China low-ball pricing
In the early 1990s, China was merely a low cost place to make labour-intensive products. Now the country with the world’s largest population has become the most powerful force in manufacturing.
Prices for Chinese manufactured goods are typically half of comparable US and European products, thus giving China a strong competitive advantage. But here is something most people do not realise - it is not low-cost labour - it is low-ball pricing. China simply accepts much lower profit margins.
European and US businesses develop products with 50-60% gross profit margins and 10-15% net profit. Developing countries (other than China) look for 30-35% gross-profit, or 5-10% net-profit. China accepts gross-profit margins of only 5-7%, with 0-2% net-profit. Therefore, even with comparable manufacturing costs, Chinese products are the cheapest.
Here is a simple example to illustrate the point: let us say a product costs $40 to manufacture. In the US the target selling price will be $80; in other countries, typically $60. The Chinese would sell that product for just $45, maybe even $40 (zero margin). This astounds most outside observers, how can a profit making enterprise survive (capital and cash flow) with no profit?
The answer: in China, short and medium-term operating deficits are acceptable since the government manipulates and controls capital. Chinese planners recognise the demand for short-term profit as the Achilles’ heel of capitalism. Their own primary strategic objective is long-term global market share. The tactics:
* High volume.
* Fast response.
* Immediate local employment.
* High investment in automation and quality to maintain price leadership.
The remedies require significant attitude shifts. Our short-term financial mind-set must change. Business needs to realise continual quarter-to-quarter increases in revenue and profits cannot continue on and on with work that is done elsewhere in the world.
It must be recognised that manufacturing and job creation are not just political or business manipulations, but the building blocks of society. To be competitive in global markets, it is important to keep investing in jobs and to upgrade factories. Entrepreneurship and talent must be encouraged and stimulated to thrive in the manufacturing sector.
Whither automation skills?
Many people think that the automation industry is heading towards a skills shortage which will occur after the current generation of engineers retires. Where will the new engineers and technicians come from to operate future factories and process automation plants?
In the old days, instrumentation technicians and engineers were not really computer literate. And process engineering skills had to be acquired through a long apprenticeship - often years, and even decades. The problem today is that corporate administrators are simply extrapolating those old patterns of employment.
As industry transforms into a high-tech workplace, the new generation of automation engineers and technicians will be completely different. They will have grown up with computer games, the Internet, PDAs and cellphones. Some computer games are more complex than typical control or monitoring systems. By comparison, the software tools and smart equipment in today’s control rooms should be a cakewalk.
Sadly, large end-user company policies are still measuring progress by obsolete learning standards. And this is why bright youngsters shun jobs in factories and plants, and go off looking for careers outside the automation business.
The Instrumentation, Systems and Automation Society (ISA) is working diligently to develop the image and value of certified automation professionals. But progress is stymied by lack of recognition of the profession. Here is the key question: will automation professionals be recognised with higher base pay and faster advancement? Without that recognition, certification is worthless.
ISA’s challenge is to convince employers of the merits of the CAP program. If there is a big pay differential that comes with CAP certification, engineers will want to achieve that status. Right now, it is just eyewash.
Dick Morley, father of the programmable logic controller (PLC), and co-author of the book, 'The Technology Machine - how manufacturing will look in the year 2020', suggests that the remedies require significant social change, a modification of the mind-set.
Young people must feel that engineering is significant work. Pay scales must change, to encourage the brightest and best to become engineers and innovators. Manufacturing people must be considered and respected as professionals. Heroes of engineering and manufacturing must be recognised and lauded.
Jim Pinto is an industry analyst and commentator, writer, technology futurist and angel investor. His popular e-mail newsletter, JimPinto.com eNews, is widely read (with direct circulation of about 7000 and web-readership of two to three times that number). His areas of interest are technology futures, marketing and business strategies for a fast-changing environment, and industrial automation with a slant towards technology trends.
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