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Does the Peri minicar (left), built by China's GreatWall Motor, look remarkably similar to the Fiat Panda (right)?
A Turin court was in no doubt last month when it barred the Peri from being sold in the E.U., after an appeal by Fiat. Yet unsurprisingly, Great Wall Motor was able to shrug off the Italian court's decision, because a few days later a Chinese court dismissed the claim filed by Fiat in China alleging the GWPeri model was an infringement of its patent.
The Peri/Panda case is by no means the first claim of imitation against Chinese auto makers. In 2006 The Times described at length how the likes of General Motors, Rolls-Royce, BMW, DaimlerChrysler, Honda, Audi, Nissan, Toyota and Mercedes-Benz have all had to fend off a so-called attack of the clones from Chinese manufacturers like Chery, Shuanghuan, Hongqi, Geely and JiangLing. Some analysts have even concluded that Western manufacturers have to accept copying as part of the price of doing business in China, like Honda concluded when it lost half of its motorcycle manufacturing market share in China to cheaper Chinese immitations. Staying in China, Honda decided, required entering into partnership with some of the very companies copying its bikes.
Yet with the steady growth of the Chinese car market, China is no longer producing just lower-value clones. Chinese brands have grown to the point that 57% of all vehicles sold in China in 2006 were from local manufacturers, and in March 2006 Chery Automobile became the first Chinese auto maker to top the domestic car sales list. To actually break in to markets overseas, however, and to overcome their disadvantages in product and business model innovation and manufacturing quality, Chinese car makers have to make a quantum leap across the automotive value chain, enhance quality standards while developing unique models. While positioning itself for exports, Chery has been co-operating with global design and engineering experts and is now boosting exports to markets such as Egypt, Italy and Russia.
For many years regarded as low-end, unreliable brands, Chinese auto manufacturing is experiencing a gradual coming of age with the global emergence of Chery, and with the growth of the market in China and government encouragement of R&D, China will gradually lose its knack for manufacturing cheap clones.
Additional sources:
China. An Automotive Industry on the Verge (Accenture)
Shaping the Future of China's Auto Industry (McKinsey)
Foreign Technology in China's Automobile Industry (China Environment Series)
Images:
http://blogs.automobilemag.com (Panda)
http://www.cnnauto.com (Peri)
Changes in labor organization and regulation in China are providing a unique perspective on China's systematic move up the production ladder and its embrace of higher-skilled industries.In a landmark agreement, employees of a Wal-Mart outlet in Shenyang, capital of Liaoning Province in northeastern China, last week signed a collective labor contract with the retailing giant. Under the agreement, employees' salaries will be raised by an annual rate of 8 percent in 2008 and 2009, and standards for minimum pay, paid vacation, social security and overtime pay were agreed to. The International Labor Rights Fund (ILRF) Blog has hailed the contract as a stepping stone for Walmart's ongoing labor organizing efforts in China (as well as for its influence on the All China Federation of Trade Unions), the successes and challenges of which China Labor News Translations have been documenting at length.
The ILRF Blog has pointed to draft labor regulations proclaimed in Shenzhen in June as evidence of the persisting trend towards collective bargaining and legislation in China; and this trend, in turn, as an indication of China's growing conviction that it must move up the production ladder, focusing on higher-skilled industries - or be stuck forever competing with its poorest neighbors for the cheapest manufacturing orders.
The IHLO (Hong Kong Liaison Office for the international trade union movement) in June investigated the impact of the Labor Contract Law in the preceding six months of implementation, and concluded that the real impact of the new law has not been its negligible overall impact on labor costs, but rather the way it makes it harder for companies to avoid paying benefits to their employees or to circumvent implementing existing labor legislation. And this encapsulates government policies aimed at transforming China's traditional reliance on low-cost labour and labour-intensive industries to the development of higher-value industries. This process requires companies to invest in employee training, and makes it harder to routinely flout labor regulations. With such incremental developments, the organizational and regulatory outlook for labor in China provides ongoing insight into more long term transformations in the Chinese economy.
(Image: Wal-Martwatch)
Chen Weiliang, President of Foxconn International, Taiwan's biggest company and the largest contract manufacturer of electronics worldwide, last week announced that the company will be moving its factories from Shenzhen to northern Chinese provinces such as Hebei and Shanxi, where the average salary is more than 60% lower than in Shenzhen. In addition, Chen said Foxconn will be opening new factories in low-cost markets like Hungary and India to reduce the pressure caused by cost increases.
Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.
China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design.
While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.
Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.
Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.
China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design.
While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.
Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.
I could not help being somewhat sidetracked this week by unprecedented political events in the U.S. as Barack Obama became the presidential nominee for the Democratic Party. Conducting his campaign with a message of substantial change, Barack Obama has also indicated a desire to engage more constructively with China. China Dialogue recently compared and analyzed the policies of both presidential candidates on climate change, and has republished in full Obama's speech from late May setting out his vision for a new energy future. Bemoaning the U.S.' failure to lead on climate change and its struggling to stay relevant in the debate, Obama noted that already some coal pollution from China's dirty plants is making its way to California, and in an effort to curb China's carbon emissions, he promised thatObama's willingness to more readily share technology and innovations with China resonates with the approach adopted by German chemicals manufacturer BASF, which is finalizing plans for an ambitious joint venture in Nanjing with China energy group Sinopec in which the latter is set to receive $900m in investment to boost output by 25% over the next three years. Martin Brudermuller, head of BASF's Asia activities, told FT.com that the Nanjing operation willas we develop new forms of clean energy at home, we will share our technology and innovations with all the rest of the world. If we can build a clean coal plant in America, China should be able to as well.
