“In the future, coding will be a core skill, not a specialization.”
— Why I am learning Python at the age of 49
“In the future, coding will be a core skill, not a specialization.”
— Why I am learning Python at the age of 49
Near People’s Square, Shanghai
Skyline in Silhouette
Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.
One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.
But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.
From Buy to Make
Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.
The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.
China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.
By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”
By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.
Innovation, however, remained a challenge. While a handful of local tech companies – notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.
Enter the Innovation Platforms
And there it remains today.
This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.
Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:
Significant – The core innovation is a genuine advance that is both useful and relevant;
Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;
Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;
Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.
Supported - Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.
Early Innovation Platforms
Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.
But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:
The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;
The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;
Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.
Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.
Platforms for the Future
In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.
But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.
For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.
But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.
The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?
I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.
Blue Moon and Justified
When challenged to come up with examples of innovative Chinese companies – or those that might start innovating soon – many of us are hard-pressed to come up with names beyond the obvious Tencent, Huawei, and Lenovo. To help remedy this, and to make a balanced case for China as an innovator, I am going to start highlighting select Chinese companies that I believe are moving in that direction.
One company to keep on the radar is Hisilicon. Formerly Huawei’s application-specific chip (ASIC) division, Hisilicon has developed a system-on-a-chip (SOC) product line designed for mobile devices. The recent announcement that Huawei will be using Hisilicon chips in its upcoming flagship Ascend P7 mobile phone offers no surprise – on the surface. In fact, a skeptic might suggest that Hisense winning a spot on a a Huawei device is so much internal self-dealing.
The skeptic would be only half right. Huawei’s mobile device team are a loyal bunch, but the company’s leaders are no idiots. To risk the company’s tenuous reputation among consumers in an insanely competitive market merely to engage in some gratuitous dogfooding is uncharacteristic of the firm. Something else is going on, and it is likely that Hisilicon is sneaking up on the better-known MicroTek in its ability to provide the processing power for complex smartphones. If that is the case, Hisilicon is about to pop onto the radars of both Qualcomm and Intel as well.
Before we add Hisilicon to the ranks of mobile chip powerhouses, however, we need to add an important caveat. It makes good sense for Huawei to buy from Hisilicon if it can, but it probably does not make as much sense for other manufacturers. Putting a chip into a phone design involves more than just buying processors off the shelf and sticking them on a printed circuit board. Smartphone testing and development demands close cooperation between component providers, essentially letting everyone in the process into a lot of proprietary secrets.
If I were a smartphone manufacturer, I would look at Hisense SOCs in the same way that I would look at Samsung memory: whatever the virtues of the silicon, I am giving my competitor a close-up look at my mojo. In a world where Samsung and Huawei are pulling out all stops to lead the smartphone business, that’s writing an invitation to my own funeral.
So that is why I am watching Hisilicon. The technical capabilities are growing to the point where the company is likely to become a nexus of innovation, but the commercial challenges it faces are interesting indeed.
“Mobile Advertising Lags China’s Smartphone Explosion“
January 24, 2014
Reporting from Shanghai, AdAge‘s Angela Doland writes a thought-provoking piece on how mobile e-commerce continues to outpace the growth of mobile advertising in the world’s largest smartphone market. As a percentage of all e-commerce, mobile is creeping into the double-digits, reaching as much as 21% during major holiday promotions.
At the same time, after years of effort, the most optimistic projections would have mobile advertising reach 3% of total ad spend in China this year. Given that Chinese users spend some 40% of their media consumption time staring at their mobile screens, you can understand the frustration of the advertisers.
Mobile Advertising Done Right
On the one hand, this trend should not surprise us. History teaches that effective advertising techniques for any new medium emerge only after an often extended period of trial and error. E-commerce initially grew much more quickly as a percentage of Internet-based revenues than advertising, and advertising was slow to find purchase in print news, radio, and television.
What this suggests is that the problem is not whether advertising can be adapted to mobile. The problem, rather, is that advertisers have yet to find an approach that makes the channel compelling.
Mobile Ad 1.0
There are three ways to approach mobile advertising. The first is to approach it as another channel for online advertising. This is where you talk about text-based advertising, display banners sized for the mobile screen, mobile search-based advertising, and ways to insert clever ads into music, videos, books and games consumed on a phone or tablet. Let’s call this “Mobile Advertising 1.0.”
My experience is that this has been the common approach in China, but that the challenges involved in making it work across three carriers, a half-dozen operating systems, hundreds of devices, and thousands of apps have made it difficult to get economies of scale. This alone might, in fact, explain why we are yet at such low numbers. Would it be easier with one carrier, one phone, and one operating system? Indeed. But I suspect that is not the real problem.
