moleculo
Footballguy
So I've learned some things today about how the world works. I feel a little bit less naive today than I did yesterday, and it's not good.
TL;DR: there is no way American companies can compete, long term.
Let me preface this by saying that I am a design engineer with almost 20 years experience designing consumer grade products. I have done consumer electronics including cell phones and pagers (anyone remember those?), medical devices, biometric security devices, retail security devices and now design consumer grade child safety products. What is clear to me now should have been clear years ago, but I held onto a vision about how the world should work.
My current project is a consumer grade child safety product. My company is a large multi-national manufacturer who is considered a global leader and is widely lauded for excellence (even referenced in the "products you believe in" thread). We do have domestic manufacturing but for this particular product, my superiors elected to have the product designed and manufactured in China, which is where I type this from today.
Here's what threw me for a loop: the company that is making my product (lets call them X) also manufactures similar products for our direct competitors as well as makes their own product for the Asian market.
My assumption WRT Chinese manufacturing is that American companies had wholly owned subsidiaries in China to do their manufacturing...that's not that case. State of the art is that American Companies contract design and manufacturing out to the Chinese companies. My client also designs and manufactures products for a myriad of American competitors and is a direct competitor in Asia. To me, this is a gross conflict of interest, but that's just how it works. We do not have our own manufacturing facility here, and neither does anyone else. If you buy from us or our competitor, it's all likely all designed and made by the same guys in the same place. In fact, at lunch, I saw other Americans (from competing companies) eating in the same cafeteria (see below).
X is able to keep costs down by leveraging their expertise across different brands. Here is how they keep costs low: the owner of X has good relationships with the government. They take a hit on margin in exchange for sweet-heart deals on real-estate. If they can tell the Red Party that they employ thousands of workers, they are given sweet-heard deals on real-estate, allowing them to purchase property much lower than market value. They make their money on real-estate, as opposed to margin that gets passed to consumers. In essence, manufacturing costs are subsidized indirectly by the Chinese Government.
The "cafeteria" I mentioned earlier - it is basically a log-cabin style lodge on their property with their own chefs. This is where they wine and dine customers, as well as government officials. The reason this is note-worthy: local press is not allowed inside as it is private property. They don't risk the press taking pictures of government officials inside, and are free to do what they please there (bribes, favors, etc). It's essentially a zone where they can be free to make sweet-heart deals.
Anyways, because of their low cost proposition, they charge us (and everyone else) a fairly low rate. Bottom line - this supplier makes a really high percentage of the global market share in this category. If you buy my product or our competitors, it's all designed by and made by the same guys. To me, this is troubling.
We had a similar arrangement at my last company. Except, that manufacturer took our design, changed it slightly, hired an American sales staff, and started selling competitive products in America. We saw them become direct competitors, selling against us domestically. That drove prices, and margins, down and made it tough for us to compete. We struggled big time with that, and eventually led to me being laid off. Apparently, after talking to my colleagues here in China, that's par for the course and it has to be...that's another way that Chinese manufacturers can keep their production costs down.
At the end of the day, you can buy from us (and we want a premium because we are a premium brand), or you can buy from our competitors, but it all comes from the same place and is equally as good. So...what makes us better than anyone else? Why pay the premium that we rely on?
Further, there is really no barrier to entry for our manufacturer to start selling product similar to ours in America, without our mark-up. How can we compete with that?
It's a global race to the bottom. American consumers make decisions on cost. Global quality goes down, American brands suffer and the Chinese gain.
The Chinese gain is driven by government subsidized costs on real-estate. We, as consumers, all end up paying for it, and all facilitated by Chinese real-estate profits derived from the government.
As an example, many years ago I worked for Motorola. We designed cell phones in Florida, Illinois, and New Jersey. All manufacturing was in a Motorola owned plant in Tianjin (outside of Beijing). We enjoyed Chinese labor rates, and it was all good. We also used a contract manufacturer for some stuff called Foxconn. Foxconn took what they learned from Motorola and sold their expertise to Apple, who never built a Chinese manufacturing facility. Today, Foxconn is basically Apples sole manufacturer, but they also manufacture products for other customers, as well as make their own products (i.e pentium motherboards and I assume other phone hardware suppliers). As an American consumer, everything electronic I buy is likely made by someone with a relationship to Foxconn.
The problem isn't simply outsourcing manufacturing expertise (which is a huge problem in it's own right), the problem is that nearly everything in the world is built by a small number of companies who may or may not share trade secrets across competitors. We don't realize it, but there is a huge amount of consolidation globally in manufacturing. There is very little product differentiation any more, which leads to a global degradation in product quality across the board across nearly all product categories.
My manufacturer, X, took what they learned on or last product (2013), and used that to develop a product for our competitor Y. They took what they learned from Y, and are using that as the basis for my current product. I have no doubt that they will take what they learn from developing my product to company Y to develop their next product, and the cycle continues. Our prices go gown, which is great, but I’m very concerned that we are teaching our competitors how to make better products for the next round. It’s a viscous cycle, where the only winners are the Chinese. Long term, I see no way how American companies can win. As an American engineer, I don’t see how we can compete.