According to Brudermuller, such an approach is required as China's economy starts to mature. Yet BASF's strategy in China is part of a current wider phenomenon as China goes through (as the FT.com article puts it) a more subtle phase:aim to gain expertise in combining China's famed low cost
with the development of new design and production skills. If all goes to plan, this will involve importing ideas from BASF's operations around the world and linking these with concepts developed by BASF's 6,000-strong staff in China.
The article goes on to cite Jimmy Hexter, a director at the Beijing office of the McKinsey strategy company, who claimed that the greatest commercial rewards will be reaped by companies who are able to optimally utilize networking approaches that link different groups in different countries.Known for its rapid progress to become the world's joint-second most productive manufacturing region, China...is becoming a giant test bed for manufacturing ideas, building on its existing strengths in low-cost production by using the efforts of engineers and developers not just in China but from around the world.
The growing imperative for networking and collaboration in global supply chains has also been emphasized in a new report and supply chain model, Future Supply Chain 2016, published by the Global Commerce Initiative and consulting firm Capgemini. Citing the new report, Sustainable Life Media outlined the best way companies can redesign their supply chains for maximum efficiency:
Cooperation in the form of information sharing and collaborative warehousing and distribution, the report found, can offer efficiencies that companies simply cannot achieve on their own.The coming years will see a new era for industry collaboration, which will become an important factor for future success...Some business areas that are now considered to be core differentiators may well become candidates for collaboration with competitors.
While China remains gripped in the traumatic aftermath of the devastating Sichuan earthquake that have juxtaposed extreme tragedy and national outpourings of grief with heroism and sheer determination to save more lives, the economic impact of the quake is largely regarded as limited. While an important producer of agricultural products, Sichuan comprises about 4% of China's GDP production and most of the province's developed areas were left largely undamaged. Chinese government sources estimated the quake to have affected 14,207 industrial companies, however, which may have incurred losses of 67 billion yuan, equal to about 0.5% of China's GDP for 2007. State-owned enterprises are estimated to have incurred losses of about 30 billion yuan, and around 3,000 employees of these companies are injured, dead or missing. As such the quake is expected to rather aggravate inflation than impede economic growth, and the loss of farm output in Sichuan will impact already tight supplies of rice and pork. Anticipating more upward pressure on prices, Premier Wen Jiabao this week described the quake's impact as uncertain, and of immediate concern is the formidable challenge of sheltering close to 5 million residents left homeless in Sichuan. Yet coupled with the effects of a mature industrial base and the new labor law, the quake could amount to what David Dayton at Silk Road Blog calls a perfect storm of price increases, and production costs from most of China's east coast relying on cheap labor from other provinces will be directly affected.
Yet while the quake is a human tragedy more than an economic one, much of the uncertainty rests on the potential impact on China's energy infrastructure and raw materials supply. The Green Leap Forward has put together a posting on the quake's impact on energy in Sichuan, which is a major onshore gas producer and China's largest hydropower generating region. Sichuan's electricity grid is reportedly running at 76% of pre-quake levels with 27 power stations shuttered, and 22 coal mines in Sichuan, Chongqing and Gansu were also affected by the quake. Furthermore, the operations of Dongfang Turbine, which produces 30% of China's locally made turbines (and is also the third largest domestic manufacturer of wind turbines), were virtually wiped out. In addition, with 391 dams believed badly damaged by the quake, the Water Resources Ministry has acknowledged major safety issues with reservoirs, hydropower stations and lakes. Earlier this year, the deputy minister of Water Resources admitted that roughly 37,000 of the country's 87,000 dams are in a dangerous state.
For a fare twenty time more expensive than the ordinary fee, a five-star hotel on wheels will from September this year offer the most luxurious train in the world for the journey between Beijing and Lhasa, complete with a sightseeing car to take in the view on the 'roof of the world.' A few more affluent visitors might well be useful, because according to an evaluation of comprehensive economic competitiveness among China's 31 provincial-level administrative regions in 2006 (released this week by China's Overall Economic Competitiveness Research Center), Tibet finds itself at the bottom of the list, along with other western provinces like Xinjiang, Yunnan and Gansu. Topping the list is highflier Shanghai (with the bad luck that it might find itself inundated by ocean water by 2050 when global temperatures are expected to rise by 2 degrees), where residents have recently been competing very effectively to induce the local government to delay construction of an electromagnetic train line until next year. FT.com reports on mass protests by residents whose flats are situated near the planned track as becoming an important test of the potential for political activism among the new middle class, especially residents of the wealthier cities who have acquired their own property. For all their efforts, the people of Shanghai may soon be able to indulge in Asia's third Disneyland as the city's mayor this week announced plans to build the theme park right in Pudong - the cradle of China's reform-era industrial leap.