Perhaps, instead, we are misunderstanding the channel, and need to rethink how we do things. Back in 2006, I was in the room when my friend and former client Ian Chapman-Banks explained to a Japanese reporter that the reason that mobile advertising was having so much trouble was that we had failed to understand the value proposition.
Mobile Ad 2.0
Ian’s point (and I am paraphrasing heavily here) was that advetising as we know it was based on reaching out to chunks of people with similar characteristics at a given point in time. Mobile, Ian noted, had the ability to enable us to deliver a specific message to a specific person at a specific location and specific time.
In other words, what was keeping mobile advertising from being effective was that we were not using what made it fundamentally better than mass media advertising. This is the first time in history that advertisers could reach a person of their choosing at the time and place of their choosing, and all advertisers seemed to worry about was where to stick the banner on a small mobile screen.
Mobile advertising would be effective, Ian implied, when we figured out a way to make these capabilities work for the advertiser. Clearly, we are still looking for that combination, yet given the speed with which mobile is evolving and the innate conservatism of the advertising industry, this should come as no surprise. The key was to experiment and to keep experimenting.
The Mobile Ad 2.0 argument, then, is that if we want to figure out how to make mobile work for the nearly 1 billion mobile users in China (not to mention the rest of the world,) we have to experiment. Ian, who at the time had a generous marketing budget at his disposal, had allocated 10% of it to what he called “R&D:” money to try new channels of advertising and marketing that would not be evaluated alongside traditional channels, but that were just there to make sure that when something new worked, the company would be ready to exploit it.
So we aren’t at Mobile Ad 2.0 yet, but if we stick with it, we will get there eventually.
Is there a Mobile Ad 3.0?
Late last year I wrote a post that summarized why there are a number of ways to approach social media, each of which is guided by the marketing or technology silo from which one has emerged: practitioners who come out of advertising see social media as an advertising medium; people who come out of direct marketing see it as a direct marketing channel; PR people see it as a means of delivering messages; and so on.
What is different with mobile is that, in part because the challenge in putting mobile to work is, at the moment, much more technically intensive, the companies, departments, and agencies playing in that field have been those with lots of money. In short, it has been the advertising people. For that reason, we tend to talk about mobile as an advertising platform.
That exposes an assumption that is not necessarily supported by the facts. Zooming out of our ad-focused myopia one step further, then, we have to ask this: does mobile marketing need to be advertising-based, or are we missing something?
It’s Mobile Marketing, Jim, But Not As We Know It
In addition to allowing us to target an individual based on habits, time, and location, mobile also allows us to engage that individual in a conversation at a specific time and place. Mobile market research is based on that premise, and some of the early results hae been promising. As long as market researchers do not bombard us to the point of insensitivity with intrusive polls, and provided that we make it worth someone’s while to respond (good information is never free), this is likely to be a fruitful channel for some time to come.
Mobile has great value for point-of-sale applications based on near-field technology that go beyond completion of a sale. I walk into a hotel, and I am already getting notes on Foursquare about specials in the coffee shop. That’s a good start: it would be better if those specials were relevant to my dietary needs (e.g., “hi, David! We have great vegetarian options for you today!”)
Or how about direct-response on demand? When driving from city to city, I could tell Google’s Waze app on my phone that I needed a Sinopec station, and it would tell me distance, directions, prices, and offer me a coupon for stopping in.
I could go on, but you get the point. If there is a Mobile 3.0, and I think there should be, the opportunity is to start from the targeted user’s wants, needs, location, situation, and time, and work backward to the advertiser. This demands an intermediary who can make the match, of course. That’s why I think services like Criteo are going to translate well into the mobile space, and, in the long run, so will Baidu and possibly Tencent. The real gold rush will be for those companies who have the mass of advertisers on the one hand and the mass of users on the other.
Hence, Baidu’s ongoing interest in mobile. IF there is a single Chinese company that should make mobile advertising 2.0 or 3.0 happen, Baidu is it.
No PR Playground
What I am still trying to figure out, though, is where public relations has room to play in mobile. I have heard a few ideas, but I don’t see anything compelling so far. Classic advertising and classic PR don’t yet have roles to play in mobile to the degree that advertising does with online and PR does with social.
Yet every time I sit down and watch another compelling mobile technology demonstration, I am reminded that the tools we are creating today will be hopelessly antiquated, irrelevant, or both in five years. At some point, we are going to figure out how to make a connection between a company and a mobile user work out well for everyone. But we aren’t there yet.
