Paul Wallbank – Brilliant Communications

Tag: manufacturing

  • Six billion pairs of socks

    Six billion pairs of socks

    Ever since the days of Napoleon business people have lusted over the idea of selling into the Chinese market – the idea of a billion people clambering to buy just one widget each brings a gleam to the eyes of even jaded entrepreneurs.

    When Deng Xaioping opened the Chinese economy in the mid 1980s Australian brewers, Swiss watchmakers and German motor manufacturers rushed into the country believing that a billion liberated peasants would rush to buy expensive beer and watches.

    As it turned out, the real opportunities for foreigners were in the other direction. When China joined the World Trade Organisation in 2001 the boom that had already started in the Special Economic Zones along the southern Chinese coast spread across the Eastern provinces as manufacturing from Hong Kong, Japan and Taiwan to find cheaper labour.

    300km South-West of Shanghai the city of Datang became “sock town” where local companies manufactured a third of the world’s sock supply.

    Chinese sock manufacturers became so competitive that their Japanese counterparts were forced to move upmarket in an effort to secure a position in an industry awash with cheap products.

    Today the Chinese sock industry is looking sick as manufacturers go broke and inventories pile up reports The Observer.

    Excess capacity is a problem in many industries, particularly motor manufacturing where governments around the world have supported their local producers resulting in a glut of cars and trucks. Socks are no exception to the laws of supply and demand.

    The travails of China’s sock industry are a cautionary tale for those who project straight lines for Chinese growth.

    Facile assumptions that every man, woman and child on the planet needs to buy two pairs of socks a year, or that China will build millions of steel hungry apartments each year, is not economic analysis and any business built on such shaky beliefs is leaving itself vulnerable when things don’t work out.

    The same is true for nations. Hollow assumptions can put an entire economy on shaky ground. Just thinking that every Chinese family needs six pairs of socks doesn’t guarantee economic success.

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  • Risks and opportunities in crowdsourcing

    Risks and opportunities in crowdsourcing

    Crowdsourcing and offshoring are changing bringing to small business the same changes we’ve seen in manufacturing and low level office jobs over the last forty years.

    Those trends are going to affect local businesses – particularly the home based service providers – in a serious way as the local web designer and bookkeeper find themselves undercut by freelancers in countries where an Australian day rate is a month’s pay.

    With those thoughts in mind I went along to a round table discussion with crowdsourcing advocate Ross Dawson, Freelancer CEO Matt Barrie and Design Crowd founder Alec Lynch to hear them discuss some of the issues around the concept ahead of their half day workshops in Sydney later this months.

    Having read Ross’ recent book, Getting Results From Crowds, many of the concepts and arguments are familiar but its worthwhile considering how the trend of a globalised workforce is changing.

    The benefits of crowdsourcing services

    Crowdsourcing services like Design Crowd and Freelancer have benefits traditional outsourcing services don’t have.

    Alec Lynch describes these as reduced expense, speed and risk. A broad range of cheap, accessible suppliers mean businesses aren’t locked into costly contracts with the attendant risks while they can bring projects to fruition in days.

    Until recently, globalisation only bought benefits for major corporations with manufacturers contracting work out to China, back office functions to India and software development to Eastern Europe.

    The rise of web based services where smaller, one off projects could be paid for by credit card has bought global outsourcing into the small and medium sized business markets.

    Now local businesses are affected by business practices that, until recently, were the concern of those working for large organisations.

    This is bad news for local service businesses; the suburban web designer or bookkeeper is now finding themselves competing with individuals who, as Matt Barrie points out, have a very good weeks’ income for the equivalent of a day’s pay in Australia.

    Basically the same forces that drove most low value manufacturing offshore are now driving services and white collar jobs the same way.

    Responding to the threat

    There are major downsides for clients using these project based outsourcing services; for instance designing a logo is only part of a much bigger branding exercise which in turn has to be considered against the orgainisation’s longer term objectives.

    Often, most of us don’t know what we don’t know and that’s the real reason why we hire an expert to explain why a logo should look a certain way, an expense should be allocated to one specific cost centre and not another or why we should one software package over another.

    When we outsource our services, particularly to a low cost provider, we lose that expert insight and end up with someone just carrying out a task; it is up to us to supervise something we probably don’t understand ourselves.

    Part of that supervisory role is project management, in the design field managing creatives can be like herding cats. This is why experienced project managers are worth their weight in gold.

    Like many essential skills, project management is one of those which most of us don’t have and is chronically undervalued but when a business is outsourcing to a freelancer in Estonia or Eritrea then this service is essential.

    Providing those skilled supervisor and management roles is where the opportunities lie in a crowdsourced market place.

    In many ways, we’re seeing the end result of the post-industrial society. Just as we offshored the manufacturing industries through the 1970s and 80s then the low skilled office work in the 1990s and 2000s, we’re now outsourcing local services to low cost countries.

    Whether ultimately this is a good thing or not is a big question but for local businesses, the trend is clear and much of the basic work is going offshore. Those who choose to whinge rather than adapt will be left behind.

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  • We come here to work

    We come here to work

    “We come here to work and not to play” is the quote from a Chinese production line worker in Reuter’s article on Foxconn factory workers.

    That quote could have come from a hundred years ago in Western societies as young workers fled agricultural communities to make better money and find greater opportunities in the factories and cities of North America, Europe and Australia.

    In their report on Chinese labour conditions commissioned by Apple and its supplier Foxconn, the US Fair Labor Association confirmed the quotes from the Reuters article.

    48% thought that their working hours were reasonable, and another 33.8% stated that they would like to work more hours and make more money.

    These workers have an average 56 hour working week and over a third are putting in 70 hours each week.

