Competitive Advantage

When one think of China, her competitive advantage on providing low cost manufacturing usually comes into mind. Others will think of her Great Wall, culture and food. For past two decades, the Chinese Price is a formidable phenomenon that delights the buyers and consumers while probably cause detestable reaction from the workers in the western industrialized countries.

I can empathize the distraught feeling towards the impact on low cost manufacturing from China. I remember my aunt who is from China came to visit me in Singapore in 1986 and would like me to go to China to assist them to beef up their manufacturing capability. I politely turned down her offer as I was having a good job and life in Singapore then. Nine years later while I was working in a high tech computer peripheral company, a product was transferred to China for manufacturing because the total cost is US$0.50 cheaper than in Singapore. The product cost was US$46! Never have I thought that I would end up here in China since 1997 because Singapore is no longer a manufacturing base.  I am not sure how long I have to stay in China.

The Singapore operators had lower education compared to the Chinese, who were at least junior high school educated, in the MNC factories. The higher education and younger age provide them the ability to learn fast and agile. 

The cheap goods from China remind me of Japan, Korea and Taiwan. In the 1960s and 1970s, Japanese goods were known to be cheap and of poor quality. I remember vividly as a teenager in 1970s, branded goods were non-Japanese made and were produced in the West. So were the goods from Korea and Taiwan in the 1980s. I saw an advertisement during my trip to US in mid 1980s, that for the price of one Ford car, you can buy two Hyundai cars – one to drive to work and another to drive home. Now no one doubt about the quality and reliability of these products. And their price is no longer very cheap.

Will China follow the same path of development? I am sure she will as this is natural law of evolution. But because of her sheer size, it will take longer time for us to detect the change. The sweatshops or mom & pa factories are still there slogging long working hours with the minuscule profit churning out goods to be sold in the big discount mega chains in the Western countries. These factories could not raise their price as the buyers would just go to next door to procure. 

I usually feel pathetic towards the workers in such harsh and horrible working environment. Safety measures are not in place and many of them have to endure the exploitation from the employers who are trying to squeeze every penny to meet their customers’ target price. Worse still, the people and the country are paying the high price through poor health, loss of family members due to work related accidence or hazards, environmental pollution, etc. Isn’t this similar to the Minamata disease (mercury poisoning) in Japan during the late 1950s?

The sweatshops are moving inland due to higher operating cost, stricter government monitoring, higher wages and land cost in the coastal cities. As long as there are consumers who want to buy cheap goods, there will be manufacturers willing to provide. Hence the Chinese Price will continue to dominate the low price merchandized goods globally.

The current economic crisis is taking a grave toll to many enterprises regardless whether it is a big or small company. Thousands of them have gone bankrupt. However knowing the perseverance and resourcefulness of the Chinese entrepreneurs, I am sure many of them will spring back to life when the crisis is over. Many of those who survive the ordeal and the new starters will not operate the sweatshops like they did before. The reasons are as follows:

1.      The mass media and Internet have been exposing the horrendous situation at work sites, ill treatments by the employers, conspiracy between local government official and entrepreneurs to exploit the workers and country, corruptions, unethical practices, etc. This civil monitoring has prevented many companies from attempting to take the malice path.

2.    The extreme immoral disregard about the environment and caused noxious pollution is no longer tolerable by the people and the government. The government is now fully aware of the consequences of the pollution in terms of live loss, humongous cost to clean up, long lasting stigma and high medical cost of those infected. And most effectively, the local government officials either lose their jobs or being prosecuted together with the factory owners. Many companies are denied license to operate if they are found flouting the environmental controls. This is beginning to happen in the inland provinces as well. A good step to start with!

3.    The continuous effort by the central government to fight corruption is showing some results. Hence many of the unlawful and unethical practices found in the factories are beginning to diminish. Many folks may not agree with me due to the presence of rampant corruption in view. However if you were here in 1990s when the government officials openly accepting bribes and now they have to do it deviously behind closed doors, would agree with me. I will talk more about corruption in my next blog post.

4.    The Chinese government has been implementing new or amended legislations and policies regularly to address the inadequate control system. It helps to bring the country in line with the global general practices. Inspectors and auditors are sent to ensure conformance to the new rulings. Many malpractices are being curbed or stopped. The prosecution of the offenders has an intimidating effect on others that they need to follow the law.

