Thoughts on China sourcing: Despair is a sin

Thoughts on China sourcing Despair is a sin

I don’t fit in well in my home town in America anymore. Oh, I was born and raised here, have friends here, go to the church where I was baptized, confirmed and married, but having been an expat, spending a couple months a year in China, having a workday that spans the globe, and making a living “taking American jobs overseas”, suffice it to say conversations are often awkward.

My view on China sourcing can be summed up thus:

  1. I might change things in the rulebook if it were up to me, but it’s not. The game is played by rules written by others, and until someone makes a change, the world is a global market and one man or one company cannot change the system by refusing to play. When I came back from my first experience living in Asia in 1994, I told everyone in our company that the “great sucking sound” from Mexico was not what we were really hearing. It was the tidal wave headed across the Pacific from China. I knew that our company was not going to stop that wave and we could either drown on the beach trying, or get a board and learn how to surf. PassageMaker’s services can be described many ways – China supply chain management, vendor coordination, China sourcing, China contract assembly, blah blah blah blah blah – but we are really surfing instructors for hire. It’s my job to keep you from drowning, not change the world.
  2. China moving from a desperately poor nation to a more prosperous one is a good thing. I would rather 1.3 billion Chinese people feed themselves than starve waiting for foreign aid. That doesn’t mean I’m in love with the government or that I think Chinese people are perfect or better than Americans. America’s problems are mostly our fault and entirely up to us to fix. The solutions are there, and most business owners I know, regardless of political affiliation, will prescribe the same solution – get the government out of the way and let me get to work. Nothing is accomplished by blaming others or giving up hope. To quote Jerry Pournelle:

Despair is a sin.

At the end of World War II, much of Germany was in ruins. Large parts of its infrastructure was attacked or bombed by the Allied Forces. The city of Dresden was completely destroyed. The population of Cologne had dropped from 750,000 to 32,000. The housing stock was reduced by 20%. Food production was half the level it was before the start of the war; industrial output was down by a third. Many of its men between the ages of 18 and 35, the demographic which could do the heavy lifting to literally rebuild the country, had been either killed or crippled.
During the war, Hitler had instituted food rations, limiting its civilian population to eat no more than 2,000 calories per day. After the war, the Allies continued this food rationing policy and limited the population to eat between 1,000-1,500 calories. Price controls on other goods and services led to shortages and a massive black market. Germany’s currency, the reichsmark, had become completely worthless, requiring its populace to resort to bartering for goods and services.
In short, Germany was a ruined state facing an incredibly bleak future. The country was occupied by four nations, and soon it would be divided into halves. The Eastern half became a socialist state, part of the Iron Curtain that was heavily influenced by Soviet policy. The Western half became a democracy. And caught in the middle was the former capital of Berlin, which was divided in two, eventually separated by what became known as the Berlin Wall.
But by 1989, when the Berlin Wall fell and Germany was once again reunited, it was the envy of most of the world. Germany had the third-biggest economy in the world, trailing only Japan and the United States in GDP.

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There is a way out of this Depression. Our lands do not lie in ruins. Our fields are not cratered from bombs and filled with mines. Many of our idle factories still exist. Wonderful machine tools and laboratory instruments are sold at scrap value on eBay and at public auction. There is lots of unused productivity in this land, and we know the formula for prosperity. It is liberty. That has always been the secret of American exceptionalism. We had founders whose goal was to insure the blessings of liberty for themselves and their posterity.

Freedom is not free. Free men are not equal. Equal men are not free. We have always known this. We know it still.

China sourcing is a tool businesses can employ to help make themselves more competitive. That doesn’t mean you should source in China. And that doesn’t mean it is the only way to compete. Blaming others solves nothing. Time to get to work.

Automation in China?

Automation in China

Interesting blog post from Tim Worstall at Forbes entitled, “Foxconn to Automate: Be Careful What You Wish For“. You should click through to read the whole thing, but the money ‘graphs:

I think we’re all familiar with the regular cries that Foxconn, over in China, should pay its workers more? …

The thing is though, higher wages are not something that happen in a vacuum. Or if you prefer, there are no answers in economics, only trade offs. Foxconn wages have gone up and here’s the trade off coming:

Taiwanese technology giant Foxconn will replace some of its workers with 1 million robots in three years to cut rising labor expenses and improve efficiency, said Terry Gou, founder and chairman of the company, late Friday.

