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A tale of two factories

In two plants 7,000 miles apart, two workforces make the


same products for the same company. But how they go
about the business couldn't be more different. Fortune's
Alex Taylor III takes a look More from Fortune
at who's winning this
China - U.S. competition. Obama's opportunity
costs
Cisco Systems layers it on
By Alex Taylor III, Fortune DirtCheapCouture.com
Magazine FORTUNE 500
September 14 2006: 9:39 AM EDT Current Issue
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(Fortune Magazine) -- China can be
scary.
One reason is people like Pu
Chaunming. He and his wife make
exhaust systems in an industrial
park outside Shanghai. They each
earn about $1.56 an hour, commute See more
to work by bicycle, and live in a photos
small one-bedroom rental
apartment. Because of their long
On the Job
working hours and lack of day care,
their 4-year-old son lives with Pu's How the two factories compare
parents, 240 miles away. Pu and his 2005 data Shanghai Litchfield
wife talk with him every night on the Employees
telephone and visit him 225/50 296/28
hourly/salaried
occasionally. Pu is philosophical Wages monthly, $1,880 -
about the separation, which he $210 - $250
blue-collar $4,064
believes is a necessary investment
Wages, as % of total
in his child's future. "My son is cost
1 12
having a better education," he says.
Production number
"I believe he will have a better life 400,000 1.4 million
of units
than me."
For many people in high-wage Revenue millions $53.20 $171
countries like the U.S., Pu Capacity(2005/2006) 85%/100% 65%/85%
exemplifies the China threat - a Employee turnover less than
5%/13%
hard worker making a tenth of U.S. hourly/salaried 1%
wages. Who can compete with Absenteeism 1% 10%
Average Age 29 40
that? In 2005, China exported $202 billion more to America than it
imported, accounting for more than a quarter of the U.S. trade deficit.
There is no question that, thanks to the labor of tens of millions of people
like Pu, China has become a genuinely fearsome economic competitor.
To get a sense of how China's rise is playing out, Fortune went to two
factories -one in China and one in the U.S. - that make the same product
for the same company. Our conclusion: China's progress is impressive,
and it will continue.
That said, America's factories have strengths of their own: U.S.
manufacturers have improved productivity at least 4% a year for the past
decade. Although wages in Shanghai are rising sharply, labor is still
comparatively cheap. But that is an advantage that goes only so far.
Consider: At Tenneco's plant in Shanghai, labor represents just 1% of
production costs; at its Michigan plant the figure is 12%. It is Michigan,
however, that wins hands-down in terms of profit, reporting gross operating
margins that are a third higher. The death of U.S. manufacturing has been
greatly exaggerated.
Shanghai
Tenneco (Charts), a maker of auto parts based in Lake Forest, Ill. (2005
revenues: $4.4 billion), opened its Shanghai plant in 1998. At the time the
company was still part of a conglomerate; it broke off the following year.
The idea of going to China was to grab a chunk of the fast-growing market
and to satisfy customers like General Motors (Charts), which want
suppliers to be able to service them everywhere they manufacture.
The timing was excellent. Auto sales in China are forecast to reach 3.5
million in 2006, compared with fewer than one million in 2001. Tenneco
owns 55% of the Shanghai operation in a joint venture with a state-owned
company, Shanghai Tractor & Engine Co., a subsidiary of automaker
Shanghai Automotive. The factory provides exhausts to GM (Charts),
Volkswagen, and Peugeot and to Chery, a local manufacturer.
Sparsely automated and a little grubby, Tenneco's Shanghai factory
resembles a large barn with an attached warehouse that, open on one
side, is little more than a shed. The place is clean but scuffed around the
edges. The workers' white cotton jumpsuits look as if they are cleaned
about as often as a car owner changes the oil.
In winter the only heat is

in individual offices; in summer rolling electrical blackouts are common.