5.    The young generation growth is slowing due to the one-child policy. The population is aging fast and the factory is not going to have an eternal abundant supply of young workforce. The younger generation is better educated and has higher expectation. They are not going to be like their parents working long hours in a dim lighted and dirty shop floor.

6.    Operating cost at the coastal cities is rising rapidly. Land and building cost have risen with the property bubble inflating. They now have to implement proper process and quality control system.

7.    The entrepreneurs have learned to say no to their customers on cost reduction. Previously they are not good at accounting and agreed to the price from the customers thinking that they would make some profit. “If my competitor sells at X dollars, I am sure I can do it in less than X dollars” was the common mindset. After some years of operation, they know the cost structure better and would not agree with the price or cost reduction if they are not making a reasonable profit. Some of the entrepreneurs have diverted their investment into stock and property speculation for higher return. The bosses are being preoccupied with stock indices instead of the issues on production floors. This is one of the factors causing the bubbles right now.

With the above control measures, many sweatshops have learned (or forced) to operate in an appropriate manner. Though there are still many factories hiding in the remote corner operating the old ways, I am confident they would eventually be wiped out. Not in the next ten years but would happen in the following decade. Thus the Chinese Price is not going to be cheaper but would reflect the real cost obtained by the shrewdness and resourcefulness of the entrepreneurs who cannot afford to pollute the environment and exploiting the workers anymore.

We have been overwhelmed with these low price merchandize that we have missed out the subtle change that China is embarking on high-tech and high cost products. She has received huge orders for her maiden passenger jet (C919) to be delivered in the next couple of years. With the collaboration from foreign companies, she is producing high end computers, electronic and electrical goods and gadgets, cars, industrial equipments, etc. Her high-speed train is now zooming in some countries already.

Twenty five years ago during the height of Japanese dominance in the global market, I read an article by a western journalist that Asians were innovative and no way creative like the Caucasians. This is because of the way Asians were brought up and educated. Culturally they were submissive and lacked the questioning mind to ponder. I kept that belief until some years ago. I had visited many historical sites and museums and saw the engineering feats and inventions that were awesome. I read the books, “1421” and “1434” by Gavin Menzies where he illustrated the breathtaking journeys of the Chinese voyagers and the Chinese inventions at that time. I am convinced that Asians (Chinese, Indians, Japanese, Koreans, and yes including Singapore) are also creative too. I have learned a lot more of my race now and proud of it.

The Chinese has new found pride and self confidence in them. I had talked to two senior executives from two different large MNCs. Both had the opportunity to visit Singapore on many trips throughout 1990s. In the early 1990s, they felt Singapore was awesome and many years ahead of China in terms of living standards, modernization and industrialization. In the mid 1990s, their admiration had withered and believed they were on par with us. And at the turn of the millennium, they would not want to come to Singapore as they saw their Shanghai city had more to offer than our tiny island. And this quick mindset change is awe-inspiring, isn’t it? They no longer accept the bias criticism from the West and would fight for their dignity and rights. The recent demonstrations of the Chinese students in Western countries to protest unjust treatment towards China are good illustration.

Hence we need to understand that the new generation in China is more intelligent, better educated, proud to be a Chinese and still hard working to achieve their career goals. This is the strategic leverage that China could use to maintain her competitive advantage.

The competitive advantage of China is no longer just cheap goods. They will keep some low cost manufacturing to feed the huge population and pass the rest of the sweatshops to the third world countries. The price is not going to be cheap but it would be competitive that not many countries could match. The strong supply chain that has been developed in the industry is not easily emulated by another country.

China attempt in the high technology products is yielding results and has appeared in the market in modest form. With the new found wealth, drive and intelligence of her workforce, she will dominate the market with automobiles, electronics, high-tech industrial equipment and probably advanced military hardware. 

This create a unique scenario where she posses two contrary competitive advantages at the same time. A world manufacturing base that produces cheap merchandized goods and high tech products.  By then she is a formidable force to be reckon with.

China is no longer relying on low cost manufacturing as the only competitive advantage to dominate the global market. What is happening now in China is mindboggling.

Posted on 13 Sep 2009