The arrival of the full Disney cast in Pudong forms a poignant juxtaposition with Nanjie village in Henan, China's so-called utopian communist village (where workers supposedly go to the factories as equals every morning to the tune of "The East is Red"), and Dazhai village in Shanxi, home of the famous 'Dazhai spirit' of self-reliance and selfless devotion, later renounced during the Cultural Revolution and now a renowned patriotic tourist destination with its own brand name and newly-built Buddhist Temple. No such luch for Nanjie, though. Global Voices Online translates a review by Chinese blogger Xiong Peiyun, declaring the 'Nanjie myth' to the 'broken' and the model village utterly bankrupt. When village director Wang Jinzhing died in 2003, according to Xiong, a full 20 million Yuan was found tucked away in his office.
The obvious gap in access to wealth and instances of corruption have made inequality a serious topic in China. While not supposed to make important decisions, China's National People's Congress (currently in the midst of its annual session) can illustrate the government's two main policy concerns for 2008 which, according to FT.com, consists of taming inflation (which hit a 12-year high of 8.7% in February) and improving the workings of the central government to better facilitate protecting the environment (see Washington Post's article on supposedly green solar energy firms leaving waste behind in China, where the push to get into the solar energy market is having unexpected consequences) and reducing inequality. Thus in order to bypass provincial leaders able to flout the will of the center, plans are afoot to establish a number of 'super-ministries' with increased powers, despite the fierce rivalries anticipated in the streamlining process.
In addressing inequality in China there is clearly (as the President of China Merchant Bank told the People's Daily last week there to be for rural financing in China) "large room for improvement". A World Bank report released this year entitled Migrant Opportunity and the Educational Attainment of Youth in Rural China illustrated the entrenched challenges affecting the social mobility of migrant laborers, an important cog in China's economic transition.
As yesteryear's model villages Nanjie and Dazhai make way for the dream world of Disneyland in Pudong, its obvious that many in China will happily go relish the arrival of Mickey and Goofy - and many others will never make it there.
Yet with people like Liu Xiufang around, an 80-year-old woman from a village in Fujian province who (the Shanghai Daily recounts) lives on 10 Yuan a day and has donated more than four million yuan to charity and public welfare over the past 20 years, it is interesting to think whether China's growing affluent class can learn something from her, as she probably did from Dazhai.
The arrival of the full Disney cast in Pudong forms a poignant juxtaposition with Nanjie village in Henan, China's so-called utopian communist village (where workers supposedly go to the factories as equals every morning to the tune of "The East is Red"), and Dazhai village in Shanxi, home of the famous 'Dazhai spirit' of self-reliance and selfless devotion, later renounced during the Cultural Revolution and now a renowned patriotic tourist destination with its own brand name and newly-built Buddhist Temple. No such luch for Nanjie, though. Global Voices Online translates a review by Chinese blogger Xiong Peiyun, declaring the 'Nanjie myth' to the 'broken' and the model village utterly bankrupt. When village director Wang Jinzhing died in 2003, according to Xiong, a full 20 million Yuan was found tucked away in his office.
The obvious gap in access to wealth and instances of corruption have made inequality a serious topic in China. While not supposed to make important decisions, China's National People's Congress (currently in the midst of its annual session) can illustrate the government's two main policy concerns for 2008 which, according to FT.com, consists of taming inflation (which hit a 12-year high of 8.7% in February) and improving the workings of the central government to better facilitate protecting the environment (see Washington Post's article on supposedly green solar energy firms leaving waste behind in China, where the push to get into the solar energy market is having unexpected consequences) and reducing inequality. Thus in order to bypass provincial leaders able to flout the will of the center, plans are afoot to establish a number of 'super-ministries' with increased powers, despite the fierce rivalries anticipated in the streamlining process.
In addressing inequality in China there is clearly (as the President of China Merchant Bank told the People's Daily last week there to be for rural financing in China) "large room for improvement". A World Bank report released this year entitled Migrant Opportunity and the Educational Attainment of Youth in Rural China illustrated the entrenched challenges affecting the social mobility of migrant laborers, an important cog in China's economic transition.
For the 324 Chinese companies listed on China's two stock exchanges who have filed their annual reports for 2007, however, profits have nearly doubled compared with that of 2006. And as an indication of future prospects for Chinese industrial growth and profit, a survey of 2,000 U.S. consumers conducted in 2007 by market research firm GfK Roper found that Chinese products are regarded as being inferior only to American goods, and in terms of prestige products from China are held in higher regard than those of Canada, South Korea and any other developing country.While the opportunity to migrate has raised living standards in many rural areas of China, access to migrant employment appears to create a disincentive for continued increases in educational attainment levels among rural youth... For most individuals in rural areas, the decision not to attend high school is irreversible. When large numbers of families opt out of educational investments in favor of the relatively attractive migrant wage available to middle school graduates, the effectively resign themselves to the long-term prospect of earning considerably less than urban youth, nearly all of whom graduate from high school and who are enrolling in college in greater numbers. The decision not to enroll in further schooling increases the likely gap in the lifetime earning ability of a rural child relative to an urban child, and may therefore contribute to increases in inequality, at least for one generation, within urban areas after migration occurs.
As yesteryear's model villages Nanjie and Dazhai make way for the dream world of Disneyland in Pudong, its obvious that many in China will happily go relish the arrival of Mickey and Goofy - and many others will never make it there.
Yet with people like Liu Xiufang around, an 80-year-old woman from a village in Fujian province who (the Shanghai Daily recounts) lives on 10 Yuan a day and has donated more than four million yuan to charity and public welfare over the past 20 years, it is interesting to think whether China's growing affluent class can learn something from her, as she probably did from Dazhai.
