agoura hills, ca usa china-bps © copyright 2007 paul deis. all rights reserved i-1 china & best...
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Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-1
China & Best Practices – China & Best Practices – Reality or Myth?Reality or Myth?
Paul Deis
APICS – San Diego Chapter
June 20, 2007
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-2
What We’ll Cover:What We’ll Cover:
• Best Practice Keys• China – facts, culture and context• Challenges to success – why its not
easy.• The “Lure” vs. hidden costs.• How to Succeed with China
outsourcing.• Best Practices & China business• Some fun photos (time permitting)
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-3
Best Practice KeysBest Practice Keys
• Effective Leadership & Culture
• Effective Enterprise Systems & Processes
• Continuous Improvement Processes
• Education and Training
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It’s a BIG country!It’s a BIG country!SOME of the major manufacturing cities.
~3000 miles
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China - Big Numbers*China - Big Numbers*
• 1.3 Billion people; growth 0.606%/yr; Median age: 33.2 yrs old.• GDP – About $2.5 Trillion USD (US is about $13 Trillion)• Internet - ISPs – 3; 100 Million Internet users.• Literacy – 90% over age 15.• Area: slightly SMALLER than the US.• GNP around 10-11%/year• Industrial production growth rate: 22.9%• Electrical generating capacity – China adds generating capacity = to
entire Australia or UK capacity each year – & it’s not enough!• Driven by:
– Rural to Urban migration – 300 Million next 15 yrs– Rural poverty, starvation, unrest.– Drive for developed nation status– Government’s desire to avoid “unrest” (revolution)– Political power – use developed country money to fund expansion,
development, political & military power growth.
* Source: CIA World Factbook & other sources.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-6
China – Political Factors:China – Political Factors:
• Communist – yet pragmatic, realistic – “signal left, turn right”
• Divesting State Owned Enterprises rapidly; major source of unemployment
• Unclear intentions of government re: military power.
• Manipulate exchange rates for advantage• Using developed world money to develop
China, strengthen military, fund expansion ambitions.
• Trade surplus – $1 Trillion, $800 Billion in USD.
• Little/no real personal freedom as we understand it.
• 25-30 yrs ago – like No. Korea now – starvation, etc.
• Legacy of Mao – 1 party; everything subordinate to political interests.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-7
Environment & Pollution Facts*:Environment & Pollution Facts*:
• 1998 UN/WHO report – 7 of the world’s 10 most polluted cities are in China.
• Costs – about 7-10% of GDP/yr.
• 410,000 deaths/yr.• Exempt from Kyoto• 90% of urban water
“severely polluted.”
Beijing - After rain Sunny day
• Acid rain from coal.• Separate gov’t
agencies for each area.
*Sources: Wikipedia, Washington Post
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China - ChallengesChina - Challenges
• Pace of construction, change is intense• 3rd world mentality; endemic low-level
corruption • Procuring in a “boom.”• Language, culture differences.• Little respect for intellectual property.• “Its how Chinese do business.”• “Tired of Americans telling them what and
how to do things.”
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-9
Airport: getting a boarding pass…Airport: getting a boarding pass…
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-10
Cultural Factors:Cultural Factors:
• Very hard working; family loyalty, hard for westerners to understand.
• Business culture – low self-responsibility; boss-driven; varies w/age.
• Very weak commercial contract code, court enforcement.
• Product quality – inconsistent.• Honesty/integrity – pragmatic,
rather than principle-driven.• Foreigners stand out.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-11
Unique Construction Methods:Unique Construction Methods:
Highlights:
• Floors built above excavation
• Pilings support
• Excavation during building
• 24/7 work
• Tower cranes; a growth industry.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-12
Trade & Outsourcing OverviewTrade & Outsourcing Overview
• China - the world’s “workshop”• No meaningful pollution controls in China• Safety/HR standards not like the west• Many large corporations have been
successful with China-based production• CAN be successful - much lower-cost• Vendor sourcing – challenging, difficult• Vendor negotiations – more challenging• Quality – usually needs independent
inspection; little “process control” quality• IP – you teach them, then they own it.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-13
Chinese Culture & PracticesChinese Culture & Practices• Communist legacy & culture
– Older workers – obedient, low initiative
– Younger folks – changing; more inclined to take initiative, responsibility
– Divesting SEOs; political connections still important.
