China, Day Two: The business of China is business

Part two in a series

From space, the road system around Shanghai must look like a bowl of Chinese noodles. But traveling on the roads themselves feels like traveling the straight and narrow. The long, straight parkways, well-manicured, roll out across the flat coastal plain that surrounds Shanghai.

sm-cooper
Component await shipment at Cooper Industries
outside of Shanghai

The business of the day is business, so we’re visiting a number of manufacturing companies. The industrial parks we visit are laid out in grids that keep things well organized and makes it easy for delivery and cargo trucks to move about. It’s just the most visible indication of the careful planning the government has put into place to attract companies.

We tour a few American-based companies as well as a German-based one, although all are quick to characterize themselves as “global companies.” One company manufactures parts for electricity transmission; another manufactures parts for auto transmissions and brakes; another is an aerospace manufacturer; another specializes in urban development.

China represents a key market for each of them. Business here is booming.

And it’s hard to imagine what China has NOT done to encourage those companies to set up shop. For instance, we visit a special free-trade zone that facilitates the movement of raw materials and processed goods in and out of the country. “This allows us to avoid import and export duties,” an aerospace manager tells us. “It allows us to respond to customer needs faster, too. Instead of shipping something here from the U.S., we can already have it on site.”

A light-up map of the Suzhou Industrial Park
A light-up map of the Suzhou Industrial Park

In the city of Suzhou, 80 kilometers northwest of Shanghai, the Chinese and Singapore governments have created a planned city, called the Suzhou Industrial Park, that provides huge tax breaks for businesses, social security incentives for workers, and a host of other enticements for a pro-business environment.

“We have to be careful about how we market our products,” one engineer tells me. “There’s a perception that ‘Made in China’ means something inferior even though that’s not the case.” One way the company gets around that perception is that it creates products in China, then ships them to Mexico for assembly before they’re sold in America. All that shipping still makes the products cheaper to produce than if they were made and assembled in America.

Near the heart of the Suzhou Industrial Park
Near the heart of the Suzhou Industrial Park

China also offers other key advantages for businesses. The country’s location makes it an ideal platform for doing business with other Asian markets. The country’s size means virtually any natural resource and raw material is available without having to import it.

The biggest incentive, of course, is the cheap labor force. “In America, labor costs are the number one concern for a company,” the engineer tells me. “In China, businesses don’t even worry about their labor costs because it’s so inexpensive here.”

For some companies, labor costs are as much as thirty to forty percent cheaper in China than in the U.S. At one plant we visit, workers make the equivalent of around $200 a month. That’s $50 for a forty-hour work week.

“Here, the worker efficiency is much higher, and their productivity is higher,” one manager tells me. “And the product we produce meets the same quality standards that workers in the U.S. have to meet.”

At the German company, laborers work on a series of modern—but not cutting-edge —machines to make bearings for automobiles. “The machines we use in our German plants are more fully automated,” one of our guides says. “That allowed us to ship the older machines, which are more labor-intensive to use, to this location because the labor is so inexpensive.”

Mandatory retirement for unskilled workers is 55 for men and 50 for women; skilled males can work until 60 and females until 55. After retirement, workers get a small government pension.

“We have a free hand in who we hire,” a manager tells me. That’s a big change from the days when China told each citizen where he or she would work and how to make a living. “It’s a competitive work environment for skilled workers. They are always looking for opportunity. They don’t consider company loyalty, so it can be tough for us to keep workers.”

The workforce presents other challenges for American companies, too. “Innovation and creativity are not taught in the school systems,” the engineer explains. “In that respect, the engineers we hire out of college are quite raw.” The challenges of teaching them innovation represent a significant—but not insurmountable—cultural challenge.

While the Chinese don’t seem to excel at innovation, they demonstrate excellent adaptability. One reason China’s business climate and infrastructure are booming is that the country has been able to take advantage of the learning curve other countries have experienced.

“Our plants in America grew organically, which isn’t especially efficient,” the engineer tells me. “When we built this facility, we could build it specifically to suit our needs.” The growth of the plant in America gave them a clearer, more efficient idea of how to build the plant in China.

The same thing is happening with thousands of other companies.

Chinese adaptability also translates as an all-out assault on intellectual property rights. For instance, millions of Chinese smoke like chimneys, but I’ve seen far more Zippo knock-offs than Zippos. “We have to defend our intellectual property rights vigorously,” the engineer tells me. “But even still, Chinese companies are learning from us. After all, our suppliers don’t just supply to us. Our competitors benefit from the same high standards we demand from our suppliers. So, at some point in the future our competition will be competing at a level not much different from us.”

For the time being, though, China continues to depend on foreign companies to help fuel the country’s explosive growth.

“The investment market here is so large,” the engineer tells me. “But that doesn’t mean the Chinese are just spending. ‘Investing’ means they’re getting better.”

3 comments on “China, Day Two: The business of China is business

  1. Thanks for that inside look. Very revealing interviews with the manager and engineer. Much of it made me slightly ill, though:

    “In China, businesses don’t even worry about their labor costs because it’s so inexpensive here.”. . .

    “The machines we use in our German plants are more fully automated,” one of our guides says. “That allowed us to ship the older machines, which are more labor-intensive to use, to this location because the labor is so inexpensive.”

    Feel as bad for underpaid Chinese workers as for American workers deprived of jobs.

  2. Thanks, Russ. One thing I probably should’ve explained more is that the Chinese look at this as a good thing. Compared to what they used to make, this is good money. A tour guide told me yesterday that young Chinese people are happy with these changes and the modernization, but the older generations are not happy about it much at all.

  3. Thanks, Russ. One thing I probably should’ve explained more is that the Chinese look at this as a good thing. Compared to what they used to make, this is good money. A tour guide told me yesterday that young Chinese people are happy with these changes and the modernization, but the older generations are not happy about it much at all.
    OH! You’re my new favorite blogger fyi

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