Less enthusiastic job-hunters turned up at Guangzhou, capital of Guangdong, for the city's first labor fair after the beginning of the lunar year. From China Daily,
Yet trade unions and government officials in Guangdong have pointed out that wages in Guangzhou have failed to keep up with inflation and the overall growth rate of industrial output, and need to be increased further. Does this mean, the China Labour Bulletin wonders,
Some workers in Guangzhou, however, are wondering whether their jobs are even worth it. From Tim Johnson at China Rises (blocked on mainland China), three U.S. researchers who spent time querying 634 factory workers outside Guangzhou railway station before the spring festival found underlying concerns not only about low wages and poor working conditions but also about whether it was worth the effort at all. Suppliers desperately need to improve job satisfaction in China, the researchers concluded (I noticed though seemingly universally disparaging comments on the China Rises site to the research mentioned in the posting).
A recent article from AP (via Herald Tribune, see also China Law Blog's downplaying response) suggests that, due to pressures of regulation and rising costs for energy, materials and labor, China's economy is set to lose its claim on cheapness. Similar echoes from Frank Langfitt at NPR outlining the pressures faced by shoe, furniture and other manufacturers and smaller factories generally in China, and FT.com about the plight of Changdeng Shoe Company in Guangdong, whose company compound recently became a ghost town as the company folded in the face of
It is clear that capitalism, the CEB posting infers,
- which really disappointed employers who could only raise their salary standards 13% (on average to 1,160 yuan or $155 a month) compared to previous years. (Come to think of it, this is almost exactly how much I receive as monthly stipend as a scholarship student in China)....the job-seekers gathered there appeared not be as enthusiastic as their counterparts of years past. For the first time, the number of job-hunters fell far short of the number of vacancies advertised at the fair: 4,000 versus 7,000...
Yet trade unions and government officials in Guangdong have pointed out that wages in Guangzhou have failed to keep up with inflation and the overall growth rate of industrial output, and need to be increased further. Does this mean, the China Labour Bulletin wonders,
Yet only time will tell, they conclude, as the actions of trade unions over the coming years will indicate whether developing collective bargaining at the grassroots level will make enterprise-level unions genuine representatives of workers' rights.that Guangdong's trade union and labour officials are now determined to take their responsibilities seriously, and defend the rights and interests of workers in the province? Crucially, Guangdong union officials have now acknowledged that the most effective way to protect wage levels and ensure regular payment is through direct negotiations between labour and management.
Some workers in Guangzhou, however, are wondering whether their jobs are even worth it. From Tim Johnson at China Rises (blocked on mainland China), three U.S. researchers who spent time querying 634 factory workers outside Guangzhou railway station before the spring festival found underlying concerns not only about low wages and poor working conditions but also about whether it was worth the effort at all. Suppliers desperately need to improve job satisfaction in China, the researchers concluded (I noticed though seemingly universally disparaging comments on the China Rises site to the research mentioned in the posting).
A recent article from AP (via Herald Tribune, see also China Law Blog's downplaying response) suggests that, due to pressures of regulation and rising costs for energy, materials and labor, China's economy is set to lose its claim on cheapness. Similar echoes from Frank Langfitt at NPR outlining the pressures faced by shoe, furniture and other manufacturers and smaller factories generally in China, and FT.com about the plight of Changdeng Shoe Company in Guangdong, whose company compound recently became a ghost town as the company folded in the face of
Lastly, some hyperbole from the China Economics Blog (blocked on mainland) who quotes an article from the Peterson Institute claiming that, without anyone noticing, the capitalists have upended the People's Republic by effecting a significant redistribution of income away from workers. This might be, they say, the mother of all redistributions. According to a few Berkeley economists, between 2002 and 2005 the share of economic output going to workers decreased by about 8 percentage points, from about 50% of GDP to 42%....a survival-of-the-fittest struggle affecting primarily smaller factories in relatively low-tech, labour-intensive industries...
It is clear that capitalism, the CEB posting infers,
I myself am overjoyed that it seems we might be in for a nice mild spring in the north of China this year round.now has China in its icy grip.
THE issue of 2007 must have been Quality Fade. A huge proportion of last year's China-related media coverage and all the consequent spats and convulsions flowed from some lead-painted toy, toxic pet food or other faulty products that had the label Made in China on them.
And the random reduction in quality of some Chinese products, which the whole world uses...(except probably soon for Martin Richenhangen, whose leading tractor-making company has been consistently prevented by Beijing from attaining a majority stake in a Chinese state-controlled company. From FT.com, Richenhangen slammed Chinese manufacturing for, among other things, its obsessive copying of other companies and for not working hard enough) ...fosters a sense of foreboding about the quality of future supplies, which could at any time fall prey to short-term planning by Chinese factories.
What makes the phenomenon of Quality Fade so interesting is the seeming deliberate malfeasance inherent in the process, and how this illuminates the interplay of economic conditions in China. The term was coined last year in the wake of a host of product quality issues by Paul Midler (audio interview at China Talk Radio here) who described it as the deliberate and secret habit of widening profit margins through a reduction in the quality of materials...(W)ith each successive production run, a but more of the necessary inputs are missing. Seeking cost savings, suppliers push the limits until they are caught, or until disaster strikes. As manufacturers in China are subject to a government able to act without restraint or controversy, factories operate with a sense of urgency, hence they have become excellent at the 'short game' to compete at the lowest prices in order to ensure profitability over the short term.
