It is absolutely true that China has a very long way to go on the product quality front, but this is changing very fast.
by Gordon Styles, Engineer & Managing Director, Star Prototype
I am a manufacturing diehard. I love engineering. I am British, and for the last six years I have lived and worked in China.
I have my own 100% privately owned factory in Zhongshan with 80 employees, and I have hands on experience in dealing with Chinese regulation in many aspects of business.
I recently bought an American, FARO laser-scanning arm for USD $100,000 and I imported it into China with a customs duty of $0. Yes, $0.
China has decided that the country needs to buy a lot of the world’s high-technology equipment, and it is helping its factories do so by raising the value of the Yuan by 6 percent per annum and dramatically reducing import duties. Does this surprise you? It should. I am also guessing that Donald Trump missed that annoying little detail.
So, when I read Perry Sainati’s piece “Why China is Vulnerable” I felt compelled to respond to his many reasons for China’s vulnerability. Perry, my response is meant in good spirit and with the hope of developing a healthy debate between us.
Reason #1: The Lead Paint Factor
I have to buy from my Chinese suppliers all of the time and it is absolutely true that China has a very long way to go on the product quality front, but this is changing very fast.
In 2010, the Chinese Premier Wen Jiabao pronounced, “Food safety and product quality should be our top priority." Since that time, there has been a huge push to ensure that China’s manufacturers deliver higher quality goods.
One of the effects of this is to ensure that all kinds of high-tech imported inspection and manufacturing equipment are duty free — hence the $0 duty on my new FARO arm.
On the issue of lead paint, it is true that some products recalled as a result of excessive levels of lead in paint on Mattel products in 2007. The levels were higher than regulated, but not one single case of lead poisoning was reported in the U.S. as a result.
In contrast, the company at the center of the paint scandal was Lee Der Toy Company. As a direct result of Mattel and CNN complaining loudly about the lead-in-the-paint issue, the Chinese government took away Lee Der’s export license and 5,000 people lost their jobs. The manager of the factory, Zhang Shuhong, sold all of the machinery, distributed that money to his workers, and then hanged himself shortly after the factory closed its doors. The paint had come from a number of his suppliers. Only one person died, and it wasn’t from lead poisoning.
Mr. Zhang’s funeral was held in the factory yard shortly after his death.
Most of the Mattel recalls in 2007 had nothing to do with lead. In fact, it was as a result of a faulty Mattel design and loose magnets.
From Wikipedia: On September 21, Mattel issued an apology to China over the recall of Chinese-made toys, taking the blame for design flaws and acknowledging that "vast majority of those products that were recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in China's manufacturers." Reference: http://en.wikipedia.org/wiki/2007_Chinese_export_recalls
The video of the infamous Mattel apology can be found on YouTube: http://www.youtube.com/watch?v=J1YDa3t-z20
The apology was played at almost every opportunity on all of China’s news channels for days, and yet I have been unable to find a single person outside China that saw it. Mr. Zhang paid the ultimate price and, as a result, became a Chinese national hero.
One piece of advice to all buyers of product from anywhere in the World: Make sure you have awesome QC. If you cannot measure it; you cannot make it.
China’s quality drive is in top gear at this time and I receive standard letters from the government urging me to produce better products. Enforcement is the problem though. That said, this weekend 14 people were sentenced to jail with terms of up to life for yet another melamine tainted milk scandal. There is no shortage of desire on the part of the Chinese government to improve quality; but there is no end to the desire to cut corners to make more profit — and that is a human fault.
Reason #2: Market Knowledge
I do believe Perry’s assertion that U.S. companies are nimble and light on their feet because they have operated in an open and competitive environment for a long time. They also do not suffer overbearing government interference, and it makes American companies more responsive to customer needs. This is true, and it is part of the great American spirit.
But, it was the lack of government interference in some very important areas of American and U.K. business that led to the world’s worst financial meltdown in history — and America’s worst environmental disaster in history (with more than a little help from the Brits, again). Regulation must not be too overbearing, but there must be enough functional regulation to ensure that greedy individuals and companies don’t wreck the joint.
China does have tight control over its state-owned enterprises. Frankly, I could not agree more with their strategy in many instances. I will give you one example. It is a fact that economies expand and contract as the Money-Supply+Credit expands and contracts. If you can control the precise amount of Money-Supply+Credit, you stand a chance of controlling the growth of the economy.
China’s Central Bank, and a plethora of state owned banks, have the most draconian controls over Fractional Reserve Requirements (now 20%+) and creation of credit. As a result, China’s GDP has grown at a straight line 9.91% per annum for 30 years (or 15.2% in today’s prices). Even at the height of the global financial crisis in 2009, GDP grew 9.2%.