    Like our great grandparents they are focused on bettering themselves and deeply conservative; they know their immediate livelihoods and future prospects depend upon the work they can get.

    They also understand the government owes them nothing and their expectations on what the authorities will do for them are low.

    It often said the Communist Party of China is the most effective capitalistic organisation on the planet today. In reality it’s the workers on the assembly lines who personify what we know as the free market.

    As the leaders of Western nations continue to indulge in corporate and middle class welfare while believing in magic pudding economics where massive mis allocations of resources have no cost and tax cuts pay for themselves, it might be worthwhile thinking of the businesses those 23 year old factory workers in Shenzhen or Chengdu might be running in thirty years.

    Just as our great-grandparents built modern economies and industrial empires out of their hard work, which most of us still reap the benefit from, those young Chinese workers are doing the same thing.

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  • Playing with Dragons

    Playing with Dragons

    Chinese manufacturing has been in the news recently with various exposes of factory conditions by the New York Times, the now discredited Mike Daisey and a fascinating look at US store chain Wal-Mart’s supply chain by Mother Jones’ Andy Kroll.

    In his examination of Wal-Mart’s Chinese suppliers Andy Kroll interviews factory owners and managers with a common theme, they are all loath to be identified for fear of incurring Wal-Mart’s wrath.

    This is wall of silence is familiar in Australia; the reluctance of local suppliers to speak about the conduct of the Coles’ and Woolworths’ policies has hobbled enquiries into the domestic retail market.

    Another aspect Chinese and Australian have in common is how the retailers drive down costs with big buyers insist upon regular price reductions from their suppliers.

    This is what happens when your business is a price taker that relies on one or two suppliers; you accept what you’re offered or lose a large chunk of your business.

    With many of Australia’s industry sectors now dominated by one or two incumbents, this way of doing business is now the norm rather than the exception.

    As a nation Australia’s finding itself in that position as well. Now our governments and business leaders have decided Australia will only dig stuff up with a few favoured, uncompetitive industries like car manufacturing being being protected, the entire country is in a position not dissimilar to a Foshan coat hanger manufacturer.

    Having that dependency on one or two major customers is a risk and when the commodities boom turns to bust – commodities booms always do – our relationships with these customers will be tested.

    When that test comes, the clumsy way the Federal government has banned Chinese companies from tendering to the National Broadband Network or blocked investment in mining projects may turn out to be mistakes.

    This is the problem with being a price taker selling a commodity product, you become hostage to fortune and when the market turns against you there isn’t a great deal you can do.

    In the early 2000s computer manufacturers like Dell and HP decided to sell commodity products then watched with despair as Apple captured the premium, high margin end of the market. Neither business has truly recovered.

    Being trapped at the commodity end of a market is not a comfortable place to be, particularly if you don’t have a plan to move up the value chain.

    If your business is currently selling low margin, commodity goods then it’s worthwhile considering what Plan B is should the market turn against you. You might also remember to be nice to your customers

    At least you’ll show you have more forethought than our leaders in Canberra who seem to like to play with dragons without thinking through the consequences.

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  • Insanely profitable

    Insanely profitable

    Apple’s announcement that they will start paying dividends to shareholders changes a number of things in Apple’s business model and those of many other businesses.

    The sheer size of Apple’s cash reserves also illustrate how profitable the outsourced manufacturing model is as well the contradictary nature of special pleading by affluent corporations.

    Moving a cash mountain

    Not only is Apple’s business insanely profitable, but sales are growing exponentially. In the company’s conference call, CEO Tim Cook reported that 37 million iPhones sold last quarter and 55 million iPads sold in the last two years.

    Apple’s CFO Peter Oppenheimer pointed out the company’s cash reserves increased $31 billion in 2011 and 2012 is on track for a similar result in 2012, leaving them plenty of money for investment along with a “warchest for strategic opportunities”.

    Paying a dividend

    The reluctance to pay dividends has been a feature of the US corporate for the last few decades and Apple are certainly not alone in not distributing their profits to shareholders.

    Companies like Microsoft, Google and Oracle -even Yahoo! once upon a time – have been just as profitable as Apple and their efforts to shrink their cash mountains has had some perverse effect.

    Many of these companies have squandered suprpluses on poorly thoughtout and badly executed buyouts of smaller businesses, this urge to avoid returning money to owner has been one of the drivers of the Silicon Valley VC Greater Fool model.

    Another result of fat profits is the rise of flabby, overstaffed management ranks at some of these companies. Although this certainly isn’t the case at Apple where Steve Jobs ran a very lean machine.

    The retail model

    Unlike their major tech competitors Apple is a manufacturing and retail business as well. In 2012, 40 new stores are planned around the world.

    This vertical control of their markets, from the beginings of the supply chain  to “owning” the end customer is anathema to modern MBA thinking and probably the area that gives them the greatest competitive advantage over their hardware competitors.

    Justifying Mike Daisy

    In some ways this announcement justfies Mike Dasy’s discredited criticisms about Apple’s Chinese suppliers.

    The reason for manufacturing these goods in places like China, India or Vietnam is the vastly cheaper cost of doing business, not just in labour rates but in reduced environmental and safety standards.

    Plenty of brand name clothing, footware and fashion accessory companies make similar massive profits to Apple with their ten, twenty and sometimes hundred fold markups on their products.

    Repatriating profits

    One of the big changes of Apple repatriating money is that is undercuts the special pleading by these extremely profitable companies that they should have a US tax holiday so they can repatriate their riches.

    It’s now clear these companies can easily afford to pay the taxes of their home countries and it’s time they started to, along with returning dividends to their shareholders.

    Once again Apple have changed the way others do business, how these changes affect the way we invest and governments treat companies is going to be one of the most interesting developments over the next decade.

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