Midler's views elicited a host of responses. While acknowledging quality fade as a problem in China (telling his customers that the fade usually sets in with the fourth shipment), Dan Harris at the China Law Blog saw a less gloomy outlook as the product situation in China is slowly improving and will continue to do so as China's economy evolves. Quality fade is driven by economics, he argued, and occurs in order for Chinese manufacturers simply to survive for a few more months in the face of currency re-evaluation, competition, tax reform and the end of VAT rebates. In addition, much of what is described as Quality Fade Harris sees as inevitable odd mistakes resulting from the increase in products produced in China, and instances of bad products are by no means confined only to China, despite that the media have created a frenzy about faulty products sourced from China.
At Smart China Sourcing, David Dayton recently outlined two types of Quality Fade, the willfully dishonest variety described by Midler, and a more common 'natural' quality fade over time, the result of an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments, and so forth. Yet ultimate responsibility for ensuring product quality, Dayton argued, lies with the buyer to remain diligent in maintaining quality control. Importers are often hypnotized by the opportunity and hospitality offered by China, and under the China sourcing spell, we too often check our good sense at the door.
Quality Fade starts with the supplier, Dayton posits, but ultimately has to stop with the buyer, who holds the final responsibility. A straightforward solution to either type of Quality Fade is to hire third-party inspectors, who should catch many of the problems. Another solution is to build your own production facility and hire and train your own staff, although this could take years and a lot of money. Yet the bottom line is, according to Dayton, at some point you must have a degree of trust with your supplier... Trust but verify is excellent advice, but verification will never be 100 percent. Some element of your QC is necessarily left to trust in the relationship.
And the random reduction in quality of some Chinese products, which the whole world uses...(except probably soon for Martin Richenhangen, whose leading tractor-making company has been consistently prevented by Beijing from attaining a majority stake in a Chinese state-controlled company. From FT.com, Richenhangen slammed Chinese manufacturing for, among other things, its obsessive copying of other companies and for not working hard enough) ...fosters a sense of foreboding about the quality of future supplies, which could at any time fall prey to short-term planning by Chinese factories.
What makes the phenomenon of Quality Fade so interesting is the seeming deliberate malfeasance inherent in the process, and how this illuminates the interplay of economic conditions in China. The term was coined last year in the wake of a host of product quality issues by Paul Midler (audio interview at China Talk Radio here) who described it as the deliberate and secret habit of widening profit margins through a reduction in the quality of materials...(W)ith each successive production run, a but more of the necessary inputs are missing. Seeking cost savings, suppliers push the limits until they are caught, or until disaster strikes. As manufacturers in China are subject to a government able to act without restraint or controversy, factories operate with a sense of urgency, hence they have become excellent at the 'short game' to compete at the lowest prices in order to ensure profitability over the short term.
Midler's views elicited a host of responses. While acknowledging quality fade as a problem in China (telling his customers that the fade usually sets in with the fourth shipment), Dan Harris at the China Law Blog saw a less gloomy outlook as the product situation in China is slowly improving and will continue to do so as China's economy evolves. Quality fade is driven by economics, he argued, and occurs in order for Chinese manufacturers simply to survive for a few more months in the face of currency re-evaluation, competition, tax reform and the end of VAT rebates. In addition, much of what is described as Quality Fade Harris sees as inevitable odd mistakes resulting from the increase in products produced in China, and instances of bad products are by no means confined only to China, despite that the media have created a frenzy about faulty products sourced from China.
At Smart China Sourcing, David Dayton recently outlined two types of Quality Fade, the willfully dishonest variety described by Midler, and a more common 'natural' quality fade over time, the result of an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments, and so forth. Yet ultimate responsibility for ensuring product quality, Dayton argued, lies with the buyer to remain diligent in maintaining quality control. Importers are often hypnotized by the opportunity and hospitality offered by China, and under the China sourcing spell, we too often check our good sense at the door.
Quality Fade starts with the supplier, Dayton posits, but ultimately has to stop with the buyer, who holds the final responsibility. A straightforward solution to either type of Quality Fade is to hire third-party inspectors, who should catch many of the problems. Another solution is to build your own production facility and hire and train your own staff, although this could take years and a lot of money. Yet the bottom line is, according to Dayton, at some point you must have a degree of trust with your supplier... Trust but verify is excellent advice, but verification will never be 100 percent. Some element of your QC is necessarily left to trust in the relationship.
The People's Daily on Tuesday proclaimed that China and the E.U. were leading the 'Third Industrial Revolution,' a view espoused by Jeremy (or Jereny as horrendously misspelt in the article) Rifkin, an economist and author of 17 books on environmental, energy and economic issues. The E.U. and China, Rifkin posited, have made binding commitments to renewable energy. For its part the Chinese government pledged to have renewable energy rise to 15% of all energy consumption by 2020, which would supposedly make it a leading light in the so-called Third Industrial Revolution.
Facing menacing environmental concerns and eager to present itself as a progressive nation in sync (or harmony if you will) with the environment, China has invested in more environmentally-friendly policy initiatives (such as tax breaks for makers of greener products) and in providing technological support for developing efficient and sustainable energy from renewable sources (see description of report on China energy industry). Yet the impact of global supply chains on economic, social and environmental conditions in sourcing countries remains a battleground in the debate on corporate social responsibility.