TL;DR: there is no way American companies can compete, long term.
Let me preface this by saying that I am a design engineer with almost 20 years experience designing consumer grade products. I have done consumer electronics including cell phones and pagers (anyone remember those?), medical devices, biometric security devices, retail security devices and now design consumer grade child safety products. What is clear to me now should have been clear years ago, but I held onto a vision about how the world should work.
My current project is a consumer grade child safety product. My company is a large multi-national manufacturer who is considered a global leader and is widely lauded for excellence (even referenced in the "products you believe in" thread). We do have domestic manufacturing but for this particular product, my superiors elected to have the product designed and manufactured in China, which is where I type this from today.
Here's what threw me for a loop: the company that is making my product (lets call them X) also manufactures similar products for our direct competitors as well as makes their own product for the Asian market.
My assumption WRT Chinese manufacturing is that American companies had wholly owned subsidiaries in China to do their manufacturing...that's not that case. State of the art is that American Companies contract design and manufacturing out to the Chinese companies. My client also designs and manufactures products for a myriad of American competitors and is a direct competitor in Asia. To me, this is a gross conflict of interest, but that's just how it works. We do not have our own manufacturing facility here, and neither does anyone else. If you buy from us or our competitor, it's all likely all designed and made by the same guys in the same place. In fact, at lunch, I saw other Americans (from competing companies) eating in the same cafeteria (see below).
X is able to keep costs down by leveraging their expertise across different brands. Here is how they keep costs low: the owner of X has good relationships with the government. They take a hit on margin in exchange for sweet-heart deals on real-estate. If they can tell the Red Party that they employ thousands of workers, they are given sweet-heard deals on real-estate, allowing them to purchase property much lower than market value. They make their money on real-estate, as opposed to margin that gets passed to consumers. In essence, manufacturing costs are subsidized indirectly by the Chinese Government.
The "cafeteria" I mentioned earlier - it is basically a log-cabin style lodge on their property with their own chefs. This is where they wine and dine customers, as well as government officials. The reason this is note-worthy: local press is not allowed inside as it is private property. They don't risk the press taking pictures of government officials inside, and are free to do what they please there (bribes, favors, etc). It's essentially a zone where they can be free to make sweet-heart deals.
Anyways, because of their low cost proposition, they charge us (and everyone else) a fairly low rate. Bottom line - this supplier makes a really high percentage of the global market share in this category. If you buy my product or our competitors, it's all designed by and made by the same guys. To me, this is troubling.
We had a similar arrangement at my last company. Except, that manufacturer took our design, changed it slightly, hired an American sales staff, and started selling competitive products in America. We saw them become direct competitors, selling against us domestically. That drove prices, and margins, down and made it tough for us to compete. We struggled big time with that, and eventually led to me being laid off. Apparently, after talking to my colleagues here in China, that's par for the course and it has to be...that's another way that Chinese manufacturers can keep their production costs down.
At the end of the day, you can buy from us (and we want a premium because we are a premium brand), or you can buy from our competitors, but it all comes from the same place and is equally as good. So...what makes us better than anyone else? Why pay the premium that we rely on?
Further, there is really no barrier to entry for our manufacturer to start selling product similar to ours in America, without our mark-up. How can we compete with that?
It's a global race to the bottom. American consumers make decisions on cost. Global quality goes down, American brands suffer and the Chinese gain.
The Chinese gain is driven by government subsidized costs on real-estate. We, as consumers, all end up paying for it, and all facilitated by Chinese real-estate profits derived from the government.
As an example, many years ago I worked for Motorola. We designed cell phones in Florida, Illinois, and New Jersey. All manufacturing was in a Motorola owned plant in Tianjin (outside of Beijing). We enjoyed Chinese labor rates, and it was all good. We also used a contract manufacturer for some stuff called Foxconn. Foxconn took what they learned from Motorola and sold their expertise to Apple, who never built a Chinese manufacturing facility. Today, Foxconn is basically Apples sole manufacturer, but they also manufacture products for other customers, as well as make their own products (i.e pentium motherboards and I assume other phone hardware suppliers). As an American consumer, everything electronic I buy is likely made by someone with a relationship to Foxconn.
The problem isn't simply outsourcing manufacturing expertise (which is a huge problem in it's own right), the problem is that nearly everything in the world is built by a small number of companies who may or may not share trade secrets across competitors. We don't realize it, but there is a huge amount of consolidation globally in manufacturing. There is very little product differentiation any more, which leads to a global degradation in product quality across the board across nearly all product categories.
My manufacturer, X, took what they learned on or last product (2013), and used that to develop a product for our competitor Y. They took what they learned from Y, and are using that as the basis for my current product. I have no doubt that they will take what they learn from developing my product to company Y to develop their next product, and the cycle continues. Our prices go gown, which is great, but I’m very concerned that we are teaching our competitors how to make better products for the next round. It’s a viscous cycle, where the only winners are the Chinese. Long term, I see no way how American companies can win. As an American engineer, I don’t see how we can compete.
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