Why Chinese Factories Fare Poorly in the U.S.

CURRENCYJANUARY 14, 2016
Why Chinese Factories Fare Poorly in the U.S.
BY JEFFREY ROTHFEDER




China’s manufacturing strategy, made possible by low wages and subpar conditions, can succeed in emerging nations, but it’s not feasible in developed economies.CREDITPHOTOGRAPH BY MICHAEL S. WILLIAMSON / THE WASHINGTON POST VIA GETTY

In September, on an abandoned forty-acre Westinghouse factory site in Springfield, Massachusetts, the China Railway Rolling Stock Corporation (C.R.R.C.) broke ground on a sixty-million-dollar plant to assemble subway cars for Boston’s Orange and Red lines. Although commentary on the Chinese-American trade relationship is often colored by suspicion and xenophobia, virtually no one in Massachusetts publicly opposed the arrival of C.R.R.C., a state-owned enterprise controlled by Beijing.

After all, Springfield is not a position to be picky about its economic partners. Once a dominant manufacturing city—the assembly line and the concept of interchangeable parts were invented there, in munitions factories that were centers of global innovation for much of the nineteenth century—Springfield has been spiralling downward for decades. Currently, unemployment there stands just above the national level, but the city depends on state government and municipal services, not the private sector, for much of its cash flow and jobs. In just the past five years, even as U.S. industrial employment has surged some 7.5 per cent, representing nearly a million new jobs, about two thousand additional manufacturing positions have disappeared from Springfield.

Curiously, though, no one has been complaining about the growth of Chinese manufacturing elsewhere in the U.S., either. For at least the past seven years China has been the fastest-growing source of non-domestic business expansion in the U.S. In fact, Chinese foreign direct investment here—that is, the amount of money used to acquire American companies or to build factories and other commercial facilities—reached record levels in 2014, about twelve billion dollars, up from five billion in 2009. Moreover, in the first six months of 2015, Chinese direct investment in the U.S. rose nearly fifty per cent compared with the same period the year before, according to the Rhodium Group, which tracks Asian economies.

Lately, most of this investment has been in real estate (such as Anbang’s $1.95 billion purchase of the Waldorf Astoria hotel in Manhattan, from Hilton) and technology (such as Lenovo’s $2.9 billion acquisition of Motorola Mobility, from Google). But manufacturing has also been a frequent target, beginning as early as 2000, when the Qingdao-based appliance maker Haier made Camden, South Carolina, the site of the first Chinese factory in the U.S. Since then, Chinese manufacturers have acquired or built facilities to produce textiles, copper, steel, automobile supplies, renewable-energy equipment, and industrial machinery, among other items, in dozens of states.

China’s emergence in the U.S. economy recalls another transplant frenzy some three decades ago, when Japanese companies entered the U.S. in droves, swallowing up iconic symbols, like Rockefeller Center and Pebble Beach Golf Club, and raising automobile and steel plants in the Rust Belt. Back then, the general response was anger and fear. After Honda Motors opened the first Japanese auto plant in the U.S., in Marysville, Ohio, in the early nineteen-eighties, followed by an engine factory in nearby Anna, Ohio, the company faced an onslaught of vicious anti-Japanese ads on TV and in print, often supported by American manufacturing trade and labor groups. In one memorable incident that grabbed headlines across the country, William Leitz, the mayor of Wapakoneta, Ohio, angrily resigned his position, saying that he could not work side by side with the Japanese. “I was on a destroyer [in the South Pacific] that was sunk,” he said. “I’m an American, and I love my country.”

The comparably subdued response to Chinese manufacturers speaks, on one hand, to changing circumstances, especially the broad acceptance of globalization in the United States and the desire, on the part of some politicians and business leaders, to create manufacturing jobs by whatever means necessary. But it also follows from a conclusion that American companies have reached about their Chinese counterparts: namely, that they are, thus far, relatively inconsequential rivals. Despite contracts like the one in Springfield, most U.S. producers don’t think Chinese manufacturing is good enough to pose nearly the same level of threat as Japanese companies did, decades ago.

The arrival in the U.S. of Japanese manufacturing methods precipitated a radical transformation in the accepted ideology behind how assembly lines should operate and how the highest levels of industrial productivity are achieved. This new factory model, which the Japanese call lean manufacturing, offered a blueprint for continuous plant improvement and innovation, driven by workers who are encouraged to experiment with new ways to enhance quality and productivity, and to minimize waste and inefficiency. In a lean factory, employee creativity and coöperation between management and assemblers are paramount, even if plant output is temporarily slowed to, for example, fix defects before a product is finished or to implement an untried process.