In China, a slew of recent unsettling instances ranging from product quality and safety issues to cases of slave labour have, however, intensified pressure for ethical and sustainable sourcing. Ethically-sourced products, moreover, are moving into the mainstream, and market research has indicated that customers are increasingly seeking out greener products. A survey (see also summary here) conducted in 2007 of shoppers in 15 countries found that more than half of global consumers prefer to purchase products and services from a company with a strong environmental reputation. Shoppers in China, by the way, reported the greatest interest in environmentally responsible purchasing, with 67% preferring greener brands.
So if the customers want it, then surely they must be given it? Starbucks (and more recently Wal-Mart) famously put their best foot forward when the company implemented a scheme to pay farmers handsome prices for their crops, forging long-term relationships with them, offering technical support and contributing to social development programmes (see Food Production Daily article). There is undoubtedly a toll to pay for companies treading the path of sustainable righteousness, yet as added costs and the maintaining of ethical standards and codes of conduct are swallowed up in the unassailable trend of sustainable sourcing, we will advance further down the road of the imperative.
In a publication entitled Beyond Monitoring: A New Vision for Sustainable Supply Chains, the organization Business for Social Responsibility recently put forward a new organizing framework for companies to ensure ethical supply chains. Seeking to integrate labour and environmental considerations more fully into companies' procurement efforts and to re-emphasize the role of workers and governments, the framework rests on four pillars:
Facing menacing environmental concerns and eager to present itself as a progressive nation in sync (or harmony if you will) with the environment, China has invested in more environmentally-friendly policy initiatives (such as tax breaks for makers of greener products) and in providing technological support for developing efficient and sustainable energy from renewable sources (see description of report on China energy industry). Yet the impact of global supply chains on economic, social and environmental conditions in sourcing countries remains a battleground in the debate on corporate social responsibility.
In China, a slew of recent unsettling instances ranging from product quality and safety issues to cases of slave labour have, however, intensified pressure for ethical and sustainable sourcing. Ethically-sourced products, moreover, are moving into the mainstream, and market research has indicated that customers are increasingly seeking out greener products. A survey (see also summary here) conducted in 2007 of shoppers in 15 countries found that more than half of global consumers prefer to purchase products and services from a company with a strong environmental reputation. Shoppers in China, by the way, reported the greatest interest in environmentally responsible purchasing, with 67% preferring greener brands.
So if the customers want it, then surely they must be given it? Starbucks (and more recently Wal-Mart) famously put their best foot forward when the company implemented a scheme to pay farmers handsome prices for their crops, forging long-term relationships with them, offering technical support and contributing to social development programmes (see Food Production Daily article). There is undoubtedly a toll to pay for companies treading the path of sustainable righteousness, yet as added costs and the maintaining of ethical standards and codes of conduct are swallowed up in the unassailable trend of sustainable sourcing, we will advance further down the road of the imperative.
In a publication entitled Beyond Monitoring: A New Vision for Sustainable Supply Chains, the organization Business for Social Responsibility recently put forward a new organizing framework for companies to ensure ethical supply chains. Seeking to integrate labour and environmental considerations more fully into companies' procurement efforts and to re-emphasize the role of workers and governments, the framework rests on four pillars:
So while we may think of the immeasurable ways the first two industrial revolutions changed our world and our planet, bringing great advances in our standard of life as well as damage to our environment, all I'll say is BRING ON NUMBER THREE!
- Buyer internal alignment of purchasing practices with social and environmental objectives
- Supplier ownership of good working and environmental conditions in their workplaces
- Empowerment of workers who take a stronger role in asserting and protecting their own rights, and
- Public policy frameworks that ensure wider and more even application of relevant laws
China's strength lies in its workers. Millions of migrants leave their homes and villages to work in factories and cities at low wages, for long hours, making the products that are snapped up and sent to every part of the globe. It is an unbeatable process that has been instrumental in catapulting China to the verge of superpower status as the 21st century unfolds. Most of these workers can expect to see their families only once a year, when they have to brave the spring break rush, which FT.com depicted on Thursday as the world's largest human migration (bigger even than the Islamic Hajj pilgrimage). Yet the worst snow and ice storms in 50 years have played havoc with China's power grid and transportation network, meaning that millions of migrant workers in southern Guangdong province greeted the start of the year of the rat still away from their homes. Desperate to relieve the strain on the country's rail network, the Chinese government attempted to entice workers to cash in their tickets and return to their factories for the holiday. Overworked, underpaid, and now even deprived of their holiday, China's migrants can take a bow.
In the face of such challenging conditions Chinese labor organization is politically weak and largely unorganized; the most explosive labour grievance in China, however, is simply not getting paid. Workers will endure very demanding conditions and the lack of independent unions, as long as they get paid, yet rampant problems of nonpayment of pensions and wages have led to persistent unrest among migrant workers. In its 2007 report on the Workers' Movement in China for 2005-2006, The China Labour Bulletin concluded that
Interestingly, Ching Kwan Lee* contended that although Chinese workers are aware of their common predicament and aspire to legal rights as citizens, they find the public identity of the "unprivileged masses" the most empowering and effective:
So at least China's migrants are getting a bit more pay, IF they get paid at all.
