February 8, 2005
Two weeks after the first FMA China Tour group returned to the U.S., news broke that IBM had entered into talks to sell its PC business to China's largest PC manufacturer, Lenovo. That news came as no surprise to tour participants.
The group had just spent 11 days last November traveling through Taiwan and China, visiting sheet metal stamping and fabricating operations, as well as the facilities of tour sponsors SEYI Presses and The TRUMPF Group. They had seen global PC brand logos applied to products in large factories pumping out computer parts for the world's PC OEMs. They had seen sheet metal fabricating shops using state-of-the-art equipment.
More important, they experienced firsthand the competitive and entrepreneurial spirit driving the economic boom that's been under way in China since 1978—from the aggressive bartering in the shops and street markets, to the fabricating shop three hours outside Shanghai, spitting out laser-cut metal parts in a scene that could just as easily have played out near Cleveland, Chicago, Los Angeles, or Seattle.
Tour sponsors SEYI Presses, with headquarters in Taiwan, and The TRUMPF Group, based in Germany, both maintain global presence, including operations in China and the U.S. It was their customer relationships that opened the doors to the stamping operations and sheet metal fabricators that were the main events for the tour.
China's threat to U.S. manufacturing, particularly small companies, was a motivating factor for most participants. But they also shared a sense that there may be opportunities as well. The need to explore and understand those opportunities is what ultimately got them on the plane.
|Workers assemble computer chassis at Eastech Electrical Products (Dongguan) Company Ltd., manufacturer of computer housings, keyboards, computer mice, speakers, and power supplies. The company employs 6,000 people at this Dongguan, China, location. It also has a factory in Brazil and will establish one in Mexico in the near future.|
"The fact that China has incredible manpower and an intense cultural background, which channels its people to perform at the highest levels, makes it difficult, if not impossible, to compete," said Marg McCall, executive vice president, McCall Capital Inc. "Our Canadian factories use technology to obtain optimal production. The Chinese have the manpower to do whatever needs to be done."
"Their strength is clearly their massive level of human resources, along with modern equipment," said Mark Rasmussen, sales/engineering manager, BTD Manufacturing, Detroit Lakes, Minn. "Their people are hard-working and dedicated to improvement. I see them struggling somewhat with concepts like JIT, quality control, matching up material specifications, understanding U.S. prints and drawings, and operating systems to track materials and parts."
"I was overwhelmed by the capital investment and how fast China is developing its infrastructure," said another participant. "It will continue to grow as a world business power and is here to stay as a manufacturing competitor on the world stage. The factories we visited were well-managed and had an abundance of labor, both direct and indirect. Their strength appears to be the ability to provide large volume to OEMs.
"I feel that I'm competing with one arm tied behind my back," he continued. "My only advantages are communications, time to market, small lot sizes, and transportation costs. If the Chinese job shop model is sophisticated equipment, low-cost labor, no safety or environmental regulations, and very low cost of money, in the long run it will be very hard for companies like mine to compete—not impossible, but we must become very innovative."
"It was a complete eye opener," said another participant. "We had heard how manufacturing in China is strong competition. But to see it firsthand confirmed this is a great threat to American products. There appears to be two ways to stay competitive when large production runs are required—either source in China or completely automate. Our greatest opportunity is to minimize labor in our production processes."
Medium- and short-run volumes, however, are also seen as an opportunity. "Short-run production and true kanban production will most likely stay in the U.S.," he noted.
"I was able to see what U.S. manufacturers are up against and how we can continue to fit in the world of manufacturing," added Paul Gintner, CEO, BTD Manufacturing. "The Chinese operations we saw were, in most cases, running state-of-the-art equipment. In the U.S. we spend a lot of time engineering labor out of the process. This was not evident in the plants we visited. Labor is the biggest asset they have. Their strengths include modern equipment; an abundant, well-educated, skilled work force; and a culture that values hard work."
Believe it or not, China's widely perceived labor advantage is beginning to confront some pressures. Currently, for example, significant regional wage disparities are impacting the movement of available workers.
"They are already starting to talk about the cost of doing business in certain parts of China, as well as the regional competition for trained and qualified employees," said Gintner of BTD Manufacturing.
Eastech Electrical Products (Dongguan) Company Ltd., one of the companies the group visited, is facing this challenge in spite of the seemingly unlimited low-cost labor cited as China's main strength.
"All foreign investors in southern China are struggling with this problem," said Phil Peng, logistics director. "Wages for production operators, for example, are 50 percent higher farther east and farther north, such as in Shanghai and Suzhou. It's the same with engineering wages.
