Why few Chinese factories are adopting lean principles

A few days ago, I wrote that yes, lean production IS possible in China… But it will take a long time to become as widespread as in Japan.

In the 1970s, everyone in the Japanese car industry was wondering what allowed Toyota to resist downturns so well. And they started to take inspiration from the Toyota Production System’s principles and the tools.

One would think that in the current environment, where most Chinese manufacturers make less than 2% of profit on their sales (and many losing money), their managers would be ready to switch their mode of thinking.

I am pessimistic. And there are four reasons for this.

1. Ignorance of best practices

Over 95% of factory owners are not aware of the benefits they would gain from a lean transformation.

Actually, they don’t even believe it when I tell them. The batch-and-queue system, with tons of work-in-process inventory, seems to be the most efficient. That’s how their former employers, their friends, and their competitors do, after all.

Very few Chinese factory owners are engineers. And the State media aren’t going to recognize Japan’s superior know-how anytime soon. So this obstacle will not disappear quickly.

2. The whole supply chain would need to be restructured

Manufacturers are not focused on streamlining the flow in their supply chain. As I wrote before, they tend not to think in terms of systems. But there are two other factors at work:

  • Their export customers themselves encourage a batch-and-queue organization, because they often purchase full containers at a time.
  • Their suppliers give low prices when materials are purchased in large quantities.

3. No interest in improving processes

In Toyota factories, processes are automated only when they are physically hard or dangerous for workers. The objective is to keep improving each process by using the operators’ brains. A robot has no brain, runs no pilot test, and makes no suggestion.

In contrast, Chinese factory owners usually think automation is a solution to reduce their costs and their quality problems. They automate their existing bad processes!

As I wrote before, automation is usually not a good idea, but few people agree with me here… Sales of robots are booming in China, as related in a recent New York Times article:

China is expected to pass South Korea and Japan to become the largest robot market next year, according to a forecast from the robotics federation. Units in operation worldwide are expected to top 1.3 million by 2014, the group said.

4. No respect for people

A lean transformation is only possible if people are respected. For example, productivity gains (thanks to increased throughput, more orders shipped, and more efficient processes) should not result in layoffs.

This is very, very far from current practices in China, as described below:

  • Short-term thinking on the owner’s side (his wife is often using the factory’s profits to invest in real estate). No investment in training, little investment in equipment.
  • Short-term thinking on the employees’ side, and in particular the migrant workers who might not come back after Chinese New Year.
  • Constant fear of losing one’s job in many factories.

Oh, and while I am at it, there are a few other obstacles to lean production:

  • Focus on pushing production out of the door: operators usually get paid by the number of pieces they make, and seldom control the products they receive (let alone control their own work).
  • Factory workers are narrowly specialized. Different departments don’t work as a team. Making small production cells would require a change of mentality.

How about the role of Chinese culture?

A lean transformation takes years, and necessitates a strong impulse from the top of the company. The role of the local culture is minimal, actually.

I completely agree with Michel Baudin, a lean expert, who writes:

All the factories in the world draw their work forces from societies with their own cultural idiosyncrasies. This is equally true in the US, France, Russia, or China. However, once on the shop floor, dealing with machines and production lines, the national culture is little more than background noise. You have to pay attention to the local etiquette, but that is not a show stopper.

But let’s move on to what can help China manufacturers transform themselves…

China’s biggest ally in this battle is… Japan!

Thousands of potential “seisei” (masters) are coming from Japan to work in China’s industrial areas. I just found this fascinating CNBC article on the subject: ‘Made in Japan’ Engineers Find Second Life in China (h/t to China Challenges).

Japanese government data shows 2,800 Japanese expats living in Dongguan alone, a city of more than 8 million people.

That’s a large number for one city. Are they working in buying offices? No, it seems like they are mostly helping factories get better.

Millions of Japan’s “baby boom” generation which makes up nearly a 10th of the country’s population are starting to retire, with many engineers among them.

