McKinsey Endorses Our Thinking

“Next-shoring: A CEO’s guide”
Katy George, Sree Ramaswamy, and Lou Rassey

McKinsey Quarterly
January 2014

The end of China’s time as the uncontested factory floor of the planet has become something of a meme. If that has failed to come to the attention of any of the world’s CEOs, McKinsey’s consultants make sure they get caught up.

My take is that McKinsey is late to the party. I made most of these same points two years agoI called it “right-shoring.” In such a circumstance, I would have thought that McKinsey, seeking to retain “thought leadership,” would have offered deeper insights. They don’t, even though they provide endorsement to my original thinking.

Thanks, McKinsey!

For the record, check out:

The Beginning of the End of Outsourcing,” Silicon Hutong, February 7, 2012

China and the Rightshoring Movement,” Silicon Hutong, December 4, 2012

 

“A” Buildings and “B” Management

Or, Top 10 Signs that Your Building Management Has Been Localized

Hutong West
Nursing the Party Secretary
1136 hrs.

A good friend and client of mine set up offices about two years ago in one of Shanghai’s better office buildings. The building housed some top professional services firms, including a cluster of subsidiaries of one of the world’s largest marketing services conglomerates. The building has been a prestige address, and is close to some funky local neighborhoods and two of my favorite hotels in the city.

Unfortunately, according to my friend, the owners of the building apparently decided to drop the global firm managing the property, choosing instead a local management company. Not long after, things began to get noticeably, well, grottier.

As our conversation progressed, I began to think about similar situations I’ve encountered with local building managers in China, and in the process I came up with this list of the top ten signs that your building management has been localized.

I post this as a public service, both for companies who are seeing the quality slip in their buildings, and as an encouragement to local management firms to up their game.

Sidebar: It is important to note that not all Chinese management companies are cut from the same cloth. Top Glory and its subsidiary Gloria Property Management (owned by the state-owned COFCO Group) in particular are a standout from the bunch, as are most of the management companies based in Hong Kong. Nonetheless, these are the exceptions that prove the rule.

Here are the signs that you may want to start hunting for new offices. “Red Alerts” are signs that it is time to get out now.

10. Advertising everywhere. Ads start showing up on almost every surface: lobby displays, floor stickers, elevator displays, video ads, ads in the toilets, and on the windows of the ground floor. Don’t get me wrong, a little targeted advertising in the right place doesn’t hurt, but when the decor becomes Madison Avenue Modern, it’s gone overboard. Red alert: when they start putting advertising on the handles of the doors into tenant offices.

9. Tragic Carpet. Stained or damaged carpet tiles stay stained or damaged for a long time. Only the most egregious stains (usually involving a very light or very dark substance spread over a large area) get taken care of promptly. Red alert: carpets are removed altogether, replaced with concrete or faux-stone tile floors.

8. Crass Cieling. Drop-down ceilings need constant upkeep. When they start showing stains, get broken, or go missing, your building has begun its long, slow slide into slumlord territory. Red alert: drop down ceilings are removed completely, leaving not an attractive “industrial” look, but just ugly pipes and ducts.

7. Security? What Security? The well-dressed, friendly, security folks sitting at the front counter and checking for appropriate badges or patrolling the floors have been replaced by surly gatekeepers who act like everyone entering the building is a terror suspect. Red alert: they stop checking ID completely, with “surly” exchanged for “not even paying attention.” Eventually even the pretense disappears, and security staff are let go.

6. Cleanliness is left for Tawdriness. Those friendly ayis constantly patrolling the public areas of the building start showing up once a week, if that. You have to start reminding the management to clean the windows. Door handles are sticky, and numbers on the elevator panel are impossible to read. Red alert: stairwells have a layer of dust so thick you could slip on it, and the doors stick.

5. Smoking in the Boys’ Room. Men’s toilets smell like cigarette smoke. Constantly. Red alert: you catch a goldbricking building employee smoking in a toilet stall. Double red alert: women’s toilets smell like cigarette smoke.

4. Cigarette Bloat. The reek of cigarette smoke starts pouring out of offices as well as bathrooms, and “no smoking” signs begin to disappear from public areas and elevators. Red Alert: building employees smoking while working.

3. Don’t Cry for Me, Cappuccino. Starbucks moves out, replaced by some poor-imitation no-name coffee or snack shop with crappy food and overpriced drinks, and probably run by the building manager’s sister-in-law. Red alert: the no-name coffee shop closes and the shell of the store just sits there, forlorn and gathering dust.

2. Vertical Transportation Gets the Shaft. It starts feeling like the elevators are offline a lot more than they used to be, and at least one is either shut down or under  maintenance on a weekly basis. Red Alert: an elevator breaks down with you, a colleague, or a loved one in it and you are stuck for more than an hour.

1. Anchors (run) Away. The building’s prestige, or “anchor” tenants, usually multinational companies, start to depart, finding other places to set up, and replaced by more, smaller tenants. Red alert: the building’s directory is at least a year out of date, or has been removed completely.

Why Robots Won’t Save China’s Factories

Somewhere near Bengbu
Riding the Rails
1112 hrs

If we have not witnessed the peak of mass production in China already, we will soon.

It is not just that costs are rising and production is moving elsewhere: the entire mass production model may well have jumped the shark. The growing costs of energy and commodities, as well as the coming end to the ability of enterprise to externalize the social costs of production will make mass production look increasingly wasteful.

We are leaving the age of “make enough so that everyone has what they want,” and coming into the age of “make just enough of the right stuff.”

Mass is Over…

With due respect to Henry Ford, we are witnessing the birth of a long-term trend away from mass production and toward an industrial model that manufactures a product only when a customer wants it, how she wants it, and where she wants to use it.