* Ching Kwan Lee, "Made in China": Politics of Labor, Law and Legitimacy, Woodrow Wilson International Center for Scholars, Asia Program Special Report, No. 124, September 2004. (link)
In the face of such challenging conditions Chinese labor organization is politically weak and largely unorganized; the most explosive labour grievance in China, however, is simply not getting paid. Workers will endure very demanding conditions and the lack of independent unions, as long as they get paid, yet rampant problems of nonpayment of pensions and wages have led to persistent unrest among migrant workers. In its 2007 report on the Workers' Movement in China for 2005-2006, The China Labour Bulletin concluded that
China's workers' movement in 2005-2006 was characterized by continued disputes and protests by urban workers laid off from privatized former SOEs and also predominantly by migrant workers in the private sector... [T]he inability of the government and unions to enforce the law or effectively implement their own policies meant that the lives and working conditions of workers across the country for the most part failed to improve; indeed for many workers, the situation worsened... For migrant workers employed in the private sector, disputes and protests arose largely from specific and blatant violations of their rights. The single most important cause of labour disputes in this period was the failure of management to pay wages on time. Often an entire factory could go for months on end without being paid, and this led to widespread strikes, protests and street blockades.
Interestingly, Ching Kwan Lee* contended that although Chinese workers are aware of their common predicament and aspire to legal rights as citizens, they find the public identity of the "unprivileged masses" the most empowering and effective:
Eventually China's seemingly endless supply of migrant labourers willing to work for long hours and low pay (and without even Spring break holidays) will recede. In fact, China Success Stories has listed rising labour costs as a major reason why souring from China will be more expensive in 2008, and FT.com on Tuesday quoted the chief financial officer of Hasbro (the world's second largest toymaker) saying the company expected a 14-15% increase in the costs of made-in-China products in 2008 due to higher labour-, commodity- and currency costs.[T]he mode and logic of worker activism in China deviate from what are conventionally conceptualized as class citizenship struggles. Chinese workers' cellular activism is predicated not on horizontal social solidarity or the idea of a judicial, rights-bearing, individual subject, but on the moral and economic entitlements of the subordinate masses in a hierarchical political community led by the central state authority. As disadvantaged masses, workers want more, not less, state intervention and regulation to restrain the market.
So at least China's migrants are getting a bit more pay, IF they get paid at all.
* Ching Kwan Lee, "Made in China": Politics of Labor, Law and Legitimacy, Woodrow Wilson International Center for Scholars, Asia Program Special Report, No. 124, September 2004. (link)
Xinhua reported on Thursday that China's first market credit index has been launched in Yiwu. The index, to be published monthly, includes eight sub-indices: credit management, entrepreneur quality, business performance, financial credit, fair competition, commodity quality, intellectual property rights and consumer rights protection - all aimed at reflecting the "development, changes and trends of the credit situation in the Yiwu market."
Located in Jinhua city in Zhejiang province, with a total population of 1.6 million people (including one million non-native residents, a fact supposedly indicative of Yiwu's success as a trading city), Yiwu was an impoverished rural area in the 1970s, but the city has now been hailed as the world's largest platform for the transaction of Christmas presents and a paradise for foreign traders from all over the world; the city's commodity wholesale market, Yiwu China Commodity City has been called The Great Mall of China.
With a trading heritage dating back to the early Qing dynasty when a peddler's organization developed from peasants trading brown sugar for rooster feathers (used in compost), the Yiwu of today originated during the 1970s when vendors spontaneously established two periodic markets. From small-scale family crafts production, capital accumulation in the 1990s led to the establishment of modern mass-producing factories which by 2004 were made up of eight large clusters: socks, shirts, wool, accessories, zippers, toys, key sticks and printing.
With Yiwu trade fairs reaching a total trade value of 9.45 billion Yuan in 2006 and attracting product displays from 110,000 business people in 2007, the success of Yiwu is also derived from local government reform policies since 1982, when restrictions on business were eased and the informal periodic market became the regular Yiwu Commodity Market, utilizing extensive local linkages and distribution systems. As business expanded and constraints appeared, new generations of markets developed in succession to the original. Thus while Yiwu has become a massive marketplace and sourcing platform, it is a product of a long-standing Chinese business heritage as well as a modernizing element of China's modern business network.
Yet with its emphasis on providing cheap, low-end products for global sourcing networks, Yiwu's potential in moving up the value chain is as yet not entirely defined, and Clay Chandler, Fortune magazine's Asia editor, recently wrote that he found
Additional sources:
DING, K, Distribution System of China's Industrial Clusters: Case Study of Yiwu China Commodity City, Institute of Developing Economies Discussion Paper No. 75. LINK
Shanghai Business Review, Volume 3, Issue 6, July 2006. LINK
Located in Jinhua city in Zhejiang province, with a total population of 1.6 million people (including one million non-native residents, a fact supposedly indicative of Yiwu's success as a trading city), Yiwu was an impoverished rural area in the 1970s, but the city has now been hailed as the world's largest platform for the transaction of Christmas presents and a paradise for foreign traders from all over the world; the city's commodity wholesale market, Yiwu China Commodity City has been called The Great Mall of China.