…to Michael Galeotto, who was kind enough to include Silicon Hutong in his list of worthy Chinese bridge blogs.
As he notes, and as readers will acknowledge, I don’t post here daily. I figure that my readers, like me, have lots to do and read in their lives, and I try to post here only when I have something to say that I figure is worth reading.
…and to you. For every article I post here, I still spike (reject) two others. I will continue to do that, because I figure it is the least I can do to thank you for eleven years of paying attention to this forum.
A quick note – in order to make this blog available to people in China without a VPN, I will be shifting servers in early April. If you are following siliconhutong.com, you should experience no change. But if you are following me through WordPress.com, please note that you will probably need to change your settings when I make the switch to a wordpress.org-based site.
Update: Added a link to Michael’s post.
The 50 Greatest Breakthroughs Since the Wheel
October 23, 2013
Doing book research (and shifting as much of it from my bookshelf to Evernote as possible), I came across this little gem that had escaped my attention while I was on the road last fall.
James Fallows turned to some experts to help him come up with the 50 greatest post-wheel innovations, and while each deserves a book – or at least a long chapter – the list is intriguing for several reasons. My favorite: counting the innovations that first came out of China.
From the top 50, they are:
Two points fascinated me. First was printing press showing up on top, and the fact that the article does not ascribe an origin to the invention. People who have studied the history of Chinese innovation understand that the movable-type printing press was invented in China by Bi Sheng some 400 years before Johannes Gutenberg and Laurens Janszoon Coster argued about who of the two of them was first. History will out, though, and China gets credit for the most important innovation since the wheel.
Speaking of wheels, a sort of honorable mention on the list goes to the wheel barrow, a simple device created in China that allows a man to move heavier loads than he can carry without the aid of an animal. And I always search these lists for acknowledgement for China’s invention of investment casting, a process that turned complex metalworking from a handicraft to a mass-production process.
But these are quibbles. The point that the article brings home is that China was once far more innovative than we – and, indeed, Chinese – give it credit. While taking credit for four great innovations, China deserves credit for at least five, and probably more.
The perpetual challenge, of course, is how to make it innovative again. And to that theme we shall return in due course.
Texas Hill Country
Doing Agronomy 101
The debate over genetically-modified crops is reaching the boiling point among Chinese policy-makers, and the past several months have witnessed a spate of media coverage on the issue suggesting that the two sides are taking their case public to try to sway the issue.
One would hope that the science will win out in the end, but in the meantime I am doing a deep-dive on the GMO issue to a) understand where the scientific consensus lies, beyond corporate positioning and activist FUD, b) understand China’s interests in the area, so that I can c) start making some calls as to where this will go in the region.
Which is important because where China falls on GMOs is critical to the special interests cheering from the sidelines on both sides. As a massive and growing consumer of the world’s agricultural products, a ruling by China on GMOs either way could determine the future of genetically-modified crops worldwide. Yet as an increasingly important exporter of processed food, China does not want to get too far ahead of the world on the issue.
There are a ton of superb, science-based resources on GMOs, and Dr. Cami Ryan at the University of Saskatchewan has compiled an incomparable list of those resources. Some are technical, but most are highly accessible even for those of us who haven’t taken a science class since our freshman year in college.
“Next-shoring: A CEO’s guide”
Katy George, Sree Ramaswamy, and Lou Rassey
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 ago. I 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.
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
Or, Top 10 Signs that Your Building Management Has Been Localized
Nursing the Party Secretary
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.
Somewhere near Bengbu
Riding the Rails
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.
North China Plain
On the G11 HST Harmony
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.
In the Hutong
Beijing Youth Politics College
China COSCO Holdings, parent company of China’s largest state-owned steamship company, has reported a return to net profit in 2013, thereby saving itself from delisting. It was not a turnaround in markets or management genius that engineered this seeming turnaround, but financial legerdemain.
Through a series of one-time transactions (it sold chunks of itself to its own parent company), the company is showing a positive bottom line. But things aren’t looking good for 2014, the company is running out of financial tricks, and slow recoveries in Europe and the United States are likely to combine with the companies huge capacity surplus to keep the firm a non-performer.
Waiting for Profits
As a state-owned enterprise, the company has the implicit backing of the government: COSCO can afford to wait for things to turn around, unlike global competitors like Maersk, Neptune Orient Line, Hanjin, Mitsui OSK, and Evergreen.