The robots will be used to do simple and routine work such as spraying, welding and assembling which are now mainly conducted by workers, said Gou at a workers’ dance party Friday night.

Higher wages means that automation becomes, relatively, more profitable. And it is to automation that most jobs go to die, not trade or international competition.

These robots are being used at Foxconn for the same reason that self-service checkout counters are being used in supermarkets, for the same reason that self-service yoghurt shops proliferate. The change in relative prices between labour and machines means the machines are being used in place of the people.

Those who have been agitating for higher wages can pat themselves on the back for those who keep their jobs will indeed be getting higher wages. But there will be fewer of them as a result.

Manufacturing jobs, minimum wage jobs, service jobs, whatever, the result is always the same: raise the price of labour and more automation will happen.

Years ago, I had a friendly debate over dinner on the subject of automation in China. At the time my dinner partner, an old Taiwanese friend, said that automation would never take off in China, as there were too many people, the cost of labor would never get high enough to make the cost curve, etc. We were dining in Dongguan, and what started the conversation was our visit to a huge stamping plant earlier that day. I grew up in the stamping business in the States, and I’ve been in some big factories in USA, Mexico, Europe, and Asia, but I’d never seen so many presses in one place.

And I’d never seen so many idle presses. More than half of the machines I saw were either sitting empty or were having dies changed. Normally the die changes would’t concern me, but we were there for several hours and the same crews were changing the same dies the whole time we were there. There was either no urgency at all or they had no idea what they were doing. Or both.

While quick die change equipment is not exactly automation of the scope or scale being discussed by Foxconn, it is indicative of the fact that even low cost employees still have a recurring cost. The last set of quick die change clamps I bought is still working fine seven years later and has not cost me a thin dime in maintenance. And they save money every day by making die changes a fast, one-man operation.

My counter-argument at dinner was that if a visionary factory owner embraced efficiency and labor saving equipment before the labor costs jumped, he would be miles ahead of his competition. My dinner partner responded that I might be right, but it would be politically riskyto eliminate jobs with automation in China.

As PassageMaker is primarily a contract assembly company, I will be watching this closely, because Foxconn will be the test case to see how Beijing reacts when workers inevitably start losing jobs to the robots. I’m betting they react poorly.

What do you think?

PassageMaker is a Type 2 China sourcing agent!

PassageMaker is a Type 2 China sourcing agent!

Great post from Renaud entitled “The different kinds of sourcing agents“. Although PassageMaker is really a contract assembly company, we end up doing a lot of sourcing as well. We are a “Type 2″ China sourcing agent according to Renaud’s categories.

I agree with Renaud’s advice in general, though I am a bit more negative of the Type 1, the trading company. Too often we see trading companies that are really glorified Type 3’s. They are making money on both sides of the deal and vanish in a flash the minute the going gets rough.

Avoid Type 3’s like the plague. Mike Bellamy tells a great story of going to a trade show years ago and playing the big dumb American (something he does surprisingly well). He stood in the lobby of the trade show and held a complex automotive casting over his head (Mike is 6′ 4”, so he towers over a crowd of Chinese people) and shouted, “who can help me source this part?”. Suffice it to say he was mobbed.

He took the time after the show to go through all the business cards he was given (50+) and perform due diligence on all of them. Two (2) were manufacturers of automotive castings. Three (3) were taxi cab drivers who claimed to be manufacturers. Thus I have referred to Type 3’s as “Cab Drivers” ever since.

Obviously I think Type 2’s are the way to go. PassageMaker used to be a trading company and we developed our model because we saw there had to be a better way.

If you really, really insist that you want a Type 1, there is only one I’ve ever encountered that I would recommend to anyone, Silk Road International. David Dayton knows his stuff and writes a great blog to boot.

But you really, really, REALLY need to work with PassageMaker!