We the people must rise up and demand a level playing field economically, and demand our governments encourage (and possibly whip) the rogue states to take positive steps toward fair trade practices.  

  28. Ashu001
    December 3, 2010

    Parser,

    You raise valuable points here about the impact of Idiotic Tax policies in the US having a major impact on moving Production,Capital,etc overseas.

    Like here

    http://www.businessweek.com/magazine/content/10_44/b4201043146825_page_2.htm

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

    What makes this story even more idiotic is that Google was started with US Taxpayer funds.

    Time to close the Tax noose,decisively around all these elite corporations…

    Instead of hounding ordinary citizens for small-small infringements the IRS should go after these guys with a vengenance.

    But then,we also have to deal with the fact that most of our Political elite has made substantial personal investments in China(& there is no way they will do anything to jeopardize that investment).So its time for Citizens to take things back into their own hands.The Best way is by stop buying Chinese products wherever possible.A lot of Americans are actually doing this today.Once greater Americans climb on this bandwagon,we will be able to force High-tech manufacturers to move production back to America.

     

    Regards

    Ashish.

     

  29. Ashu001
    December 3, 2010

    Bolaji,

    I really like what you have to say here.If we want to force High-tech manufacturers to move production back to America we need to be aggresive in our approach and hit them where it hurts the most-The Bottomline.

    When they see conscious avoidance of Chinese products they will be left with no choice but to move production either to Mexico( Eric talks about Gualadajara,Mexico in great details on EBNOnline website) or America.

    Regards

    Ashish.

  30. seel225
    January 31, 2011

    Bolaji , nice reviw about the current situation of the supply chain and their manufacturing. China has attracted many of the golbal investors, beacuse they supply the goods at the cheapest price. So the companies started moving towards china and making it as the gaint in the manufactuing sector. The rest of the world should start thinking to avoid the freezing by the china in manufacturing sector. Consider the case of US which is totally depedent on china for SCM goods. US should find alterrnative by moving towards latin american countries, which in turn brings a social and economic developemnt.

     

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.