Obligatory China post

As promised, I am delivering a boring post about three days of class in Shanghai where we learned about the way that business is done in China. The course focused on operations, so we visited a logistics company, a warehouse, a port and saw the floor at Nokia's Chinese network headquarters. If this sounds boring, stop reading here. If you are intrigued, read on to find out more about what business school is all about. I promise to go back to fun vacation stories in my next post! 

Day 1

Fresh off the plane from California, I excitedly began my two week adventure in China exploring topics in Managing Global Operations, Corporate Finance in Emerging Markets and China Globalization and the World. First on the docket was Jaume Ribera and Wei Luo’s class on operations in China.

After a brief introduction of the course, Prof. Ribera introduced Weiyin Yang from Chervon Holdings, a company that makes power drills, benches and other tools. He explained the history of the company, how they’ve expanded in China, their own brand products versus products produced for other brands and certain JVs they’ve entered into such as the one with Bosch.

One thing that I found particularly interesting was that the company promotes themselves as an American brand for their EGO and Hammerhead products sold at Home Depot in the US rather than drawing attention to the fact that they are Chinese. The reason for this, as Mr. Yang explained, was that there is a belief that American consumers may not be ready to accept a Chinese tool as a reliable product. Similarly, when marketed in the South American markets, the brands are promoted as popular US brands. Mr. Yang also introduced the discussion about how rising labor costs in China are causing the company to reconsider their production practices, a theme that would recur a number of times throughout the next few days. Chervon has been dealing with rising labor costs by focusing a lot more on automatization to cut costs throughout the value chain. While labor only accounts for 5% of costs on average, each component carries that 5% so it adds up. The company also combats this issue by hiring a number of temporary workers at peak times such as Chinese New Year and Christmas. Though costs are rising, Chinese culture has embedded in it a sense of efficiency which gives them an advantage over other emerging markets like Mexico. While labor costs in Mexico are similar to China, they have a slower pace and less access to the entire supply chain which is centered regionally by industry in China.

Mr. Emilio Salazar from Roca then took over the discussion to give us insights on the globalization of a Spanish bathroom products and sanitization company and his career as an expatriate. Roca truly is a global company with a presence in 135 markets. The interesting thing about the company is that it is still 100% family-owned with nearly 100 years of experience in the industry. The board of directors is in the 3^rd and 4^th generations of the family.  Roca has grown both by acquisition and organically with the acquisition of Keramik Laufen (Swiss company) really pushing them to becoming a global leader increasing their turnover by 50% and surpassing Kohler in size. According to Mr. Salazar, there are four key drivers to becoming a global operator: 1) complete solutions, 2) internationalization, 3) global brands, and 4) local brands. The company has design teams all over the world based on a frame of several design offices with over 150 multicultural and multidisciplinary designers and engineers. This spurs innovation and a better understanding of market needs across the global portfolio and allows them to adapt better to local markets.

After sharing his insights on globalization from a corporate point of view, Mr. Salazar moved into an interesting discussion about his career as an expat. This was particularly interesting to me, as I have lived for the past four years as an expat myself and plan to continue along this path in the future. Some of the things he said that really resonated with me were his comments about flexibility and willingness to adapt to “other ways of doing.” When I was living in Chile, I quickly learned that I wasn’t going to change the way business was done there, so I had to adapt to the way that Chileans did business or I would never succeed. In regards to career planning, he mentioned that it can be very hard to plan your return. There are too many variables that are out of your control. I couldn’t agree more—that’s why I decided to get my MBA!

The next part of the day included a visit to the Nokia Networks factory. Having spent my summer interning at Microsoft, I was excited to visit Nokia’s factory since Microsoft recently acquired their mobile phone business. It didn’t take long for me to realize that we were at the factory of the piece of Nokia that was not acquired and has nothing to do with Microsoft. Nonetheless, it was interesting to learn about the different quality requirements between products produced for the Japanese market compared to the Chinese market and to see the production line in action. Mr. Jose Menendez who gave us the tour explained to us that the industry requires a decrease in costs of 15% each year due to pressure from operators. As one could imagine, this is quite challenging because they have to be on the cutting edge of technology to remain competitive. The networks industry has a very fierce competitive landscape, high scrapping costs due to technology and demand changes, low forecast accuracy, short lead times, and therefore requires a very flexible supply chain. Sounds simple, right? Despite all this, Nokia believes they can continue growing because on average their attrition rate is much lower than the rest of China and employees are very loyal. Also, the government gives a 50% tax break for companies who invest in high-tech R&D and achieve a High Teach Certification (which Nokia has). The company encourages continuous improvement with Friday session asking for ideas from employees and middle-management which has led to savings of 3.6 million Euros in the last year and rewards employees for good ideas. All in all, it sounds like a great place to work!  Based on what Mr. Menendez told us, it seems that they have a good understanding of the their supply chain, labor in China and the competitive landscape to position the company to remain a leader in the industry for years to come.