– Lack of “rights” – includes business, not just “personal.”
• Contracts – Largely meaningless:– Language complex, opaque; due diligence
– No real enforcement, resource, court system.
– Depends on relative power, who needs what.
• Other - – Hard working people; well educated
– Strong desire to do better, succeed
– Willing to learn from foreigners
– IP – not respected, though improving some
• Developing country – its not like the US, Europe; our assumptions trip us up.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-14
The Low-Cost “Lure”The Low-Cost “Lure”
More factors:• Subsidized exports - VAT refund
– VAT is 15%– Exported products get 11% VAT refund
• Subsidized industries (SEO’s)• Intense export focus by provincial governments. • Abundant reasonably skilled labor; good education.• Sheer numbers keep labor costs low• Little/no effective regulation• Continual in-flow from rural areas
Key: Tilted exchange rate • Artificially kept low – 15% to 40% less than “real” value• 100 RMB (Renmenbi) = $US 13.1148
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Hidden Costs of China OutsourcingHidden Costs of China Outsourcing
• Quality – biggest problem; must have on-site inspection
• Inconsistent agreement compliance
• Communication – engineering docs, specs, standards, quality, etc.• Transportation & logistics; customs, risk of
damage, loss; 2-4 weeks on ocean, port time.
• Increased inventory & carrying costs.
• Slower response time to demand changes.
• China sourcing bias – hard to import stuff into China; may force substandard materials
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Hidden Costs – cont’dHidden Costs – cont’d
• Technology transfer - you invested in its development, now you’re giving it to them; make sure payoff is there.
• Travel to/from for: communication, coordination – often substantial.• Chinese capabilities for your products:
– May be very advanced, – May be primitive– Best Plan: “To teach them everything.”
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-17
How To Succeed in ChinaHow To Succeed in China
• Face and resolve trust issue up front; get a China based partner who works FOR YOU who is independent of your proposed suppliers:
– Not a family member or relative
– Not part of the company
– Best – works for a US-based company; led by US-citizens living and working in China.
– Must be FLUENT in multiple Chinese dialects – Mandarin at least; both written and spoken;
– Fluency in business practices and YOUR technology – in both languages.
• Plan on heavy involvement, communication, travel up front and for a long time.
• Don’t make a unit-cost only decision – hidden costs are all indirect, overhead costs
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How to Succeed in China – Cont’dHow to Succeed in China – Cont’d
Prospective contract manufacturing suppliers:
• Perform an in-depth Due Diligence. • Realize that financial statements may be worthless.
• Use an experienced professional, on site analysis, familiar with at least similar industries.
• Try to review detailed, auditable financial information – the check or “cash” book.
• Interviews of key managers, supervisors – with an industry knowledgeable translator.
• Reviews of process control practices & quality management methods.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-19
China – Best Practice SummaryChina – Best Practice Summary
• Best Practices – not “natural” to China; just like here or anywhere.
• Asia not = to perfect quality: (Japanese quality came from Deming, and was not originally “native” there either.)
• True Best Practices – depend on integrity, effective leadership, individual ownership of work; these may be at odds with your prospective Chinese supplier’s way of doing business.
• Best Practices – may not be a business issue; you may be completely
successful without them – IF cost, quality, dependability are present.
Most likely if:• Company is composed of younger people.• Have had heavy exposure to Western business practices, manufacturing methods.• Company is/was, a successful joint venture with a western company.
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-20
Paul Deis(818) 706-0160www.pauldeis.com [email protected]
Best Practices
= Growth & Profit
Thanks! … and Good Luck!Thanks! … and Good Luck!
Agoura Hills, CA USAChina-BPs © Copyright 2007 Paul Deis. All Rights Reserved I-21
Appendix – Appendix – Working in ChinaWorking in China
• These are some photos I took while working in China.
• Intention – give you a flavor of what it looks like – as I saw it.
The Sofitel: $70/nite: 5 star:*The Sofitel: $70/nite: 5 star:*
* Thanks to the manipulated exchange rate; which makes everything cheap in $US.