"The result is that the higher skill levels are migrating to those higher-wage areas and we are having difficulty attracting skilled workers and managers in the south. Likewise, high-tech- and high-profit-oriented companies are all moving east and north, where they are able to find qualified workers."
|The GBM Group stamps computer parts in Dongguan, in the southern China province of Guangdong. Almost 1,000 of the company's 1,800 employees work in the stamping operations.|
Peng expects manufacturers in southern China to reach out to the universities in the southwestern provinces in an effort to entice educated workers to the region. Nonetheless, higher wages in the south are looming on the horizon.
Pressure on the labor front is also expected to come from other directions, primarily as a result of economic growth.
"China, as witnessed in the large facilities we visited, is relatively low-tech with high human content," said Neil McCall, Advanced Fabricating Machinery Inc. (Mississauga, Ontario, Canada). "Over time this will become more expensive as workers' wages rise. Our offset may very well be high-tech machinery requiring a minimum of human involvement."
"The labor dynamics will begin to change as the cost of living increases," added McCall Capital's Marg McCall. "The Chinese government has recognized that its economic growth needs to be controlled, as more and more Chinese venture into the cities looking for higher-paying jobs. Chinese youth soon won't be satisfied with minimal wages and limited access to luxuries—there will be a continual struggle to obtain more of the Western commodities of daily life."
First stop on the tour was Taoyuan, Taiwan, home of 42-year-old SEYI Presses, which builds mechanical and hydraulic presses from 25 to 2,400 tons for customers in the computer, appliance, automotive, stamping job shop, and other industries. Along with a recently built factory in China (dedicated solely to serving domestic Chinese demand), the company produces 3,600 presses per year that are installed in more than 40 countries.
Significant investments in recent years include the factory near Shanghai (said to be 10 times the size of the Taoyuan facility) and installation of a multimillion-dollar, dual-bolster Mitsubishi machining center in Taoyuan.
|GBM also has PC chassis production in Dongguan.|
SEYI Chairman and Founder S.H. Kuo stressed the rapid globalization of the stamping market, noting a significant increase in the company's worldwide business between 1996 and 2000. Competing in the U.S. for 20 years, Kuo said that during the 1996-1998 period, the U.S. comprised up to 20 percent of the company's total press sales.
"In the past four years," he added, "U.S. sales have dropped to between 5 and 10 percent of our total. There are two primary reasons for this. One is that the market in the U.S. remains soft. The other is that we are seeing strong growth in other parts of the world.
"No matter which part of the world you go to do business—China, America, Mexico, wherever—we will be there. We will follow you," he told the group.
|A TC 2020 R punching machine fabricates a power generation enclosure at Suzhou Dongshan Sheet Metal Working Company Ltd.|
One company SEYI followed was Eastech Electrical Products (Dongguan) Company Ltd., a manufacturer of computer housings, keyboards, computer mice, speakers, and power supplies. The company started in Taiwan in 1987 and has been in Guangdong Province in southern China since 1997.
Massive and vertically integrated, the company employs 6,000 people working two shifts per day producing $10 million per month in sales. There are 120 SEYI presses (100 to 250 tons), 150 plastic injection molding machines, multiple assembly lines, and an in-house tool and die shop with four electrical discharge machines. All parts are designed, engineered, manufactured, and assembled in-house.
The company exports 100 percent of its production—40 percent each to Europe and North and South America and the rest to countries such as India and Russia. It has a factory in Brazil and will build one in Mexico in the near future.
Next stop, also in Dongguan, was the GBM Group, a sprawling industrial complex comprising separate facilities dedicated to stamping, plastic injection molding, and moldmaking/tool and die. The company employs more than 1,800 people, 1,000 working in the stamping operations. Major products include PC enclosures, notebook housings, monitor housings, DVD cases, and backlit module parts.
Highly vertically integrated, GBM maintains a full range of manufacturing capabilities—progressive-die tooling, stamping, aluminum processing, mold flow analysis, plastic molding, gas-assisted injection molding, die casting tooling, powder coating, silk/pad transfer screening, and heat staking.
The stamping operation consists of 120 SEYI presses from 80 to 400 tons, three pretreatment coating lines, a powder coating line, a liquid-paint coating line, 10 final assembly lines, and an array of sophisticated testing equipment—CMM, height gauge, materials testing, coatings testing, impact, drop, and vibration testing. ISO 9002 and 14001 certifications were achieved in late 2000.
The moldmaking and tooling facility houses six CNC machines, three high-speed CNCs, a five-axis CNC, six wire cutting machines, 19 milling machines, 15 grinding machines, 14 EDM units, a deep-hole drilling machine, and five injection molders. It fulfills the plastic and die cast mold and stamping die requirements for the company, as well as serves outside customers in other industries.