Government coffers are not bottomless, however, and there is no guarantee that a turnaround in the industry will be sufficient to suck up all of the extra tonnage COSCO has added in recent years. Companies are moving manufacturing of large, bulky items closer to markets, and COSCO’s overshoot on dry-bulk capacity (for carrying everything from wheat to iron ore) may leave new ships idle for a long time.
At some point, Beijing is likely to have to take ships off of COSCO’s hands, or at least remove them from the commercial market. The obvious choice would be to sell the oldest ships to ship breakers. Yet COSCO’s older ships have already been turned into scrap, leaving a fleet that is much younger than before.
And none of this addresses the growing ranks of costly thumb-twiddlers at China’s shipyards. It is hard to keep upgrade an industry when demand is imploding.
PLAN for it
In short, arrows continue to point in a direction we suggested a while ago. China’s navy needs ships of every type. China’s admirals would rather spend their precious cash on boats that shoot rather than boats that schlep, but they need both. COSCO’s surplus of capacity offers the government an opportunity to create an entity that provides full-time contract sealift to China’s armed services, something akin to the Military Sealift Command in the United States.
The spare dry-bulk carriers would probably not be much help: the cost of refitting these to accommodate troops or military cargo would probably not be far off the cost of purpose-built ships. Container and Roll-on/Roll-off vessels, on the other hand, could serve as pre-positioning ships for extended operations outside of Asia (to support China’s UN peacekeepers, for example), shuttle ships for China’s precious few underway replenishment vessels (that by definition need to stay close to their assigned battle groups), or as amphibious support ships.
A move like this seems inevitable, and when it happens it will quietly signal that the People’s Liberation Army Navy has matured, and is clearly thinking about how to start projecting power as well as how to prop up its struggling merchant fleet.
In the Hutong
Beijing Youth Politics College
A few weeks ago, we noted that the growing phenomenon of microfilms – motion pictures produced inexpensively with digital technology and distributed online – was becoming too popular to long avoid the attention of regulators.
Now, it appears, those regulations have come. As the Associated Press notes:
This week’s update of a two-year-old regulation on the supervision of online dramas and microfilms has raised fears of stifling creativity. The broadcast administration now requires content makers to register with their real names, production companies to obtain operating licenses and report their content before it is put online, and video-hosting companies to keep records of uploaded content.
This places microfilm producers in one of two boxes: they will either be legit, or they will go guerrilla, and if they do the latter, the best avenues of distribution will be closed to them. Of all of the regulations, the last is the kicker. Video hosting companies, who thrive because the government chooses not to look too closely at whether their most popular content has been approved for broadcast, will anxious to avoid antagonizing their regulator.
Depending on how stringent the regulations are and the spirit under which they are enforced, there are two likely outcomes to these regulations: a vastly larger and more creative film industry; or the world’s largest guerrilla film market. If the government simply uses the licensing regime to turn microfilms producers into legitimate small businesses, they create a tax base and the wherewithal to fill the digital pipeline with legitimate, local entertainment. They also take a step toward turning China into the global film powerhouse the government aches to create.
At first blush, this outcome seems unlikely: why regulate if you are trying to grow an industry? In China, though, because a business license is granted for one or more specific activities, the act of regulation actually creates a channel to legitimize a business, and thus afford it the ability to operate above board. Further, if the government only requires “reporting” of content and not approval prior to posting, this alone represents a major step for filmmakers.
Even under such a regime, the government will continue order the removal of any film that steps beyond the bounds of Party propriety into forbidden topics or prurient content. That door of control remains open to them, as it is today.
If, on the other hand, the government is niggardly with microfilm licenses, or if it lays upon producers onerous approval requirements as a part of the reporting process, the result will be a community of guerrilla filmmakers and sites that distribute their works. At that point, there will be no regulating the content, and filmmakers will feel free to take on even themes that would discomfit the party.
Under a draconian implementation of these laws, distribution will not stop: it is, actually, easy to envision people sharing forbidden films via email, torrent, thumb drive or other means, from person to person, much as samizdat literature did in the Soviet Union during its final decades.
The rational choice seems to call for a robust, regulated film business that builds China’s soft power and draws its eyeballs away from foreign content. We will know within six months how this will all shake out.
“The small American businessman has long complained about how difficult it is for him to survive in the competition with the large American corporation,” [Walter] Lippmann warned. “What will he do when he has to face the competition of totalitarian monopoly organized on a continental scale?”
Alan Brinkley The Publisher: Henry Luce and His American Century
Lippmann was talking about the Soviet Union at the time, but his words do resonate today.
Happy New Year, everyone, from Silicon Hutong.