As part of LGO’s collaboration with Shanghai Jiao Tong University in the China Leaders for Global Operations program, each year several LGO students visit Chinese company sites as part of their Lion Teams projects. Lion Teams are joint projects in which LGO students team with their CLGO peers to tackle partner company operations and manufacturing challenges in China. Just returned from their recent Lion Team project, Brian Hendrickson, LGO ’12, wrote about the experience of working at a major supplier site and experiencing China’s economy and culture first-hand.
|MIT in Hong Kong: LGO ’12s Christina Williams,|
Pamela Chuang, Neel Sheth, and Marnix Hollander
Just over a week ago, five of us LGO 2012s returned from a two-week trip to China, and only now has the dust settled enough for us to begin taking stock of the experience. Our group, along with five CLGO students from Shanghai Jiao Tong University, is one of several Lion Teams working this term to help client companies address operations challenges in China. My team spent two weeks working on-site primarily in Shenzhen, China, and the experience was unlike any of our prior plant visits.
|Marnix Hollander and Neel Sheth, LGO ’12,|
at a supplier site in China with CLGO colleagues
One ongoing realization was that while China’s exceptional growth is no secret, the extent to which that growth permeates society and business is endless. Behind the government’s ambitious plans to build wealth among its people are immense manufacturing and infrastructural investments. Companies that just a few years ago were small family operations have grown rapidly into multi-million-dollar, even billion-dollar enterprises that employ tens or hundreds of thousands of people. So practiced are the agents of growth that a single manufacturer can build a new factory floor every 1-2 days. One year business plans contemplate not 20% or 30% growth but instead how many new manufacturing buildings, dormitories, and supporting amenities will be needed to double, triple, or quadruple the company. Whether government-owned or privately-backed, the name of the game for a company is output.
This emphasis on production numbers shapes the very landscape in China. When Shenzhen became the country’s first “Special Economic Zone” in 1979, it was a fishing village with a population of about 20,000 people. Today, the little experimental town has grown to over 14 million people and is one of the largest manufacturing hubs in the world. The city center is full of neon-lit skyscrapers and luxury stores. High-voltage power lines crisscross the surrounding land, and government workers dot miles of new towers under construction. New roads fan out through vast empty lots, and the high speed rail comes to an abrupt stop, unfinished and waiting for building development to catch up.
At least within the factories that we visited, the growth culture drives operating mentalities in many subtle ways. The perceived cost of underproduction is very high, creating an emphasis on brute output over efficiency. Chasing after demand means finding creative ways to house more machines and more people. Modern concepts in lean manufacturing and quality management, although familiar to many managers, are perpetually on the horizon for fear that more immediate implementation would cause intolerable disruption. Section teams within the factories defend their production numbers against impingement by other teams, allowing inefficiencies to build at section boundaries. All of these issues were fascinating to explore as we interviewed factory managers, line leaders, and operators. They also make introducing change all the more challenging and add interesting cultural components to our project. Growth has created undeniable inertia.
And yet the very success of China’s planned economy is perhaps its greatest enemy. Growth faces unprecedented challenges, primarily from abundant cost inflation. In Shenzhen the price of real estate has gone up by 2000x since the 1970s, according to one factory owner. Across the country, the cost of home ownership has risen enough that many young people are delaying marriage in part because a would-be husband cannot afford to buy a home, as is the custom. Even the comparatively well-off bankers that we met in Hong Kong live with their parents. Across the street from five-star hotels and sometimes sandwiched between high-rises are dilapidated multi-family units that house white collar workers. Ironically, a number of analysts have suggested that the government has pushed construction of over 64 million apartments that now sit vacant in China. Far too expensive to be purchased, the apartments simply stoke the country’s growth engine.
Companies, too, face cost pressure as the once unthinkable has started—cheap labor is drying up. The government has steadily raised minimum wages, but much of the rate increases seem fueled by the workers themselves. Each Chinese New Year, millions of workers pack onto trains where they stand for up to 72 hours to get to their inland homes. And increasingly, fewer of those people return to work after the week-long celebration. Some factories see attrition rates up to 30%, with 5% considered a sign of happy workers. Companies are adjusting by establishing plants closer to workers’ hometowns, but existing factories in coastal areas like Shenzhen have had to increase wages by 15% or more a year. The year-over-year increases in needed people and infrastructure suggest that Chinese companies are approaching a part of the exponential growth cur ve so steep that current practices cannot simply be scaled up. New operating models are required, accompanied by adjusted mental models, in order for Chinese companies (and the Chinese government) to sustain growth.
|View from above Yangshou, China|
These are some of the issues that we witnessed firsthand, but the trip wasn’t all work. Each day at the factory was punctuated by meals generously hosted by the supplier in private dining rooms at local restaurants. The meals, each with many rounds of food, were an important place for building rapport free of the pressure that often hindered cross-language communication. Discussions ranged from personal life to the evolution of the industry and recent national developments. The conversations at once highlighted the personal stories of individuals at the same time that they reinforced the sweeping power of collective change.
|Making friends in the crowd at a rugby tournament in|
Hong Kong are Brian Hendrickson, Christina Williams,
Marnix Hollander, and Neel Sheth, LGO ‘12
In the middle of the trip we took four days off to explore China beyond Shenzhen. One of our LGO teammates met with another Lion Team in Beijing, and the remainder of us went in search of less developed China. A short flight landed us in supposedly scenic Guilin that, at 1.3 million people, was still too developed for our taste. So we boarded a boat for a three-hour trip down the celebrated Li River. There we came upon Yangshuo, a small tourist destination known for its karst mountains, caves, and outdoor activities. We went rock-climbing, biked along paddies with water buffalo, and explored merchant stalls alongside Chinese tourists. The excursion was a much-needed respite from the long hours on-site and off during the previous week. At the tail end of the trip we got one last chance to soak in Hong Kong, where we watched an international rugby tournament (including a victory by the US team) and explored the nightlife of Hong Kong’s famed bars and clubs.
Our work will continue on the project until the end of the term, but already we are looking forward to returning to Asia for international plant trek next spring.