The injection molding operation houses 80 injection molding machines, ranging in capacity from 50 to 1,380 tons. There are eight painting lines, a robotic finishing system, six silk screening/pad transfer lines, and four final assembly lines. The facility received ISO 14001 certification in 2001 and ISO 9001 certification in 2002.
The final stop in southern China was Fong Kai Industrial Company Ltd., whose customers include Hewlett-Packard, Gateway, Sony, NEC, Hitachi, Toshiba, and Fujitsu Siemens. The company has manufacturing sites in Taiwan, Dongguan, and Wujiang, a sales subsidiary in the U.S., and four engineering support locations in California, Texas, Taiwan, and China.
The tooling operations include the full complement of required technologies—radial drilling, CNC milling, high-speed lathe, sawing, EDM, surface grinding, turret milling, and so on. Seventy percent of the tooling produced is supplied to external customers.
A total of 192 stamping presses, from 5 to 250 tons, have been installed and crank out hundreds of thousands of PC and server chassis and computer parts each month.
The company also has 41 injection molding machines, liquid and powder coating lines, cable manufacturing operations, and final assembly operations, in addition to in-house engineering and design capabilities.
|The welding area at TRUMPF Sheet Metal Products outside Shanghai operates as a fully functional sheet metal fabrication shop, and also serves to showcase the company's fabricating technology and teach China's entrepreneurs the fabricating business.|
With China's history of large, vertically integrated, state-owned manufacturing enterprises, the metal fabricating job shop as a business model has been slow to develop.
"The job shop as a classical subsupplier of metal parts and components has not historically been widespread in China," said Dr. Eva Schwinghammer, managing director, TRUMPF SiberHegner Ltd., a Hong Kong-based company with representative offices in Shanghai and Beijing. "With the dominance of state-owned enterprises, outsourcing of any kind was unknown.
"With economic liberalization," she continued, "the private sector became more prominent. In the beginning, even privately owned companies tended to be vertically integrated. Only in recent years, starting in south China, have we seen the beginnings of the job shop business model."
According to Schwinghammer, the focus on exports in the Guangdong region spurred the emergence of companies based on the job shop model. It has since spread, in fits and starts, to the Shanghai region and neighboring provinces, Jiangsu and Zhejiang.
In 2000 TRUMPF invested $2 million to establish TRUMPF Sheet Metal Products, a fully functional job shop, in Taicang, outside Shanghai. The company is on a crusade to teach the fabricating business to China's entrepreneurs, introducing them to TRUMPF technologies along the way.
"We say we want our job shop model to be copied," Schwinghammer said.
The shop is equipped with laser cutting, punching, and bending equipment, including the company's TrumaBend V130 and C110 press brakes; a TC 3000 R punching machine; a TC L3050 laser cutting machine; a drilling machine; and spot, GTAW, and GMAW machines. It produces a variety of parts for switchgear applications in power generation; enclosures and cabinets; office equipment parts; automotive parts; and parts for the industrial machinery, semiconductor, clean-room, and elevator markets.
The facility also serves as a showcase for TRUMPF technologies and provides application support and training for the company's equipment customers in China.
"Most importantly," Schwinghammer stressed, "we don't want to be seen as a competitor to our own customers using TRUMPF equipment. So we don't aggressively enlarge the job shop business. We also distribute jobs we acquire to a network of other shops, guaranteeing quality standards to customers. Thus, we are building a network of subsuppliers in China."
One member of that network is Suzhou Dongshan Sheet Metal Working Company Ltd., which was established as a state-owned enterprise in 1978, during the dawning of economic liberalization. In 1998 it was converted to a privately owned company, just as the boom in China was reaching a fever pitch.
It has grown from just a few machines to more than 20, including two TC 2020R punching machines, three Weidemann punching machines, an LVD punching machine, a TC L3050 laser cutting machine, a Bystronic Bystar 3015 laser cutting machine, an LVD Axel 3015S laser cutting machine, eight LVD press brakes, Muratec and Toyokoki press brakes, an LVD shear, and a Grindingmaster grinding machine.
The company is building a second facility, which will be three times the size of the Dongshan operation.
|Shanghai Linyuan Precision Sheet Metal Products Company Ltd. in Shanghai was converted from a state-owned enterprise to a privately held company in 1998 and has grown rapidly since that time. The company will acquire three additional laser machines over the next five years.|
Final stop on the tour was Shanghai Linyuan Precision Sheet Metal Products Company Ltd. in Shanghai. The company was established in 2003 when it invested in a TC L3030 laser cutting machine and a TC 2020R punching machine. Ten months later it added a TC 3050 laser.