Armed with this uncluttered but potent set of ideas, Japanese factories were consistently more efficient and inexpensive to operate than their American counterparts, and their products were more reliable, durable, and attractive to consumers. Faced with these advantages, the initial disdain aimed at the Japanese companies was impossible to support for very long. In the early nineteen-nineties, Japanese manufacturing became the subject of an unlikely best-selling book, “The Machine That Changed the World,” and inspired a spate of analysis, implementation programs, educational programs, and self-help pamphlets. Today, no Western manufacturer can hope to compete on a global stage without adopting some version of lean production—an undertaking that remains difficult for many firms, because it can require altering not just assembly processes but a company’s culture, especially where worker roles, management, and methods of innovation are concerned.


It’s in these areas, though, that Chinese manufacturers are weakest. The country’s factory boom was made possible, instead, by low wages, subpar conditions, and few benefits. That strategy can succeed in emerging nations, especially ones with large labor pools, but it is not feasible in developed economies. The shortcomings of Chinese factories are most apparent in the relationship between managers and employees, which is based on an anachronistic top-down view of a factory as a place where the authority of supervisors is paramount, and workers are expected to take directions, perform tasks, do their work, and go home. There have been multiple reports of Chinese employers in the U.S. complaining that American workers are too outspoken and independent and are unable to follow rules. An American former executive of a Chinese firm operating in the U.S. told me that Chinese managers would complain, for example, that factory workers would arrive at a job five minutes late and not feel inclined to apologize. Such insouciance at plants inside China would lead laborers to be punished, for example by being sent home for the day, losing pay, forfeiting benefits, or being reassigned to more menial tasks. In the U.S., this approach has typically led employees to become more defiant and less assiduous. At Haier’s factory in South Carolina, Chinese managers had to be sent back to Asia because they were alienating workers and threatening productivity.

Perhaps the most extraordinary illustration of strained relations in Chinese factories occurred at the Golden Dragon copper-tube factory in Wilcox County, Alabama, last year, when workers voted to unionize the plant—an unlikely step in a right-to-work state where only about ten per cent of factory employees belong to organized labor, and in the face of a relentless and expensive “vote no” campaign led by Governor Robert Bentley. Golden Dragon workers complained that they received few benefits and that their wages, about eleven dollars an hour, were far below the pay for similar jobs in American copper plants in the South. Moreover, according to the union, the Occupational Safety and Health Administration had found fourteen serious health and safety violations in the factory in the first few months after it opened, in May, 2014. The vote was an extraordinary step, and an indictment of the factory conditions that at least one Chinese manufacturer expected to be able to export.

The perception that employees are interchangeable and replaceable has led turnover at factories in China to average an astounding thirty-five per cent a year among workers employed at least six months, according to Renaud Anjoran, an operations manager at China Manufacturing Consultants, in Shenzhen. “They’re seeing similar rates in their American operations. That’s a death sentence in the U.S., where employee skills, loyalty, continuity, job satisfaction and creativity—in other words, lean requirements—determine profitability,” he said. (Perhaps unsurprisingly, given these dynamics, Chinese factories are rapidly automating. Chinese companies now account for more than twenty-five per cent of global robotic-equipment sales, and it’s not unusual to come across a Chinese facility where as many as ninety per cent of the tasks are assigned to robots. Japanese manufacturers are among the least automated, by contrast, because, in their view, removing the human element eliminates the possibility of innovation.)

Moreover, some of the new facilities in the U.S., including the new C.R.R.C. plant in Springfield, are unlikely to be able to adapt their methods to the Japanese-inspired ones that predominate elsewhere here. C.R.R.C., like many other Chinese manufacturers in the U.S., is a state-owned enterprise, controlled by the Chinese government. State-owned enterprises accounted for about twenty-five per cent of Chinese investment in the U.S. this year, and since 2000 they have backed seventy per cent of China’s North American forays in the auto industry, according to the Rhodium Group. These companies do not enjoy a good reputation: recent research from C.E.I.C. Data found that they own forty per cent of the assets in China but deliver only twenty per cent of the country’s profits, and that their average return on assets is a meager two per cent, about fifty per cent below the private sector. But precisely because they lack the imperative to be profitable, productive, or competitive, state-owned enterprises like C.R.R.C. can underbid most other companies, winning contracts even when contract stipulations about quality, timeliness, worker treatment, salaries, and benefits are beyond their capabilities. Indeed, C.R.R.C.’s price for the Boston subway-cars job was two hundred million dollars lower than its nearest rival. Analysts contend that C.R.R.C. will almost certainly lose money on the deal, but that it was a strategic bid to gain a foothold in the U.S.

Given the deficiencies of Chinese manufacturers, the ho-hum response from U.S. manufacturers to the influx of new rivals makes sense; the welcome mats laid out by cities like Springfield are another matter. New factories are generally viewed as a source of good jobs and long-term economic improvement, and for that reason communities frequently offer companies discounted land and substantial tax breaks to open them. Springfield is forgiving about fifty per cent of C.R.R.C’s property taxes for the first three years and thirty per cent over ten years. But if the manufacturers turn out to be nothing more than low-paying loss leaders, cities may find that they’ve given away more than they receive in return. This would, in fact, be something to complain about.