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China Faces a New Set of Manufacturing Challenges

Posted By David Brousell, July 01, 2013 at 12:56 PM, in Category: The Adaptive Organization

One of the interesting things about business evolution these days is how short certain cycles seem to be getting. Analysts rooted in silicon would say it all stems from the microprocessor and Moore’s Law. Innovation seems to confer increasingly temporary competitive advantage, product cycles are measured in months if not weeks, and market dominance can disappear in just a few years. Whatever your perspective, the days of decades-long corporate or even national hegemony seem as long past as the fins on a 1950’s era Cadillac.

When it comes to manufacturing historically, we have tended to think of generational periods of national power which span decades. Great Britain was the world’s leading industrial powerhouse in the 1800s and into the 1900s but was succeeded by the United States, due in large part to World War II. But America’s leading position hasn’t lasted nearly as long as Great Britain’s did. The spotlight already has shifted to China, which passed the U.S. in 2011 as the world’s largest producer of manufactured goods.  

As Shakespeare would say, however, heavy is the head that wears the crown. Just two years after achieving the distinction of becoming the world’s largest manufacturer, China is beset by a growing host of manufacturing-related problems that, while not immediately threatening its leading position, do raise questions about its trajectory and pace, and its ability to change. Already, McKinsey & Co. says, there is evidence that China is losing new factory investments to lower-cost areas such as Vietnam.

“Today, … China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demanding,” says a new report by McKinsey & Co. “Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China as it gets richer.”

Successfully attacking these challenges will require Chinese manufacturers, as well as global manufacturers with Chinese operations, to confront challenges that American companies know all too well – the leadership, cultural and organizational issues that don’t always lend themselves to technical solutions. In the operational excellence realm, for example, McKinsey cites a lean manufacturing project at a state-owned Chinese enterprise that didn’t come close to achieving targets because the organization’s leadership didn’t have the soft skills necessary to complete the lean transformation.

In an example of an organizational issue, McKinsey tells the story of a Chinese unit of a multinational medical device manufacturer that developed a successful new product only to have research and development of future versions of the product transferred, against the Chinese unit’s better judgment, to the company’s headquarters. “The product flopped when new and technically elegant features insisted on by the [headquarters] group proved too expensive for customers or irrelevant to them,” McKinsey said.

Similarly, Chinese manufacturers’ heretofore monolithic supply chains, designed for a low labor cost environment that McKinsey says is “quickly disappearing”, will require a new level of competency in demand planning, which some companies are now undertaking.

Whether it is operational efficiency, supply chain management, or more innovative product development, the rules of the manufacturing game in China are rapidly changing, requiring Chinese companies as well as multinationals doing business there to re-think what they are doing in some fundamental ways.

Will Chinese companies rise to meet the new challenges, many of which require creativity, adaptability, and openness to foster cultural and organizational change? Time will tell, of course, but time also tells us the lesson that the tectonic plates do shift – and in increasingly shorter cycles.

Written by David Brousell

Global Vice President, General Manager and Editorial Director of the Manufacturing Leadership Council

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