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On Oct. 7, 2011, Dr. H. James Harrington appeared on our live streaming video program Quality Digest Live, where we talked about China and quality. Harrington has 30 years of experience in working with the Chinese on quality issues. Below are some further insights on what is going on in China. Some of this was covered during the live program, which you can watch by clicking here.
Quality Digest Daily: Does the U.S. customer really value price over quality or safety? Why are we content in getting inferior products from China?
H. James Harrington: We do not get inferior products from China. We get inferior products from Walmart, Target, Sears, Costco, and the like. These are China’s customers, not the consumer. Three words have become synonymous with manufacturing. These are “made in China.” What comes to mind when you see these three words are cheap, poor-quality, affordable goods. Quality is almost an afterthought in the minds of Chinese manufacturers’ direct customers. Chinese companies are known as OEMs or “original equipment manufacturers.” This means they manufacture parts for foreign brands.
The real question is: Do Chinese customers (Walmart, Sears, etc.) compete based on price or quality? Are these Chinese customers pushing Chinese manufacturers for higher quality products, or more volume? Consumers that shop at Walmart, Target, Sears, and Costco by far make up the biggest part of the purchasing economy in the United States and Europe. There is no doubt about it.
The fantastic expansion of manufacturing capabilities in China has been driven based on the fact that low-cost labor in China allows the country to produce products that meet requirements at a very competitive price. As long as the direct customers for Chinese products make their buying decisions based on cost and not quality, Chinese manufacturers will strive to comply with their direct customers’ desires and specifications.
We need to question if these distributors desire to sell products that will last, or are more interested in selling products that have a short lifespan resulting in additional sales opportunities for them in the near future. I believe that these organizations have found out that they make more money by selling low-priced products that consumers purchase more often. These distributors are driven by their consumers’ requirements and desires. Based on actual buying data, it looks like this large block of consumers is more interested in low prices than high quality. These consumers are looking for immediate gratification, not long-term usefulness. They want the newest and latest, not the “old faithful.” The consumer defines the market, and the U.S. consumer is communicating that it is price, not quality, that drives their buying decisions.
Often consumers make their buying decisions based on brand names, not on where the product is manufactured. If brand name distributors like Sony, IBM, Hewlett-Packard, Canon, Apple, and others are willing to put their reputations in jeopardy by compromising quality for cost, then that is what the OEMs will provide. We cannot blame the Chinese manufacturers for building products that meet their customers’ desires, specifications, and requirements.
Foxconn Technology Group, a contract manufacturer for companies like Dell, Hewlett-Packard, and Nokia, employs more than 1 million workers in China. At Foxconn workers’ wages have increased so rapidly that the company is moving parts of their manufacturing to China’s inland cities or other emerging markets. To offset the increased labor costs and continue to compete in the low-end market, they plan to increase the number of robots used from 10,000 to more than 1 million within the next three years. Demand for Foxconn services and products are continuously growing, but it’s not due to high quality; it’s low cost that drives increased demand. Foxconn plans to buy a set-top plant in Mexico from Cisco Systems this year and is looking into investing more in Brazil, where Foxconn is already making mobile phone headsets.
It is becoming more obvious that as labor costs increase in China,Chinese manufacturers must start competing on the world market based upon value, not cost alone.
To answer your question on cost vs. safety, when seat belts were an option in automobiles, very few people would pay the additional cost, even though it was very low. It took federal legislation making seat belts mandatory before we accepted them, and even worse, another law had to be passed where you were fined if you didn’t use them. We have a tendency to believe it will not happen to us.
QDD: What action does China need to take to get on track with quality? Compare China today with Japan following World War II.
HJH: China’s manufacturing revolution started with the United States reestablished diplomatic relationships with China during the early 1980s and opened its market to that country. My first trip to China was in 1982, and at that time the country had many problems:
• Most businesses were managed by the government and were not required to be profitable.
• It had a very poor education system.
• It was overpopulated based on what they could produce.
• It had an obsolete infrastructure.
• The currency would not be accepted in the developed countries.
China’s competitive opportunities were based on its vast source of cheap labor, as well as the fact that Japan had moved out of the low-end product market, leaving it open to China.
At that point Japan was a role model for the rest of the world in transforming manufacturing operations to capture international markets. In analyzing the Japanese performance improvement cycles, it became obvious to the Chinese government that the Chinese environment was very much in line with the Japanese environment during the 1930s—when Japan had established a reputation of producing low-quality, cheap throwaway products. This approach was profitable enough to greatly improve the living standards within Japan. It also created the funds to manufacture a war machine that was large enough to attack the United States.
Following World War II, Japan’s focus changed from producing low-quality, inexpensive products to an environment where it established a few brand names that were noted for quality and excellence. This approach enabled wages to increase and as a result, greatly improved the standard of living. It took Japan 35 years to establish a reputation for building high-quality products. During this time Japan had a number of failures and learning experiences. For example, the first car that Toyota shipped to the United States, the “Toyopet Cown,” was a dismal failure. The company sold only 958 cars and had to ship many of them back to Japan.
