China to World: We Don’t Need Your Factories Anymore
For three decades now, global manufacturing companies have been moving to the Far East, with China absorbing most of the offshoring manufacturing activities. Recently, China’s manufacturing engine has largely stalled(1). With rising china labor cost, western countries patriotism, U.S-China trade war, intellectual property theft and China national 863 program to become a leading global science & technology power, for many western companies China is no longer an attractive place.
Robotics and 3D Printing technologies have also eliminated China advantage. After all, western countries robots work as hard as Chinese robots. And they also don’t complain or join labor unions. They all consume the same electricity and do exactly what they are told. It doesn’t make economic sense for western countries industry to ship raw materials and electronics components across the globe to have Chinese robots assemble them into finished goods that are then shipped back. That manufacturing could be done locally for almost the same cost. And with shipping eliminated, what once took weeks could be done in days. Pollution reduction is a bonus.
U.S.-based Seagate, the world’s biggest maker of hard disk drives, closed its factory in Suzhou near Shanghai on Jan 2017, in a move that has rekindled fears that China is becoming increasingly hostile towards foreign firms operating in the country. (9). Panasonic, for instance, stopped all its manufacturing of televisions in the country in 2015 after 37 years of operating in China (9). In November 2016, Japanese electronics conglomerate Sony sold all its shares in Sony Electronics Huanan, a Guangzhou factory that makes consumer electronics. British high-street retailer Marks & Spencer announced it was closing all its China stores amid continuing China losses. Add to that list Metro, Home Depot, Best Buy, Revlon, L’Oreal, Microsoft, and Sharp and we start to see more than a trend developing.
It seems that also China doesn’t want to further be the world factoring floor.
China is investing in critical future technologies that will be foundational for future innovations both for commercial and military applications: artificial intelligence, robotics, autonomous vehicles, augmented and virtual reality, financial technology and gene editing. The line demarcating products designed for commercial vs. military purposes is blurring with these new technologies. Technology transfer to China occurs in part through increasing levels of own investment and acquisitions of western companies. China’s global foreign direct investment (FDI) is growing rapidly and is at a record level in a range of $200-250 billion, with $213 billion in announced acquisitions in 2016 (2,3).
These investments are consistent with China’s goals made clear in President Xi Jinping’s statements, successive Five Year Plans, Made in China 2025 and Project 863 (4) namely, to:
Establish China as one of the most innovative countries by 2020 and a leading innovator by 2030 (5)
Become a leading global science and technology power by 2049 -- the 100th anniversary of the PRC;
Double down on R&D of core information and communications (ICT) technologies...to develop technologies on its own, acquiring expertise from abroad when indigenous development is not possible.
By some measures of innovation, China is already leading the technology race, and without question China’s capacity to innovate is rising:
In patent applications, China already surpasses the U.S. with over 1 million patent applications received by the China State Intellectual Property Office in 2015 (up 19% year over year) compared to 589,410 patent applications received by the U.S. Patent and Trademark Office (up 2% year over year).(6)
In academic research papers, Chinese authorship of articles in peer-reviewed international science journals increased such that China is now in 2nd place (2011) up from 13th place just a few years earlier.(7)
China spent 1.6% of GDP in R&D in 2011 but has a stated goal of spending 2.5% of GDP R&D by 2020 – about $350 billion.(8) Combined U.S. business and federal government R&D spending is 3-4% of GDP.
China awarded 1,288,999 Science, Technology, Engineering & Mathematics (STEM) degrees in 2014 – more than double the degrees the U.S. awarded at 525,374 degrees.(8)
China state-led policy was a central part of China’s strategy to transition from a country known for making toys and t-shirts to one that leads in advanced technologies — a transition key to becoming a global superpower.
Why Local? Why in Israel?
“Developing fast or die” is probably one of the biggest challenges a company has in today’s competitive markets. Sometimes it isn’t enough just to have the right product ready but, also the time it takes to develop it and release it to the market is critical for a company success.
Israeli companies should know that the most, after all many of us are low-mid size companies which typically face a war with global giant competitors. Running between the giant legs may remind to some of us the bible story about David and Goliath. In both cases the Israeli\ Jewish brain works but it has to work fast!
The globalization eliminated the Chinese subcontracts’ advantage in getting lower BOM prices. An Israeli subcontractor which has strong sourcing capabilities usually can get to the same BOM cost as the Chinese subcontractor. Moreover, the Israeli subcontractor’s machine cost/hour is the same as in China. Sometimes the Israeli and Chinses subcontractors even use the same machines. So if the BOM is the same and the machine cost/hour is the same then the all different between the Chinese and the Israeli subcontractors is the human working hour cost.
In general, high-mix-low-volume manufacturing expertise is typically describes the need of many Israeli companies which have verity of products that are sold in low quantities. Upgrading a company’s line of products with a new product ,a year after a year, in order to keep its relevance is another reason why Israeli companies look for a manufacturing partner which is an expert in high-mix-low-volume manufacturing.
If a product cost is mostly driven by the BOM (~70%) which is typically the case in high-mix-low-volume manufacturing then the few dollars a company may save in human labor cost is low ,if any, due to tax, inventory, and shipment cost from China. Taking in mind the cost of an Israeli company to set up a production line in China and handle the ongoing production challenges by visiting the offshore manufacturing factory may yield in higher total cost comparing to the local manufacturing cost.
Many of the Israeli companies would like to supervise the production floor of their manufacturing partner. In our small country, Israel, such desire can be achieved by working with a local manufacturing partner.
(1) Finbar Livesey, From Global to Local, 2017, published by Profile Books.
(2) Lingling Wei, “China Issuing ‘Strict Controls’ on Overseas Investment,” Wall Street Journal (November 26, 2016). Retrieved at http://www.wsj.com.
(3) While China’s global FDI has been growing at 33% annually since 2003, a leading China think tank expects global FDI to decline in 2017 to a level closer to 2015 and well below $200 billion. Lingling Wei, “China’s Overseas Funding to Shrink,” Wall Street Journal (January 14, 2017).
(4) Project 863 is shorthand for the month (3/March) and year (1986) when it was introduced by China’s leading strategic weapons pioneers to Deng Xiaoping. The proposal was approved and served as China’s leading industrial R&D program, importantly reforming decision making to be less stove-piped and more collaborative; reorienting the procurement process; investing in training of technical experts; and developing technologies of strategic value.
(5) “Xi Sets Targets for China’s Science, Technology Progress” Xinhua (2016, May 30). Retrieved at http://www.xinhuanet.com
(6) “China vs. U.S. Patent Trends: How Do the Giants Stack Up?”, Technology & Patent Research. Retrieved at http://www.tprinternational.com
(7) Hannas, William C.; Mulvenon, James and Puglisi, Anna B. China Industrial Espionage. New York: Routledge, 2013. Chapter 3
(8) Jackie Kraemer and Jennifer Craw, “Statistic of the Month: Engineering and Science Degree Attainment by Country”, National Center on Education and the Economy (May 27, 2016). Retrieved at http://www.ncee.org
(9) CNBC News, https://www.cnbc.com/2017/02/02/why-foreign-companies-are-shutting-shop-in-china.html