This will undermine the consumer model predicated on planned obsolescence, overproduction, and disposable components, and will ultimately destroy economies of scale as the means to lower costs and profit. That means moving the production closer and closer to the customer, and the growth of mass customization. That, in turn, spells the end of our reliance on mass production, and that will turn every shopping mall into a factory floor.

None of this should come as much of a surprise. Mass customization has been a meme of futurists for over a decade, and technologies like print-on-demand and 3D printing are but the harbingers of a new industrial revolution that will turn the point-of-sale into not only the point of production, but, increasingly, the point of design as well.

…So are China’s Days as the World’s Factory

But the implications for China are potentially immense. It suggest that, for most Chinese manufacturers, automation will only delay the inevitable. After all, who needs a factory in China manufacturing blue jeans when you can get yours custom sewed based on your measurements and preference right at the store? Or have your phone assembled for you at a local factory, shipped to you, then upgraded rather than changed when the time comes?

What applies to finished product applies to components as well. Fabric can be woven in custom lots as and when needed – it is not hard to visualize a Home Depot-sized warehouse store filled with machines that will knit, weave, and dye on demand, or a ballroom-sized microchip fab that turns out programmable or application-specific chips in tiny lots.

The future of Chinese manufacturing, then, lies not in producing consumer products for the world, but in producing consumer products for itself, and, I expect, building the machines that make local, personal production possible.

China’s Microfacturing Future

This will not happen right away: China’s mass-production manufacturers still have a long runway ahead as the world retools. It is also likely that the economies of mass production will continue to be essential for low-cost products for sale to developing nations.

But for producers catering to the developed world and the global upper- and middle-classes, that runway is not as long as some would wish. Our best guess: a decade at the outside, but likely less.

Watching this evolve will be fascinating. China, Europe, and the US will be scrambling for the lead as the world’s factory moves in next to the cash register, and it’s anyone’s horse race.

Why China’s Factories Will Automate

North China Plain
On the G11 HST Harmony
0900 hrs.

China has passed what I like to call “Peak Toil,” the point at which the size of the pool of labor available to manufacturing reaches its apogee and begins a long decline. Chinese workers are becoming more educated, their salary, benefit, and lifestyle expectations are rising, and because of the demographics of single-child families, their numbers are shrinking. If cheap labor isn’t dead in China, it is terminally ill.

In the coming decades, China will go from being “THE factory floor” to “A factory floor.” Many things will force that change – a shrinking pool of workers, growing local opportunities in services, tightening environmental regulations, and more expensive energy. The economics, in short, will change, and so must industrial China.

The Big Ones First

Manufacturers are facing a stark choice: raise prices, downsize, or automate. Raising prices isn’t an option in a Wal-Mart world where places like Malaysia, Bangladesh, Mexico, Eastern Europe and even parts of the U.S. are already offering competitive pricing. Downsizing only offers a short-term answer when economies of scale are driving manufacturing, and is really only an option for companies who can make the shift to higher value-added products.

Which leaves automation as the answer for large manufacturers, especially contract manufacturers like Foxconn, Flextronics, and Quanta. Unable to depend on masses of workers lining up at their gates willing to work for a modest daily wage, each is thinking long and hard about automation.

Robots Don’t Jump

Beyond rising wages, law and custom in China leave companies liable for a range of benefits. Robots, on the other hand, do not require the company to invest in the real estate for dorms, cafeterias, break rooms, and other facilities, enabling the company to utilize all of its floor space for production, logistics, and support. What is more, robots don’t get sick, charge overtime, demand bonuses, or require companies to pay the additional “social” costs to the state that it would be required to pay for each worker.

And equally important, robots don’t jump out of windows. The Foxcon story has proven that there is a perception liability that comes with a larger number of workers. Whether Foxconn has ten thousand workers or two million, a single suicide or accident affects hurts the company just as much. Statistically the likelihood of such incidents rises as the number of employees grows. The coverage given to the company’s HR troubles proves that more workers mean more problems, so the best approach from the company’s point of view is to hire fewer workers.

Not Just Tech

I talk a lot about Foxconn and the technology outsourcing firms, but they are not alone. The automobile industry is a global pioneer of robotics, and Chinese factories are increasing the number of robots they are using. The packaged foods sectors rely on automation.

It is fair to say, though, that every sector is considering automation. Until last June I lived about 400 meters from the Beijing International Exhibition Center, and in 2013 the second most popular trade show – right after the Beijing International Auto Show – was the production automation exhibition. That’s apocryphal, but it is telling, and industrial robotics is about to get very hot in China.

For Better or Worse

None of this is designed to pass moral judgment on automation. The social issues that surround the process are complex, and deserve a wider airing.

But it is safe to say that automation is the beginning of the end of The Factory Girl in China, and that this is a good thing. Having spent a lot of time in factories in this country, met some of the people on the floor, and having read Leslie Chang’s book and Alexandra Harney’s superb “The China Price,” it is hard to get sentimental about The Factory Girls passing from the scene.

For the first time in decades we now have more workers serving people than making things in China. As long as the economy keeps chugging ahead, China’s shrinking pool of young workers will have a wider scope of opportunities than their predecessors. The real question is whether China will provide these young people an opportunity to learn the skills they will need in a changing environment. Given the rigidity of the educational system, that’s an open question.

Even the most automated industries need people on the line. With respect to my friends in the software industry, there are some things that cannot be reduced to code. When it comes to quality, you cannot replace the human senses, especially a critical eye. Smart companies will reprogram robots to keep them flexible. And the best automated processes have humans watching at every step. But humans will need to improve their skills to be a part of that equation.

Whether automation works in an enterprise is a question of management. But the question of whether it will revitalize China’s economy and society or undermine them can only be answered in the realm of industry practice and government policy. The change is coming, and China’s leaders had best be ready.