Wednesday, June 9, 2010

Bending China: Eating Sweets, Not Bitters

Courtesy of a link on Credit Writedowns, there are some important insights into China's evolution as a manufacturing power in an article by Andy Xie titled Dismantling Factories in a Dreamweaver Nation. What I take as the most important core message is described in the article as follows:

An even more important factor is labor management. What I observed during my visit 10 years ago was actually the key to economies of scale. To put it bluntly, the key competence of a successful OEM in China is to squeeze labor to the maximum extent possible. That skill is developed within an organization. When a company employs hundreds of thousands from all over China, it needs a massive machine that involves recruiting, housing, training, and worker management on the factory floor.

For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers. . .

In early 1990s, when I was working in Latin America, I became bullish on China's future. I saw Chinese workers would go much farther than elsewhere to earn a little money for two reasons: a cultural acceptance of "eating bitterness" in life; and familial obligations. . .

Today's young adults are less willing to eat bitterness. They are the first generation to grow up during prosperity, without worrying about food and shelter.

Big changes are coming. If the cost of fuel continues its multi-decade ascent in real terms and if manufacturing labor wage rates continue to equalize across nations, an increasing amount of manufacturing is going to be performed near the consumer.

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