The plant employs 275 people in two eight-hour shifts; they produce about
400,000 exhaust systems a year. Machinery is scarce. Though wages are
going up 10% a year, labor is still cheap. Blue-collar workers make $210 to
$250 for 160 hours of work a month. White-collar workers like engineers
start at $625 a month. Profits, says Tenneco, are "average" in a
competitive market.
The Shanghai workers appear engaged, but concepts like self-directed
teams and even safety - workers have to be prodded to wear protective
glasses, steel-toed shoes, and earplugs - have been slow to arrive. Making
improvements is difficult; many workers, used to working for state-owned
Shanghai Automotive, are ferociously resistant to change. Relationships
with supervisors are often testy, with neither side much interested in
diplomacy.
Tenneco Shanghai uses low-tech techniques to build a medium-tech
product. Welding machines help workers connect the tubes to the catalyst
and the muffler, but they are simple rotating devices, not more
sophisticated five-axis, numerically controlled machines. Except for a few
forklifts, little other machinery is visible. There are no automated material
handlers to ease the strains on workers, no robots to perform repetitive
tasks, no lasers to guard against slips and falls. You wouldn't be surprised
to see someone haul out a hammer and start bashing a pipe to fit it into a
muffler. The place feels like an outpost on the fringe of industrialization.
There is another aspect of the Shanghai operation that isn't visible to the
eye. Because of its lack of sophistication and machinery, the factory is
dependent on its 51 suppliers, 33 of them local. But quality is uneven
because suppliers have little familiarity with statistical process control;
employers prefer to use cheap human inspectors instead.
When Tenneco contracted with a China-based company for a metal
casting, the supplier tried and failed three times to meet the requirements
for flatness and surface finish. "It didn't understand the importance of the
specification," says Tenneco's global supply boss, Paul Schultz. And it is
not exactly unknown for rogue suppliers to sell duplicate parts to
competitors. The result is that Tenneco Shanghai creates only 10% of the
added value in the products it ships.
On the human front, Tenneco has to be very careful about whom it hires,
because firing is difficult. All workers have one- to three-year contracts and
can't be furloughed until their contract has expired or the employer buys it
out. Laying off a worker with ten years of tenure (including years of service
with a joint venture partner) requires a voluntary buyout. Still, with a
burgeoning economy right outside the factory gate, turnover is a problem.
"It is a seller's market," sighs Tim Jackson, head of Asia-Pacific operations.
Zhang Yiqi, 26, is self-possessed and ambitious, with a stylish close-cut
hair style. A pipe bender at Tenneco Shanghai, he has seen his wages
double in the past six years, to $250 a month. He graduated from
vocational school and now attends evening classes. Zhang says he
spends his free time seeing his girlfriend, working out, and riding his
motorbike. Before he moves out of his parents' home and gets married,
though, he'd like to move up in the ranks.
Tenneco's China employees with fewer than five years' employment get
one week's paid vacation; workers with five years or more get two. They
also get time off for Chinese New Year and various national holidays.
The government provides medical and pension benefits; the company
provides allowances for housing and transportation, plus a free hot lunch
of meat, two vegetables, and rice. Whatever Tenneco's workers may think
of their present condition, they believe that their future as the world's low-
cost assembler is only going to get better. "Very likely I can be promoted to
supervisor," says Zhang. "I'm very happy with my job."
Take a look at the two factories.
Litchfield, Mich.
More than 7,000 miles and a world away from Shanghai (pop. 18 million) is
Litchfield, Mich. (pop. 1,458), where 324 Tenneco employees work on
three shifts. Unlike in Shanghai, this plant is heated in the winter. Pu's
counterpart might be someone like Dave Houghton, a rangy, fit-looking
man of 46. Houghton and his wife also make exhausts. But they commute
to work in two cars, own a home, raised their own children, and recently
returned from a vacation to Hawaii.
Combined, they earn about $30 an hour (plus benefits), enough to provide
a comfortable living in this farming community in rural south-central
Michigan. Still, Houghton admits to concerns about the effect of global
competition. "It makes me nervous," he says, "but we think our
management is doing everything possible to keep us very competitive."
The atmosphere at the Litchfield plant is businesslike; the workers are
attentive, careful, and restrained. Partly that's due to the subdued
economic times, partly to the maturity of the workers. The workforce in
Shanghai has few people over 40, which is the average age in Litchfield.
Average seniority is ten years, and turnover is minimal. The workers'
experience shows in the productivity results.
Last year, with about 20% more employees than in Shanghai, Litchfield
built more than three times as many muffler systems for GM and
DaimlerChrysler (Charts), producing gross revenues of $171 million.
Executives at Tenneco call the plant a "money machine."
Litchfield workers make about ten times as much as their Chinese
counterparts, and they appear solidly middle class. But wages in Shanghai
are rising much faster. Tonya Wilson, a repair technician, started at
Tenneco 11 years ago when the average salary for her position was $8.50
an hour; it now averages $14.10. She worries about the future. "I don't feel
safe," she says. "My daughters are both straight-A students. I hope they go
to college and get good jobs."
If other workers share Wilson's uncertainty, they don't act that way. Ten
percent don't make it into work on any given day (in China, the
absenteeism rate is less than 1%). Family emergencies take a toll, but it is
not a rash of sick children that make Mondays after the Super Bowl
particularly high in no-shows.
The first day of deer season in November is so widely observed that the
plant closes. With wages high and attendance patchy, Tenneco would like
to reduce the amount of labor in its mufflers. "The goal is to automate as
much as possible," says supply chain boss Schultz. "We want a lights-out
plant." In China the reverse is true; the plant there automates as little as
possible to take advantage of the cheap labor.
