3. What we know RMB-USD exchange rate 2006=8.15; RMB-USD exchange rate 7/28/2010=6.779; Difference=16.8% Approximate monthly labor cost 2006 (Zhejiang) RMB 750-1000; Approximate monthly labor cost to retain workers 2010= RMB 2000; Difference 100%+ Monthly labor cost translated to USD 2006=$92-$123; Monthly labor cost translated to USD 2010=$295; Difference=140-220% China is a market with labor shortage so labor rates are not solely determined by government mandated levels.
4. What we don’t know Where will RMB-USD exchange rate land 2010-beyond. 6? 5? IF RMB appreciates to 6.5/USD and labor rate for 2011 increases only by the China Labor Contract Law of 2008 mandated 8.3%, monthly wage translated to USD will increase to $333, an increase of 13%. This will also affect labor-intensive services such as trucking and transportation. What will effect be on materials? In dollar terms, exchange rate appreciation will affect every part of the production process.
5. The undeniable fact is that labor, which has been a nearly inconsequential factor for China, will become very dear for manufactured product, especially those of low FOB value such as textiles.
6. China’s “Bad Habits:” Built factories structure and process around cheap labor; Growth accomplished with labor and equipment, NOT technology; Because of cheap labor, efficient process flow not worth considering; Plans assume growth can continue on this basis forever.
7. China’s Quality Process: Not built around inline or process control; heavily based on final inspection by customer; Assumes some or all defects should be passed through in the hope that customer will not catch. Both Money and Time are wasted when defects are caught.
8. China Myths: “Endless Labor Pool.” In fact, there is a severe labor shortage in China at times, which will grow worse as time goes by. “Cheap Labor Will Last Forever By Moving to Western Provinces.” In fact, most of China’s labor is migratory and labor price in Western provinces will also increase due to increasing standard of living and competition for labor. Young population increasingly reluctant to work in factories. “Domestic Consumption Can Replace Lost Exports.” To some degree this is true, but much of the domestic consumption increase may be lost to imports.
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10. Second, the development process always follows the same course: As GDP growth continues, consumption increases, wage demands become higher, and low-wage industries like textiles are squeezed. Resultant price increases reduce competitiveness on a global basis.
12. MOST IMPORTANT: PARADIGM SHIFT (Paradigm=A philosophical or theoretical framework; a way of thinking) Government and business MUST change their way of thinking; the old way of thinking will NOT work any more. It will only result in erosion of export business and the consequences of that. Labor MUST be replaced by technology, and any cost that does not add value must be eliminated; in Kaizen they call it MUDA-waste.
14. Every step of the process must be examined in terms of its three elements: People- How many people are involved in the process and what do they do? Process- What steps/method do they take to accomplish the process AND keep proper records? Technology- What technology is available/used to help them accomplish the process?
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16. What is the process flow? How do the steps of the process flow into each other? Is there any time and effort waste BETWEEN the steps?
17. Materials Management-How much waste is there in the purchase and usage of materials needed for the process itself and to assist the process? What records are kept and how?
18. Materials Purchasing and Planning- How much cost can be taken out of the materials process by resourcing, relocating, verticalizing?
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20. This is a different kind of waste-waste of our future. Any and every effort must be made to add steps and process that do not eat our future resources—Alternative power, non-polluting dyestuffs, recycling, etc. MANY retailers like M&S are specifically calling attention to green elements on their product, and, over time, buyers and consumers will demand these. China should take the lead in this effort, but surely any factory that has “greened” a significant part of their process will be preferable to buyers in the future.
21. Problems/solutions- China factories are not used to paying for knowledge, and some will be shortsighted in not making the small investment to insure their future. The investment in making these changes is a small fraction of the savings that can be achieved, especially over the longer term. Reeducation of an long-standing and ingrained process will be difficult. Many will not believe. If Management thoroughly support these changes, the rest will follow.
22. ?????????????? So ask yourself: If Japan, USA, Germany, Korea and Taiwan had not found efficient way to manufacture and had continued to depend on cheap labor, where would their economies be today? China is expected to be the worlds #1 economy soon-this growth CANNOT be sustained if the changes needed are not made.
25. How we work First, we will carefully and thoroughly review ALL processes and operations in the factory; Then, we will compose a report with recommendations and costs; If accepted, we will supervise any and all work. Once complete, we will measure all improvements to be sure they are as recommended.
26. How we work If changes/improvements need to be made, we will recommend and supervise; When you are satisfied, we will finish our work and return 3 months/6 months/one year to review progress and be sure everything is followed and on track.
27. How we work We understand that these improvements are not cost-effective unless recognized by buyers. We also understand that there is little or no growth business in today’s market for new suppliers. Therefore, once the factory is ready, we will personally help you to gain new customers by presenting the DIFFERENCE between your factory and your competitors.
28. The magic formula Lower Costs + New Customers= A Bright and Profitable Future.