The day ended with a discussion with Franc Kaiser from InterChina Consulting. His firm has given the year 2014 in China a great label: “Crossing the river by touching the stones, clear direction with short-term uncertainties.” The notion is that growth isn’t the only priority any more. China needs a more harmonious society with a good balance of unemployment, inflation and GDP growth. Watching the news about Davos last night, the commentator said something very similar about how China’s growth in 2014 was slower than it has been in over 20 years, however this isn’t something to be concerned about. While the country has been growing at an extremely rapid rate in the past two decades, the slowing of their growth (to 7.5%, cough) shouldn’t be alarming. What it really means is that things are beginning to stabilize. Mr. Kaiser’s response to this change is that China’s strategies need to be more responsive; new success factors are being added, while the old ones become even more important. He also discussed at length the automatization tsunami – production costs are really ­increasing; labor costs have reached a tipping point. Companies are beginning to pull out and move their production to Mexico, a theme that we heard earlier in the day. Salaries are still growing at 10% to 15% for blue collar workers. Workers are getting to the point where they are too expensive for China to delay automating their processes. There are also problems with labor availability and retention, which was brought up at Nokia by Mr. Menendez. People desire more challenging work that provides them with better opportunities. Policies toward automation are being pushed in many manufacturing-heavy provinces. Compared with the past, F&B and pharma will provide new emerging opportunities for automation providers. Some of the players to look out for in the next few years are Inovance, SIASUN, Estun Automation, GSK, Invt, and Supcon. If was Mr. Kaiser says is correct, these are the Siemens of tomorrow. I think I might know where I am going to invest my money next!

Day 2

Day two kicked off with a visit to the Yanshang ports, the world’s largest port. We drove there across a 32 km bridge surrounded by turbines out in the water. The bridge and the port were immense. It was really impressive. I’ve been to the ports in Houston, TX, Long Beach, CA, Valparaiso, Chile, and Seattle, WA – all of which are quite big, or so I thought. None of those come close to comparing to the size of the port at Yanshang. On the way there, Cristina Castillo shared some of her research and background about the port, certain regulations and gave us an overview of maritime logistics and its developing challenges. While she was able to explain well the import/export process when things go according to plan, she noted that she is restricted from visiting the port when things are out of line. After visiting the port, we visited the Free Trade Zone nearby. Inside the Free Trade Zone, there was a show room for cars that recently arrived to the zone and a foreign goods market selling all sorts of international products at prices that are much lower than you would find at a market anywhere else in China. The reason for this is because the transport costs haven’t been added on, as there isn’t any middle man between when the items arrive into China and make it into the hands of the buyer. After spending the day yesterday learning about global companies that operate in China, it was interesting to learn about how products move in and out of the country.

After our trips to the port and Free Trade Zone, we returned to CEIBS to discuss the Mattel case. This case gave some interesting insights on the way that people, especially in the US respond to the media. While the real problems that Mattel had which had caused a number of recalls in 2007 related to design of their toys with small magnets that could be swallowed, the media quickly blew things out of proportion blaming Chinese manufacturers for using lead paint. There were far more units recalled from the design problems than the lead paint. Mattel took certain measures to deal with the media storm, first by lumping problems together, then apologizing to China, introduction quality checks and taking better control over their suppliers. China also went on a PR offensive by announcing official inspections, revoking the licenses of certain suppliers (such as Lee Der) and making a public pledge to improve product safety. The main takeaway from the case was that no matter what you do for PR, you have to crack the system—you must ensure the whole chain works. The weakest link in the chain determines the strength of the whole chain.

Day 3

As the course came to an end, our last day began with a discussion of Nokia and how they were able to respond quickly to a fire at Philips while Ericsson lost market share as a result of their failure to respond. Nokia’s success lent from having procedures in place to remedy any issue in their supply chain and a well-planned chain of communication. Upper management heard about the fire at the Philips plant almost two full weeks before Ericsson ever knew about it. This gave them a chance to secure any excess capacity of chips before Ericsson could and their production went out without a hitch. Conversely, Ericsson wasn’t able to meet their release deadline for their next model of phone and their stock price plummeted. What we can learn from this case is that a well-planned supply chain and communication are key to being flexible and responding to any problems that might arise due to issues at any point along the supply chain. You are not immune to the problems of your suppliers!

For our last visit of the course, we loaded back up on the bus and headed to Lifestyle Logistics. I was really excited about this visit, mainly because I wanted to see rooms full of designer goods. J Mr. Andre Suguiura was a very knowledgeable speaker and taught us a number of things about the luxury goods market and logistics in China. Apparently, 25% of the world’s luxury goods market is in China. Chinese customers are now looking for more differentiation and quality than in the past where the label (or as he called it “Bling Bling”) meant more. For luxury goods, there are three distribution channels: direct operated stores, partners and distributers, and e-commerce sites. Traditional retail is characterized by high rental costs and low availability of top locations. There are over 1,000 malls under construction in China, which is also the home to some of the biggest flagship stores in the world. Interestingly, luxury conglomerates are becoming developers to deal with the challenges they face in the Chinese market. E-commerce is really growing in China as well. There are 550 million internet users in China—that’s more than people in the whole US! Of those users, almost 70% of users search for luxury brands each month. Sounds like the luxury brands are doing well here. Such a large interest in luxury brands in China comes with its challenges. Some of these challenges include customs inspections and classifications, China retail labeling requirements, CIQ statutory supervision for imported textile, logistics distribution, and random inspections and sample testing at retail shops by SAIC. Before our tour of the warehouse facilities, Mr. Suguiura left us with some recommendations for retail logistics in China: define a logistics model that will sustain growth in China and consider pretesting swatches in an accredited test lab. Unfortunately, we weren’t able to take home a goody bag of defective goods, but I can always hope that someday I will be invited to a “Family Sale” at Lifestyle.

It was a really enlightening three days. I can’t believe how much my knowledge of China has grown in such a short amount of time. I will look at China going forward through a different lens based on the perspectives given by all of the guest speakers and company visits this week. Who knows? Maybe one day I’ll follow the advice of Mr. Salazar and volunteer to work in China.