To boost productivity, Tenneco's Litchfield facility also tries to work smarter.
It bristles with evidence of the latest efficiency techniques: Lean
Production, Six Sigma, Continuous Improvement. Workers take an active
interest in reducing bottlenecks.
Every day starts with a 30-minute production meeting in the second-floor
cafeteria, which has its own television screen. Some 30 representatives
from engineering, operations, and human resources go over the previous
day in great detail, identifying snafus in deliveries, materials, production,
and shipping. Each defect - a misaligned hanger hole, an inaccurate pipe
bend, a cracked "brick" in a catalytic converter - is tallied.
"If our scrap is up and quality is poor, we could be the next ones filing for
bankruptcy," says Sandy Giberson, a stern 26-year-old production
coordinator who has worked at Tenneco since 1998. There is a strong
sense of safety, and regulations are stiff.
Workers get 14 holidays and four weeks' vacation after ten years on the
job. Most drive to work, a few ride bikes, and in winter some arrive on
snowmobiles. Everyone qualifies for a bonus, paid quarterly based on the
plant's performance. Last year hourly workers received $900 for the plant's
work plus another $480 for Tenneco's corporate achievements - equivalent
to about seven months' pay for their Chinese colleagues.
Unlike in China, where new production contracts seem to come in every
day, they are hard-won in Litchfield. Tenneco recently received a big
contract from General Motors to supply 250,000 exhaust systems a year
for a new crossover SUV, giving morale a sharp boost. Investors have also
been bullish; evaluating tighter emission regulations as a spur for
business, they have pushed Tenneco's stock price up 50% over the past
two years.
What about head-to-head competition
Unless exhaust systems and mufflers can someday be teleported across
the ocean, the Tenneco plants in Litchfield and Shanghai are unlikely ever
to compete directly against each other - their products are just too bulky to
ship economically. Yet Tenneco's experience in China hasn't encouraged it
to make the country a platform for its easier-to-package parts like shock
absorbers either.
The value of cheap labor, it has discovered, is important but limited. "A
company that says its manufacturing footprint is a nail and China is the
hammer is in trouble," says Jackson, the head of Asia-Pacific operations.
For now, except for labor-intensive industries like textiles and toys, China
isn't that efficient a manufacturer. In auto parts China accounts for less
than 1% of the value of components in U.S.-made cars and trucks,
according to a 2005 article in the The McKinsey Quarterly by consultants
Stefan Knupfer and Glenn Mercer. They argued that Chinese producers
lack the scale to produce parts in high volume and that many are deficient
in the engineering know-how needed to meet complex federal standards.
In products with little labor content, like steering knuckles, China cannot
compete.
There are other factors that make China a risky place for Tenneco to
operate. "Law and order is a weakness," says CEO Mark Frissora during
an interview in China (Frissora has since left to head Hertz). Enforcement
of intellectual-property rights is a particular problem.
Tenneco has filed three lawsuits against counterfeiters in China. (All have
been settled.) Both national and local government agencies have lots of
clout, and Western companies often do not have a clear understanding of
the terms of engagement. Violations of poorly understood rules and
regulations can cause operations to be interrupted and managers
detained.
But that hasn't stopped Tenneco from expanding. Having opened five
plants and invested $21 million in China thus far, Tenneco expects to
spend an additional $30 million over the next three years. Over the long
term, Tenneco clearly sees China as the growth market; company
executives believe that Shanghai can become as profitable as its U.S.
operations.
With the expiration of laws requiring Western companies to pair up with
local joint venture partners, Tenneco is experimenting with setting up
wholly owned operations. That means it can call its own shots but won't get
any help with sometimes sticky government regulations.
Despite its big new GM contract, meanwhile, Litchfield is swimming hard
just to stay in place. Its Big Three customers in the U.S. are losing market
share, and Japanese and Korean transplants are located too far away for
Litchfield to supply them. The most likely scenario is that work at the plant
will continue to bump up and down.
In Shanghai the view of the future from the factory floor is more expansive.
The palpable sense is that tomorrow will be brighter than today, and
workers are hungry for their next raise and promotion. Pu Chaunming
recently bought some furniture and plans to buy a motorcycle, which will
cost him three months' wages. At night he takes courses in management.
"I want to buy a house, bring my parents to live with me, and set up a
business with my wife."
It is that kind of ambition - multiplied 1.3 billion times - that can seem
intimidating. In an echo of the demonization of Japan in the late 1980s,
China is accused of gaming the world economic system to steal American
jobs. In Michigan the Democratic Party has accused the Republican GOP
candidate, Amway founder Dick DeVos, of being a "dear comrade" of
Chinese President Hu Jintao and of supporting "unfair trade agreements
and failed Washington policies that send Michigan jobs to China."
So the question is, Will China be a beneficial driver of global economic
prosperity? Or should Americans be scared of it, as a threat to jobs and
living standards? Yes and yes.
Economic growth benefits the collective whole, but individuals will suffer.
And while China is not yet poised to compete with the U.S. across a broad
spectrum of industries, it certainly poses a challenge to any with a high
labor content. For now, Pu Chaunming and David Houghton can co-exist
peacefully, each reasonably content with their lot. Their children may not
find it so easy.
Required: Answer the following questions (should take
1-2 pages)

1. Identify the differences in the processes of the 2 factories,


addressing labor relations, safety, amount of automation,
methods, costs, etc.

2. Discuss the differences in life circumstances of the


workers.

3. How do the workers view the future differently?

4. What has been happening with how much people have


been paid over the last few years in each location?

5. If you had a crystal ball, what do you think each site will
look like in 10 years? That is, what changes will have
`occurred?