China Stopped Being the Automatic Answer for Manufacturing

2022-08-30 original Engineering

It’s rare for someone to ask that so directly to your face, though it does happen, but I sense strongly that this question is sitting in the back of many people’s minds.

To begin with, China’s rise to the kind of influence that earns it the title “world’s factory” is really only a story of the past decade or so. In the decade before that, China was a reasonable outsourcing destination and an investment target, including equipment, for large corporations. And in the decade before that, it was still risky, but a good number of people were starting to recognize that China was clearly on the verge of change.

When thinking about China as a country, it makes more sense to view its activity as a whole from a macro perspective rather than as isolated activities. Looked at that way, manufacturing in China today seems to have largely finished playing its role. China has already achieved sufficient economic prosperity, so it no longer needs to indiscriminately attract foreign capital. Of course, to keep its existing facilities and companies running at full capacity, China will likely continue to act as the world’s factory going forward as well, but that stance is expected to be clearly distinct from the one it took 20 to 30 years ago, when it was hungrily grasping for hegemony. Put simply, it means a shift toward high quality and high added value. Historically, this has happened in sequence, country by country. Before China, it was Vietnam and Malaysia. Before that, there was a period when it was Taiwan. And before that, Japan once occupied that position. History repeats itself. China will almost certainly follow the same path.

This goes back nearly 20 years, but there was a time when predictions circulated that wages at Chinese factories would, within a few years, become no different from those at other Southeast Asian factories. That prediction later came true, exactly as forecast. China’s originally cheap labor was built on a definitively finite cycle: rural workers would come to the cities as seasonal migrant laborers, earn enough, and then return home, never to come back. In other words, it was a strategy that exploited regional gaps in wealth, so once that cycle ran its course, it was bound to end. Naturally, it doesn’t end abruptly overnight, so wages rise gradually. Factoring that in, everyone understood, and the parties involved understood too, that China would gradually but surely stop being such a bargain. That’s because this, too, is history repeating itself.

Going back to the question at the start, whether it’s “correct” or not depends entirely on what you’re expecting. For example, if you’re producing an electronic PCB with a BOM that’s already fixed, there’s almost no benefit left to manufacturing it in China. On the other hand, if you’re making a product that includes components whose unit prices are prone to fluctuation, a Chinese factory with bulk purchasing power may be able to buy cheaply and manufacture stably. But this isn’t really about country or region; it’s simply a matter of purchasing power. So if you blindly choose a Chinese factory purely on the expectation of cost, supply stability, or production capacity, there’s a real chance you’ll get badly burned.

Looking at it from a different angle, quality, I don’t think many people living in this era would say “Made in Japan quality is the best.” Of course not. Made in China is also excellent. Japan’s technological edge has long since evaporated in most areas. This closely resembles the situation in the American semiconductor industry in the 1970s and 80s, when Japan rapidly closed the gap. This, too, is history repeating itself.

You might then think, well, why not just go with China? But manufacturing overseas, not just in China, comes with several inherent difficulties.

One example is shipping costs and tariffs. Manufacturing comes in various patterns. Some things are made once and never again; others are made in fixed quantities every month; still others require flexible production in terms of quantity and delivery timing each time. The more frequent the production runs, the more the shipping burden and cost naturally pile up. Overseas shipping generally takes time even including customs, and if you need a short lead time and can’t use sea freight, you end up shipping by air, which further drives up costs. Depending on the item, extremely high tariff rates can also apply. Even if you check this in advance, it’s the kind of thing that can change due to some triggering event, so it remains a risk.

Another issue is management. Overseas, the culture is different. It would be a serious mistake to assume that Japanese customs and conventions can simply be imposed as-is. In my experience, this shows up especially clearly in how people act when something comes up that wasn’t explicitly instructed. From a Japanese sensibility, if you discover something in an outsourced task that wasn’t specifically covered by instructions, there isn’t much room for choice. Nine times out of ten, you ask the client. You stop what you’re doing and inquire about the correct response to the situation that has arisen. But in reality, overseas, with its patchwork of countries, regions, and levels of maturity, the response is similarly patchwork. Honestly, you can’t predict how people you’re working with for the first time will act.

So what do you do? The orthodox approach is to be physically present. At every stage, pre-production preparation, confirming setup, checking progress on the production line, pre-shipment inspection, you keep at least one team member on-site to observe and be ready to step in the moment trouble arises. Being on-site is naturally something that happens even in domestic manufacturing. But you need to factor in ahead of time that being overseas raises both the labor and the cost of that on-site presence. For example, if trouble occurs and you end up needing to send a total of four people to the overseas factory, the manufacturing manager, an operations staffer, one development person, and one project lead, that alone can easily wipe out a price difference of $8,000 or $15,000. Instead of on-site presence, many large corporations station a resident representative. A resident representative, by staying in the country for years, develops a deep understanding of local customs and also builds direct personal connections with people there. Having such a person in place removes a lot of the anxiety around advance coordination and sudden troubleshooting. However, stationing someone comes with significant costs, so for startups, especially ones just getting off the ground, this is hardly a realistic option. That leaves hiring a local Japanese consultant as the viable approach.

Rather than blindly choosing China, if you properly understand its strengths and weaknesses and keep a number of precautions firmly in mind, manufacturing in China remains a sufficiently attractive option.

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Originally published in Japanese at https://clazytech.com/2022/08/1131/. Translated with LLM assistance and reviewed before publication.