It is not just financial considerations, but a desire to keep working beyond the rigid retirement age in Japan that prompts many to take up the offer of a move to China.

This is consistent with what I read before: many Japanese engineers want to keep working (eliminating waste in factories) well into their 60s.

But is there another reason?

Japan is burdened with debt of $10 trillion, or twice the size of the economy. That has forced the government to gradually raise the age people can get their pension from 60 years of age, leaving many salarymen temporarily income-less after retirement.

So, tens of thousands of Japanese manufacturing experts are coming to help manufacturers. Can this phenomenon have a large impact on China’s manufacturing efficiency?

Japan suffered its first tech brain drain about 20 years ago when South Korean firms such as Samsung Electronics and LG Electronics poached scores of front-line semiconductor and white goods engineers from big Japanese electronics firms.

Since then South Korean electronics manufacturers have bounded into the global top ranks, helped along by this human technology transfer.

Japan’s tech giants, meanwhile, have floundered. Sony, Panasonic and Sharp, Japan’s three main TV makers, are expected to have lost $21 billion between them in the fiscal year that ended March 31, partly because of Korean competition.

So here is my conclusion:

  1. China is ready for lean. There are no real deep-rooted, cultural obstacles.
  2. It faces strong obstacles on its way, because of the prevalent way of thinking.
  3. But thousands of its factories are conscious of the need for a higher productivity, and are hiring experienced Japanese engineers.

I guess lean thinking can only get more widespread in China…

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Comments

  1. says

    I am often amazed at the waste I see in some Chinese factories– as well as the tolerance for it. I think the problem stems from a disconnect: the most visible costs (labor rates, material, fixed overheads) are scrutinized and controlled (sometimes without regard to human dignity and safety), while the less visible costs from muda(waste) is ignored (overproduction, WIP, excess raw material stock). 

    I can give some examples: my engineer and I went to visit a pretty large electronics factory in Guangzhou some weeks ago. They had their own strong brand, and made products for lots of well-known western brands as well. Great conference rooms, sample rooms, etc. But their shopfloors were another story. We could estimate that WIP was around USD4M on one floor alone. Our factory tour leader actually boasted about the many inspection points they maintained, and later admitted that adding more and more inspection points didn’t lower their defect rates, so they added a system of fining inspectors for defects found downstream. He also admitted (surprise, surprise) that this wasn’t working either. 

    Anyway, I said to our host: This is a big factory making famous branded products. I’m sure your boss is a great businessman. But isn’t he concerned about cash-flow?

    She responded: Actually, yes. He is always telling us he doesn’t know where the cash goes.

    Anyway, it seems the boss knows there’s a problem, but simply doesn’t know what to do about it.

    Likewise, I visited small factory in Zhuhai in 2007, when business was booming. This small factory exported about USD600K/month and had, easily, the same amount in WIP (piled up right in front of the constraint, which was unmanaged and under-productive). Anyway, I asked the boss about business. He said it was “too good”– because the couldn’t get all the orders out on time, they had to turn to outsourced vendors, which added cost and further sequestered their cash. I suggested following lean principals to get out of that bind (just taking care of the  low-hanging fruit would have been sufficient). He responded that they were “too busy” to implement anything right now. Imagine “too busy” to stop losing money!

    I am convinced that:
    1. There is NO REASON why Chinese factories can’t be lean. Some are. (the factory I’m responsible for is 100% run by Chinese, and it operates largely on lean principles)

    2. On the other hand, many can’t see the connection between lean management and improved financial performance– I think this is the biggest obstacle.

    3. Many Chinese managers still believe that the old production line model (think Model-T) is the only efficient way to organize production– they seem to think that lots of people kept as busy as possible somehow ensures productivity. It doesn’t, of course,  but they will not go lean until you can convince the boss.

    4. It is not just local Chinese bosses and managers  that “don’t get it”. Many, many western, Taiwan and HK factories face the same obstacles to leaning their processes.

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