Eighty percent of its production is exported to Europe and the U.S., primarily telecommunications enclosures, elevator parts, air-conditioner parts, switchgear cabinets, and cell phone covers. It employs 45 people (six engineers) and works two, sometimes three, shifts per day. Capabilities include laser cutting, punching, nibbling, bending, and welding.
According to the company's owner, Kong Lingdao, long-term plans call for focusing laser cutting and punching in a new facility being built and concentrating bending and welding in the existing facility. Five new press brakes are on order, and within five years he will import three more laser machines. He concurred with the view that most state-owned enterprises offered little outsourcing potential, while the private sector, where there are opportunities, is still relatively small.
"More and more Chinese companies are pursuing higher levels of automation to improve efficiencies and meet government pressure to improve safety for workers," he said. "Labor costs so far are low, but China is now part of the World Trade Organization, and concerns over health, security, and benefits for workers are increasing."
The future of the job shop as a business model in China may be an opportunity that could well extend outside China's borders. As the private sector continues to expand, opportunities for outsourcing will grow, and a vibrant fabrication market should follow. Those paving the way today are opting for the most advanced technologies.
"More companies in China are going for laser technology to fulfill their dreams of becoming high-tech," Schwinghammer said.
Most FMA Tour participants left China with changed perceptions, acknowledging there are opportunities and affirming a sobering awareness of the power behind this new competition. Many felt a strong sense that they need to take action. And for just as many, it will not be their last visit to this country.
"There is definitely a market for both countries in manufacturing," said Gintner of BTD Manufacturing. "It will not be the same market in the U.S. as it has been in the past, but there is still a viable market. Every U.S. manufacturer better start understanding the markets they serve and how they fit into them. We need to build our businesses around the products that will still be produced in the U.S. and then build partnerships to bridge the things they do better in China.
"I now know, firsthand, what my company is up against," he said. "I left China feeling that instead of trying to beat them, we need to figure out how to make better products for the world along with them."
"We must revisit our current business model," another participant concurred. "The days of merely providing a job shop service are fading fast. We need to understand our customers' supply chain management strategies and how we can become a vital link in those strategies.
"Before going to China, I perceived it to be far less advanced than it is, and I saw it mostly as a threat," said Rasmussen of BTD Manufacturing. "Now I understand it remains a threat, but I see China also as an opportunity.
"China is not going away," he continued. "We will always feel pressure from our customers because of foreign competition. Our customers are also feeling those same pressures. We need to see this as an opportunity. If we can team up with Chinese partners, we can help our customers remain competitive. If we don't pursue these opportunities, we will all lose. The challenge is going to be making the relationships work."
"U.S. manufacturing will have to become better and more responsive," said another participant. "We will have to join forces with Chinese companies to be successful in the future."
"My perceptions regarding my business have changed," he added. "I may have to develop a relationship with a company in China to accommodate the changes that are happening in our marketplace. I will pursue the development of a relationship with a supplier in China to provide the price points that I cannot in certain situations."
"I need to continue to evaluate my own operations," he continued. "I need to develop the processes necessary to make my production capabilities as efficient as possible in order to compete, whether that means investment in high-tech equipment or the development of more efficient processes."
"There are markets that will remain in North America," noted Bob Watson, president, Advanced Fabricating Machinery Inc., " such as store fixtures and restaurant equipment, where short runs require personal contact and quick response time. Other markets that will be difficult to penetrate include agricultural and off-road equipment, where runs are limited and the parts are often too heavy for economical shipping.
"North American firms making computer parts—all high-volume items—should understand that over time, this business will likely be lost to low-cost, highly efficient Chinese competition," he warned. "The recent sale of IBM's computer operations to Lenovo may very well be another example of the transference of a full industry offshore."
Neil McCall feels the rise of job shops in China will be a slow process, mainly because of the proliferation of large, vertically integrated manufacturing complexes that are reluctant to offload their processes. He noted that this leaves open a secondary market characterized by relatively low part volumes fabricated from heavy-gauge materials.
In the meantime, the need for process control, management expertise, cash flow management, and efficiency improvements will only grow as China continues its manufacturing evolution and is forced to compete on the world stage, not to mention serve its own domestic markets in the face of growing wage and employment pressures and constant expectations for higher living standards.
There also appears to be a need for middle-management skills, marketing experience, and training, all of which will become more important as the world increasingly holds China to its quality standards.
Finally, as consolidation inevitably enters to correct endemic overcapacity in China's manufacturing sector, the urgency of all these challenges will accelerate, and the stakes will rise.
The question is, who will be there to meet these challenges and seize these opportunities, and who will wait and see?