Photo credit: Gina Smith
For a couple of weeks now, mostly a result of this story in The New York Times on Apple and its Chinese outsourcing, a lot of folks are all aflutter. People are focusing on the fact that Apple is making its iPhone and iPad in China, but they forget this is a decades-old practice and there’s a reason for it.
Photo credit: Gina Smith
The decision Apple made, the same thousands of other companies made before and certainly will make moving forward, is a result of one simple fact. And that is — it is impossible to produce consumer technology products in the US as quickly and as efficiently as in China.
Why is this? While China’s advantage once was its lower labor costs, that’s no longer the primary reason for high-tech products being made there. Over the years, China has parlayed its initial cost advantage into creating a huge infrastructure of skilled employees, a massive base of factories, and an entrepreneurial environment like no place else on earth.
Photo credit: Gina Smith
The real advantage of China is its ability to get a high-volume product developed, manufactured and ready for market quicker and more cost-effectively as any place else. That provides a real advantage in an industry where time to market can make the difference between success or failure.
For U.S. companies, the best tactic is to engage quickly with a Chinese partner and get a team in place in a few weeks. There’s a noticeable lack of bureaucracy and a willingness of these Asian companies to take risks, something that is anathema to U.S. startup business culture and a weak point.
Know this also: China-based companies practically on-demand are able to scale up production of a major project on short notice. It’s not uncommon for a company to begin production of a complex new product in early November and ship a million of them in time for Christmas sales. They also can scale down quickly. Notice how quickly that HP TouchPad overflow — tablets were over and done.
In China, there are many companies that already make products similar to those you want, so there’s no learning curve. The companies will engage without spending weeks of analysis, do it on a handshake, and not wait for the months to create and negotiate a contract first.
China has a huge resource pool of middle-level manufacturing and production engineers as well as assembly workers that can take a design and bring it into production quickly and efficiently. The work ethic at these companies is intensely strong — with often-color coded teams of 1000s of workers coordinated to move and work as one, and do so in as many hours as are required. Like in a US startup.
With so many Chinese companies building so many products for so many customers, suppliers of parts and services are all located within one or two hours of one another, a stone’s throw from Hong Kong in, say Shangzou or Zhen Zhen, just a few train stops away.
That means competitive pricing, quick delivery, local expertise as well as a very large pool of talented resources in the region. China’s distance from the U.S. in no longer a barrier; Fedex and UPS have huge hubs that can deliver a product to the customer two days after it rolls off of the assembly line.
Companies in Asia offer attractive costs by working on very slim margins, often just a few percent. They often offer their customers free or low-cost development services in order to keep their factories busy. This allows for sourcing e-commerce store products easily.
Another article in the NY Times this past Thursday focused on worker mistreatment. It was a sensational piece written by reporters with little understanding of the real issues. In my 30 years of working in China, bringing technology products to factories of all kinds, rarely have I seen abuse. Workers flock to the cities with factories from rural farm areas where jobs are scarce and pay little. The competition for these workers is intense and companies compete with free housing, recreation centers and other benefits.
Still, it would be naïve to think exploitation does not exist or that people are not abused; it’s just nowhere as prevalent as it’s made out to be. Remember the stories of suicides on the Foxconn campus? When Wired magazine examined the statistics, the suicide rate was well below that of the population at large.
It’s a story that plays well in the media as a simplistic reason why we are less competitive. But it diverts us from facing the real reasons for the loss of jobs, particularly when most of the cost of a technology product is not the labor, but the components that go into it. Labor costs, in fact, are typically about 5% of the total cost of a consumer electronic product.
Our country’s lack of understanding is what continues to cause us to fall further behind. The success of China as the world’s manufacturing hub is not only the result of the growth in Asia’s capabilities, but in our country’s inability to compete. Our labor pool lacks sufficient mid-level workers and engineers. Corporate and government bureaucracies, a short-term financial focus, lack of risk-taking, and legal roadblocks also contribute.
The origins of this problem go back more than 30 years. Even then I found that it was difficult to find U.S. companies to work with me in developing consumer products. Many of them grew as suppliers to the military and defense industries, and were ill equipped to participate in the growth of the consumer electronics industry in the United States. They were trained to earn large profits and work to their own schedule. When requesting help from companies, I would hear back in hours from most Asian companies, and in days or even weeks from U.S. companies. Asian companies seemed always much hungrier, and that’s still true today.
In fact, the movement to Asia has been led by the design engineers wanting to get their product into production, rather than by the accountants looking for lower costs.
These are the real reasons more and more companies flock to China to get their product made. What can we do to become more competitive? Watch my column here at anewdomain.net … soon.