For China to follow the Japanese model of brand recognition, it would require a great deal more capital investment, hiring, and time to design new, innovative products. There would be no immediate return because it would be a new product, and building a brand name alone is a massive undertaking. The Chinese market in this case has not been the engine of innovation; in fact it has been a tremendous hindrance. As a result the manufacturing model that the Chinese selected was product recognition rather than brand recognition. By working with products like toys and athletic shoes, China’s customer base was limited to a dozen companies rather than trying to understand the needs of millions of people and promoting their products to the mass populations. The Chinese focus has been on selling its products to foreign firms, not to foreign consumers.
What does China need to do to get on track with quality? I believe the concept held by most quality professionals—i.e., that there is a set of international best practices—is a fallacy. Based on surveys I’ve seen and my personal experiences, I believe there are at least three sets of best practices:
1. There is a set of best practices for the organization that is struggling to grow and stay alive.
2. There is another set of best practices for the midrange companies—the ones that are serving the general needs of the biggest portion of our population.
3. Then there is a third set of best practices that pertain to the top 20 percent of companies in the world, such as the organizations recognized for achieving performance excellence with the Malcolm Baldrige National Quality Award.
Some of the best practices recognized in the high-end companies are absolutely disastrous when applied to the low-end companies. It is obvious to me that a company that is struggling to keep from going bankrupt has to do very different things than companies like Walmart, GE, or IBM.
The majority of Chinese manufacturing industries have migrated from being low-end performance companies to the midrange, and now they must change their strategy and practices to progress up to the next higher performance level. Wages in China have increased at a rate of 20 to 30 percent a year. The country’s are losing their competitive advantage of low-cost labor. It is now time for them to focus on establishing brand recognition and competing in a high-quality marketplace.
With wages increasing in mainland China, a group of affluent Chinese buyers has been established. It is now buying high-end quality brand names produced in Europe and in the United States. This will become a major sector in the Chinese marketplace and one that is ripe for Chinese manufacturers.
QDD: What is the status of the Chinese auto industry? Will it be able to compete on quality? Does it care?
HJH: In 2010, China sold 18 million vehicles. That’s a new world record for any country, including the United States and Japan. Chinese automakers wisely have focused their sales campaigns to the Asian market, allowing them to gain experience and debug their products without tarnishing their reputations. The Buick manufactured in the production plant located just outside Shanghai is an excellent example of a quality car that is sought after in the Chinese market. At the component level, tires manufactured in China are an excellent example of a quality product that is impacting the total auto industry.
Will China be able to compete in the auto industry from a quality standpoint? If quality is what its customers want, it has the capabilities to deliver that. Just look at South Korea. It is producing higher-quality cars than General Motors can produce. South Korean automakers’ initial quality level, which is as good as or better than Toyota’s, is delighting its customers. In South Korea’s case,it was able to accomplish this amazing transition in fewer than 20 years. If South Korea can do it, certainly China can.
QDD: In your visits to China, you have seen the explosive growth in industry. Is there any sense that the Chinese care about the environmental impact of that growth?
HJH: One of China’s foremost priorities was obtaining quantities of foreign currency that could be used to upgrade its obsolete infrastructure. This meant producing a large quantity of goods with a minimum amount of investment. In this massive expansion less thought was given to the environment than the more developed countries were able to do. At the end of March 2011, China has accumulated US$3.04 trillion in foreign currency reserves. This is the largest stockpile of foreign currency in the world. At this point in time, environmental issues are important to the government and the people in China. But as a manufacturing center for the world, environmental controls are a major problem that has to be addressed without hindering the country’s manufacturing capabilities. China has 18 percent of the world’s population but consumes:
• 53 percent of the world’s cement
• 48 percent of the world’s iron ore
• 47 percent of the world’s coal
• And has produced 11 times more steel than the United States
China is focusing on using technology so as to maintain a homogeneous balance between the environment and its manufacturing commitments. The country currently has the world’s fastest train and the world’s largest high-speed rail network. China now possesses the world’s fastest supercomputer. During the past 15 years, China has moved from 14th place to second in the world in the number of published scientific research articles. Many of these focus on environmental challenges. From the standpoint of electronic technology, China is in a very good position because it currently controls more than 90 percent of the global supply of rare earth elements.
From a manufacturing standpoint, China currently is the number-one producer in the world of wind and solar power. It is conducting extensive research related to cutting pollution in the use of coal. Environmental and green technology is important to the Chinese people but will further advance only if it doesn’t slow down progress in the total economy.
As a final thought, we may say many negative things about the Chinese but being stupid is not one of them. There certainly are a lot of good things that we can share with the Chinese people and their government. But in return there are a lot of good things that we can learn from China; living within our income and not spending more money than we have is one of them.