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Home >> Business
UPDATED: 09:33, July 26, 2004
Efficiency, quality and innovation: before China becomes world's plant
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There has been talk about China as "world's plant". Americans are even worrying about the outsourcing of their jobs when their businesses are outsourcing their production. China is turning out the most iron and steel, cement, chemical fibers, fertilizers, TV sets, refrigerators, and motorcycles in the world annually. But that does not necessarily mean that China's manufacturing sector is strong.

Shann'xi born Mr. Duan built a hydraulic pressure fittings plant for a US company in Xi'an with an investment of more than 1 million USD which included his own money made in his ten-year hard work. But when it was put into operation, he found the raw materials, apparatus and even equipment offered by his domestic suppliers just cannot work normally. He had to import these things from US and South Korea, which deprived him of his advantage on prices. Finally he gave up and left his plant with tears.

One of the domestic suppliers for Duan's plant is a big special steel producer. The models and standards of its steels are the same as the foreign products, but the quality is not. "In theory, we have no problem offering you the steel with the quality you require. But in practice, we have." Replied the producer to Duan.

In fact, China exports a massive number of steel products every year. But they are mostly cheap. In the mean time, China has to import a lot of high value-added steel products every year. How can added value and profits be generated when there is no innovation or quality guarantee? This can also explain why there are only two Chinese manufacturing players in the World's Global 500, although China boasts the fourth largest manufacturing industry in the world, following US, Japan and Germany.

Low efficiency is the central problem behind the poor quality. The labor productivity in Chinese factories is one twenty-fifth of that of US, one twenty-sixth of that of Japan and parallels with that of India. As a result, producers resort to price wars to grab market shares.

Mr. Hu, an overseas Chinese investor from US, has seen some Chinese enterprises are apt to jump the bandwagon by vying to churn out the same products which proved to be a cash cow for others. Then a price war usually breaks out soon. They begin to offer prices lower than their competitors'.

Hu mentioned another way to stand out. "You should try to improve your efficiency, the technical content of your products and the added value of your products when your rivals are labeling cheaper price tags. In this way, you can make more money than your competitors."

Duan ever visited a Chinese factory with an American CEO. There they saw an oil pipe line controlled by screws. An engineer of the factory told them that they had to replace the screws which can only work for a few days. When the American guest asked about the costs, the engineer shrugged and answered: " Very little. Screws are quite cheap." The American CEO told Duan later he was wondering how those Chinese calculated the costs. Screws made in US stand 10, 000 turning. More expensive they are, they spare labor and trouble.

It is not true that Chinese plants are not able to make quality products. In fact, they have the capability. But they are not ready to. A make-do attitude permeates in many Chinese enterprises, which do not think of tomorrow as long as they can find buyers today.

The make-do mentality prevails especially in small and medium sized companies in processing industry. Duan said American and Japan businesses always had their products up to the six-stars standard if their customers asked for five-stars. But Chinese makers would think it all right to provide something a little bit better than four-stars.

"How can Chinese enterprises with this make-do attitude to customers compete with manufacturing giants from Europe and US which are transferring their facilities to China?" asked Duan.

Duan's experience is not an exception. Many experts agree that poor quality constitutes a bottleneck of China's manufacturing industry. Many Chinese producers operating their facilities with low efficiency and no innovation do not turn out quality products to generate high added value and profits, which in turn makes it even more difficult for them to invest in R&D activities to improve the quality.

The innovation gap is still widening between Chinese manufacturers and their European and American peers. A most recent survey shows that 90 percent of European and American multinationals have made innovation a part of their strategy and 80 percent of them invest at least 10 percent of their profits into R&D activities. 55 percent of their innovations are the result of their cooperation with universities, research institutes and other enterprises.

But the story is different in Chinese enterprises which do not input much of their resources in R&D. Many small and medium sized ones do not even have any R&D. Statistics shows Chinese businesses hold one thirtith of patents of that by Japanese and American companies. Many Chinese enterprises rely too much on imports of core technologies and equipment. Imported equipment costs more than 60 percent of China's input in equipment every year.

Recently, the Time Magazine in America published an article expressed concerns on the transfer of US manufacturing base to China. It also offered a solution: making US enterprises more innovative. The article recalled how innovation helped American manufacturers resist the challenge from Japanese competitors 20 years ago.

Ms. Panchak, editor-in-chief of Industry Week, pointed out that many manufacturers were worried about competition on prices because that was their weakest point. But their worries are caused by their little progress on innovation. Players with a futuristic vision can always find ways to offset price pressure with innovation.

Many enterprises in US proudly hang their patent certificates on the walls. Some have calculators showing the number of their patents at their entrance.

Mr. Jing, an engineer with Chinese origin working for a gear plant in US, told the reporter that American factories have high requirements for the skill of workers. There are only scores of workers in his plant. But they are all highly skilled. Some of them are trained under the sponsorship of the plant. The company encourages innovations from workers. Two years ago, the boss of the plant had some production lines moved to China. but core technologies remained.

It is true that with the globalization gathering momentum, developed economies like US, Japan and Europe are relocating their manufacturing facilities to China. But their technology, innovation and quality are also upgrading. This has posed a more serious challenge to Chinese manufacturing sector. Given foreign capital flocking in, whether Chinese enterprises can invest more in technology, sharpen innovativeness and improve quality will carry a direct bearing on the survival and growth of China's manufacturing industry. And on it also depends a turning point of China's manufacturing sector.

By People's Daily Online

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