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The Value of People and the China Opportunity

EntrepreneurCountry Global Friday, 01 October 2010.

Part 3 in the entrepreneurcountry China Insight series sees Kevin Meyer, President of Specialty Silicone Fabricators Inc., discuss the opportunities he has found in China.

I just returned from another trip to China.  My company, Specialty Silicone Fabricators is selling TO China, not outsourcing to them. We are able to compete based on technology, quality, service, and yes, even cost.  That success is also why we’re building a new 120,000 square foot facility to add to our existing factories in California and Michigan.

From what I observed last week I believe that other U.S. companies have a unique but narrow opportunity to capture business in China.
I’ve worked in the medical device and telecom equipment industries for nearly three decades, from Fortune-50 multinationals to my own contract manufacturing startup. I eventually moved into consulting before joining Specialty Silicone Fabricators.  Throughout my career I’ve learned about the power of lean manufacturing when it is implemented correctly.  I still do some consulting, primarily with some savvy VCs that realize that much of the value of a factory is not represented on a traditional balance sheet or P&L.

Many companies try to implement lean manufacturing methods as they’ve heard the stories of success.  The lean programs at most of those companies will fail.  The main reason they fail is because they focus on the tools and not the underlying philosophy and forget about or aren’t aware of the second pillar of lean: respect for people.  The first pillar, reducing waste and creating value from the perspective of the customer, can create considerable short-term return.  But it will all fall apart if the second pillar is ignored.

Respect for people means a true understanding of the value of experience, creativity, and knowledge.  Unfortunately that value is not explicitly represented on traditional financial statements therefore it is often ignored.  But it is real.  That value, realized in terms of ideas and improvements, can more than offset labor cost differences.  A “lights out factory” may seem competitive due to near-zero labor costs, but what happens over time?  I have yet to see a robot that has submitted an improvement suggestion.

Over the last decade many companies have chased low labor costs around the globe believing that was the key to success. Their financial statements looked great until you probed at less tangible costs… long supply chains and the cash tied up in them, the risk of a quality defect being found while large shipments were still floating on the ocean, the need for additional supply chain management infrastructure across time zones and language barriers, and longer development cycles.   Some of those companies are now realizing that error and are reshoring back to North America.

Other companies took a different approach.  They understood that the largest cost in business is not labor, overhead, or material – it is unnecessary complexity.  Many of them actually added labor – creative knowledge resources – yet lowered their overall costs.  They remained globally competitive by focusing on optimizing value from the perspective of the customer and leveraging the power of people.  They realized that people were not just the cost of a pair of hands but the value of the brain attached to the hands.

Those enlightened companies represent all industries – New Balance and Ashley Furniture to name just two that happen to be in industries that popular perception believes must use overseas lower cost labor to compete.  If they can do it then any other company that feels the need to chase low labor costs should be embarrassed.

In my opinion there is only one valid reason to move overseas: to be closer to a customer.

That brings us back to China.  A few years ago China was all about providing a low labor cost base for companies to outsource to, and then stealing intellectual property in the process.  That appears to be changing.  Thanks to a rapidly modernizing infrastructure, paid for in part by interest payments on our national debt, the domestic wealth of their population is growing.  That is triggering their own internal markets, which is driving demand – by over 1.5 billion people.  There will be significant social turmoil as class and wealth stratification issues are resolved, but the demand effect is already occurring.

Up until now we believed that we needed China to buy our debt and China needed us as an export market.  What happens when internal demand in China is unleashed, a potential demand of five times the population of the U.S., and they no longer need to rely on export markets?  The effect on Treasuries could be interesting.

That is why the next few years represent a unique opportunity for high quality, innovative, and cost competitive companies outside of China.  Last week, for the first time, I heard a Chinese company say “cost is not an issue” – that particular medical device company had recognized the value of quality and was willing to pay for it.  Other homegrown medical device companies are beginning to focus on the Chinese market and need components, yet there are no high quality domestic component manufacturers.  They are also having a problem finding domestic talent – one other Chinese medical device company, which had grown from zero to over 1,000 employees in just five years, has created a technical college that now has 10,000 students.  Just to feed that one company’s anticipated demand for talent.

Chinese internal demand is increasing rapidly, but high quality Chinese component suppliers and knowledge resources are not available – for now.  That is the opportunity for North American manufacturers to get a foot in the door of a market several times the size of the United States.  Manufacturers that leverage the value of their people to compete based on quality, service, technology, and even cost.

Kevin Meyer, President, Specialty Silicone Fabricators Inc.

Specialty Silicone Fabricators: www.ssfab.com
Factory Strategies Group

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