In contrast, the U.K. and U.S. allowed its banks to do whatever they wanted — and they did. Just before the crash, the money supply in the U.S. was about USD $1 trillion against credit of about USD $50 trillion+, a real reserve ratio of about 2%. The U.K. had a similar situation. When the big banks realized they were all disastrously overstretched, they pulled around USD $4 trillion out of the credit supply, leading to the largest economic crash in history. The fed and government had to fill a USD $4 trillion hole (about 30% of the U.S. economy).
The two graphs below demonstrate what happens when Government does not interfere appropriately:
Source: http://nowandfutures.com/key_stats.html
Reason #3: The Middle Class
The key assertion here is that as wages and standards of living rise in China, the country will see its product become more expensive and, as a result, will lose international market share. There is also an assumption that the only reason people buy Chinese product is because it is cheap.China has seen incomes rise significantly over the last few years — the government has actually driven this. This year alone minimum wage in Zhongshan jumped around 20% to USD $2,000 per annum. The average annual income in Zhongshan, a modern midsize city, is now USD $6,500 — making it about 1/6th of the U.S. average.
Even if the Chinese Yuan was 40% undervalued as many claim, that USD $6,500 would become USD $10,800 if instantly revalued — making it about ¼th of the U.S. average. Chinese people are a long way from losing their cost advantage.
Also, the reason that Chinese people earn so little is because they do not expect much in their lives. Most workers do not have cars or houses, because they cannot get loans. Most live very simple lives and are generally happy with life.
Another assumption is that China needs to export in order to have an economy. This is grossly inaccurate. Export and imports are both less than 20% of the economy. In the first quarter of 2011, China just about broke even on international trade as imports of high-tech equipment soared. It is China’s strategy to further develop the fast growing domestic consumption and to transform China into a high-tech manufacturing nation. I can testify to the fact that Chinese manufacturing is becoming more high-value added — much of this is down to the foreigners that work in China.
A recent 10-year China census was published and for the first time, it provided the statistic for the number of foreigners residing in China: 600,000. A good half of those are technicians of some kind. That number includes a lot of Americans and Brits that can no longer find a job at home and have come to China to pass on their skills.
My American colleague, Joseph Rice, is a pressure die casting (PDC) expert of 30 years experience. He ended up paving driveways in the U.S. Now, he is QC for our PDC product based in Zhongshan. In the last 12 months, he has taught at least seven guys the latest PDC techniques, and helped three PDC factories dramatically improve quality.
Another surprising fact — that most foreigners are not aware of — is the degree to which China emulates Germany. From its governance; its laws; the adoption of the German DIN system; technical training schools; road rules; even the way railways and motorways are constructed — not to mention the beer. Germans are everywhere in China, and the Chinese government loves it. China wants to be big Germany with a Chinese face.
Reason #4: The Information Age
totalitarian |tō,tali'te(ə)rēən| adjective, of or relating to a system of government that is centralized and dictatorial and requires complete subservience to the state: a totalitarian regime.My sales colleague Peter Vigil and I have unofficially twinned Zhongshan with San Diego. Both are very laid-back cities with polite and friendly people; great weather; approachable Government; great food and entertainment; and plenty of industry to go around. China is one of the most liberal and freedom loving countries in the world. You will struggle to find more than a handful of the 600,000 foreigners who reside here and use the terminology “totalitarian regime” to describe China.
They would use terminology such as strict, professional, awesome planners, corruption fighters, great leadership, peaceful, private, and respectful. Even the Premier Wen Jiabao is widely called Grandpa Wen, yet on a visit to the Oxford Debating Union in 2007 he was heckled and referred to as a Dictator.
I have no idea what it must feel like to live in a totalitarian regime, it sounds frightening. I agree that the Jasmine revolutions in the Middle East were a reaction to some extremely nasty dictators, but to call anyone of the standing committee a dictator shows a dramatic ignorance of how Chinese politics operates.
The Communist Party may have absolute control, but within the party there are many factions, each with significantly differing views on how the country should be run. But as in Germany, which has a permanent state of coalition, the party must find consensus, and it does. To call that process undemocratic would be to call Germany undemocratic. Democracy does not have to be two large parties screaming at each other, especially when it boils down and the two large parties are essentially the same. The Communist Party is made up of well-educated Chinese people from all walks of life. They must go through the Communist Party School to learn how government, administration, and economics work. The majority is degree-qualified, and a disproportionate number are engineers. This leads to a professional approach to government.
Control exists where control is important, but just like the recent ban on smoking — it’s not that important when compared to the fractional reserve ratio, so the police are not out in force. Totalitarianism is such an alien word to the 600,000 foreigners that live in China.
Part two coming ...
Contact Gordon Styles at: [email protected]. For more information on Star Prototype visit www.star-prototype-china.com.