With a trading heritage dating back to the early Qing dynasty when a peddler's organization developed from peasants trading brown sugar for rooster feathers (used in compost), the Yiwu of today originated during the 1970s when vendors spontaneously established two periodic markets. From small-scale family crafts production, capital accumulation in the 1990s led to the establishment of modern mass-producing factories which by 2004 were made up of eight large clusters: socks, shirts, wool, accessories, zippers, toys, key sticks and printing.
With Yiwu trade fairs reaching a total trade value of 9.45 billion Yuan in 2006 and attracting product displays from 110,000 business people in 2007, the success of Yiwu is also derived from local government reform policies since 1982, when restrictions on business were eased and the informal periodic market became the regular Yiwu Commodity Market, utilizing extensive local linkages and distribution systems. As business expanded and constraints appeared, new generations of markets developed in succession to the original. Thus while Yiwu has become a massive marketplace and sourcing platform, it is a product of a long-standing Chinese business heritage as well as a modernizing element of China's modern business network.
Yet with its emphasis on providing cheap, low-end products for global sourcing networks, Yiwu's potential in moving up the value chain is as yet not entirely defined, and Clay Chandler, Fortune magazine's Asia editor, recently wrote that he found
At least U.S. Secretary of Commerce Carlos Gutierrez, when recently visiting China, was impressed with the gift of an electronic dog he received from Li Changjiang, director of the General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ). China Daily reported Gutierrez describing the gift as "very lovely, very interesting."little at Yiwu to suggest Zhejiang's small producers are making the shift from quantity to quality... my visit to Yiwu left me questioning whether Zhejiang's vaunted entrepreneurs have what it takes to climb the global value chain. Part of the trouble, cearly, is that China's financial system - rigged in favour of state-owned giants and foreign multinationals - deprives small, homegrown companies of the capital they need to invest in new technologies and marketing and move beyond commodities to unique, high-value brands.
Additional sources:
DING, K, Distribution System of China's Industrial Clusters: Case Study of Yiwu China Commodity City, Institute of Developing Economies Discussion Paper No. 75. LINK
Shanghai Business Review, Volume 3, Issue 6, July 2006. LINK
Considering the immense significance of special economic 'boom' zones in China's path of industrialization, the Binhai New Coastal Area in the eastern part of Tianjin is set to follow the Pearl River Delta and the Yangtze River Delta in becoming China's third major industrial heartland. Covering over 2,200 square kilometres and with a population of 1.3 million, Binhai New Area's claim to be China's next economic powerhouse after Shenzhen and Shanghai's Pudong was greatly enhanced when it was mentioned in Hu Jintao's speech at the 17th National Congress in 2007 as an emerging economic zone that would play a major role in reform, opening up and independent innovation. Hailed for its modern manufacturing, research and development, and shipping and logistics capabilities, by 2010 half of Binhai's industrial output is expected to come from high-tech industries.
In an interview with Leaders managazine in 2005, Pi Qiansheng, Director of the Binhai Administrative Committee, identified four directions for the general development of the Binhai region:
Hong Kong's The Standard on Tuesday proclaimed Tianjin as being in 'pole position' to lead China's next wave of financial reform and to deliver the same spur to the national economy as did the development of Shenzhen and the Pudong area of Shanghai in the 1980s and 1990s.
Additional links and sources:
Tianjin Binhai to attract foreign investment, China Daily 29/12/07
First training center for outsourced services in China set up in TEDA, Xinhua Newswire, 02/08/07
Tianjin becomes new base for military-to-civilian technology transfer, Xinhua 29/12/07
In an interview with Leaders managazine in 2005, Pi Qiansheng, Director of the Binhai Administrative Committee, identified four directions for the general development of the Binhai region:
Advocating a 'brand-new vision to perceive the development of the Binhai New Coastal Region,' Director Pi expected Binhai not only to provide services to the Bohai Rim but toThe modern manufacturing, researching and transforming base; the international material-circulation center; the symbolic region of the modern international city; and a new seaside city that is suitable for living.
exert influence over northeastern, northwestern, and northern China. It should construct transportation advantages, technology-research advantages, information-service advantages, and also human-resource advantages.
The President of Rohm Semiconductor Co Ltd, investing in Tianjin since 2000, in an interview with China Daily in December felt that the government's official endorsement of the Binhai New Area would see the city's financial and logistics services and sourcing environments vastly improve, and while
The Ministry of Commerce and Tianjin Economic-Technological Development Area (TEDA) agreed to establish a 'China Training Center for Outsourced Services' to support the development of the Binhai New Area and to provide a 'new mode and mechanism for training of talents for outsourced services.' Recently the Binhai area has also emerged as an incubator for industries that adapt military products for civilian use, with potential projects involving aviation, aerospace, shipbuilding, electronics, and new materials and new energy.cheap labour used to be the top attraction for us... now we are also looking at Tianjin's financial and logistics services and local sourcing. We may shift some logistics and sourcing functions to local service providers.
Hong Kong's The Standard on Tuesday proclaimed Tianjin as being in 'pole position' to lead China's next wave of financial reform and to deliver the same spur to the national economy as did the development of Shenzhen and the Pudong area of Shanghai in the 1980s and 1990s.
Additional links and sources:
Binhai singled out as country's next economic engine, China Daily 11/08/07
Tianjin Binhai to attract foreign investment, China Daily 29/12/07
First training center for outsourced services in China set up in TEDA, Xinhua Newswire, 02/08/07
Tianjin becomes new base for military-to-civilian technology transfer, Xinhua 29/12/07
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