Sino-U.S. Trade: Truth From the Shop Floor

We went to the gemba, and this is what we learned

Ryan E. Day

May 31, 2018

With the threat of a trade war between China and the United States looming, business relations between Asia and the West have not been this hot a topic since the Japanese Economic Miracle that was birthed shortly after WW II. Today, it is China’s turn on center stage as its soaring economic growth and aggressive trade restructuring has set off alarms around the world, particularly in the United States. But how does the media furor compare to the perception of rank-and-file American manufacturing business owners?

There is much debate whether the current trade climate is advantageous to U.S. business interests. The debate has been sorely agitated by President Trump’s executive order raising tariffs on imported steel and aluminum as well as an order to scrutinize approximately 1,300 products for further duty increases. Although the administration has currently put that plan on hold, the message delivered still comes across loud and clear.

Most discussion in the news centers on economic growth and, naturally, jobs. When you hear “the economy” or “economic growth” on the nightly news, they are talking in terms of gross domestic product (GDP) as determined by the U.S. Bureau of Labor and Statistics (BLS).

But, GDP is a value-based aggregate better suited for use as statistical fodder than for understanding how Chinese and American manufacturers actually function as competitors.

If we are to have informed discussions about the state of manufacturing, we must recognize the relevant perspective that frames a particular discussion about the things that affect product value. And contrary to what one might glean from media in general, there are perspectives not shaped by American vs. Chinese GDP.

In manufacturing, perspectives are as uniquely human as in any aspect of life. It is our human perspectives that shape our narrative in regards to Sino-U.S. business relations.

I recently spoke with two directors of two different small U.S. electronics manufacturing companies that import components from Chinese suppliers. Not once did either party bring up GDP as a factor affecting their product. It’s not GDP, per se, that affects manufacturing; it’s all the things that affect manufacturing that determine GDP.

A few things they did bring up were:

Quality

When I asked about the quality of Chinese-made components, the directors had similar views:
“You have to be very clear about quality points, from product specifications, dimensions, functionalities, and materials, all the way down to what testing should look like, what’s a go or no-go on a product.”

Apparently, this issue isn’t exclusive to China:
“It’s the same thing in the United States. It’s a worldwide problem, not just a China problem.”

Quality and cost have always been joined at the hip and will continue to be for the foreseeable future:
“I think somehow there’s a notion that China is this magic place that cranks stuff out. And they are in a way. Sometimes they are better, faster, cheaper. But they can also be slower, more expensive, and lousy.

“I remember a conversation with one of my suppliers, who said, ‘Tell me what kind of quality you want, and I’ll tell you the price.’ He said too many American buyers only want to talk about price, but they bitch when the quality isn’t there.”

Tariffs and duties

“Tariffs will definitely have an effect on us at some point. We will have to revisit where we manufacture and who we partner with. We’re not going to be able to sustain things as they are if our government is going to slap 20 percent on the top of what we have to get from China. We can’t afford those prices.”

‘Tell me what kind of quality you want, and I’ll tell you the price.’

Policies made by both the United States and China have a direct effect on small manufacturers:
“I’m already at the point where I’m looking for second alternate suppliers. I just want to have that safety valve that if something changes overnight, I already have a relationship set up that can step in and help get me through till things change, or until we can figure out how else to mitigate the impact.”

Cost of components

“I’ve developed a number of relationships with Chinese suppliers over the last 10 years, and I find them to be very transparent, honest, and open about why they may have to raise their prices when they do. ‘This kind of wire has gone up in price, so our products have to go up that much, too.’”

This director wasn’t as impressed with American suppliers:
“I had a supplier in Minnesota who jumped my prices by about 30 percent. When I asked why, they said, ‘It just costs too much to make your product.’ I said, ‘Wait, we went through every single step in design for manufacturing; what’s different now?’ Finally, I had to actually fly out to the manufacturing plant to see how they made my part. Bottom line was they had five people on the line when they only needed one. When we were done with the conversation, they took away the increase because it was very true, they just weren’t paying attention.”

Cost of labor

Although there is an indisputable gap between wages of American vs. Chinese manufacturing employees, not all heads of U.S. manufacturing companies agree about the cause of price differentials between Chinese vs. American made products:
“I’ll tell you another shell-shocker that will blow you away. I took several parts that we manufacture in the U.S. and compared them to what’s happening in China, and I looked at them in several different levels to understand what is the go or no-go decision as to whether to make them in the states or in China.

“My unscientific conclusion is primarily this: When you look at the labor cost in China vs the U.S., it’s a factor of about three overall—some people might argue that number. Although a Chinese employee might be making somewhere between $2.50 to $4.50 an hour vs. $8.50 to $15 in the U.S., when you start applying automation to that process, the incremental difference in labor per piece is fairly small. So, when you look at, ‘Can you manufacture in the States and be competitive with China?’ my answer is, ‘Absolutely.’”

“The problem is not at that laborer-wage level. The problem is at the senior management level, where the greed-factor in the U.S. is infinitely higher than it is in China. In China you see a lot of plants where the ratio of employee pay to owner pay might be 3:10, whereas here you can add a couple zeros to those numbers that senior management makes. The disparity between top pay and the bottom is so huge here—that’s where the problem is.”

Another director held a more common view of labor’s impact on costs:
“As manufacturing moves to other countries their standard of living is brought up, and as their labor wages go up, offshoring is not as attractive anymore. It may be a long time coming, but eventually you’re going to run out of spots to run to.”

Automation

Automation is nip-and-tuck with labor wages as a cost factor in manufacturing.

“We get one part from Malaysia that I’ve tried to have built here, but so far I’ve been unsuccessful finding someone with the right equipment. It’s a stainless-steel piece that has to be made a certain way, and they have some automation there that we don’t have here, so they can finish the part the right way.”

This director feels that China has a distinct advantage over U.S. manufacturers due to its level of automation:
“In fact, in China there’s one plant we work with that has more robotics and automation than equivalent companies in the United States. My membranes for example, are built by a U.S. company that has their one plant in China and one in the United States, but the ones from the U.S. are more expensive because the China plant is automated, and the U.S. plant is not.”

Everything these directors of small business brought up were issues that impact the value of their products, thus impacting American GDP.

Parting thoughts

So, what is the truth about Sino-U.S. relations? The truth may have to do more with perception than with headlines about GDP.

Yes, the sheer scale of Chinese assets, combined with the country’s ferocious determination to personify “Made in China 2025” all but guarantee it will overtake the United States in GDP in relatively short order. But all is not doom and gloom.

Maybe we would all be better served to focus more on the issues that affect U.S. GDP.

Maybe U.S. manufacturing will be forced to grow and improve.

Japan’s rise as a manufacturing giant taught U.S. manufacturers that lip-service to product quality was not enough to maintain market-share dominance, and that shoddy processes would bring financial ruin.

I have to wonder: What will we learn from the Dragon this time?

Maybe one director of a small American electronic manufacturer puts it best:
“I think everybody’s holding their breath at the moment.”

About The Author

Ryan E. Day’s picture

Ryan E. Day

Ryan E. Day is a Quality Digest contributing editor and principal administrator of the company’s content marketing program, which brings together those seeking business improvement solutions, and solution providers. Day has spent the last 7 years researching and interviewing top business leaders and continuous improvement experts including Sakor, Ford, Merchandize Liquidators, Olympus, 3D Systems, Hexagon Intertek, InfinityQS, Johnson Controls, FARO, and Eckel Industries. When not developing engaging and informative content, Day might be found polishing his html and css skills, or hanging out with his 20lb American Tabby cat.