Four years ago Duncan sent me some BBC videos on Brits breaking into China sourcing. I critiqued what I saw, and made the following comments on this blog, among others, four years ago:
I would like to see a follow up on all three to see how they fare. The pillow fellow, if the order for 400,000 pillows at $3 million was valid (and not just a clown getting into a video) then $7.50 a pillow, even fob la, will not cover the rising costs that manifest after these films were made.
A better way for these people to trade with China is Vance keeps his money and goes upscale at the small biz level in UK and euro zone. Peter sells his invention in uk, and has the chinese manufacture and sell in china with royalty to Peter. Tony, keep his money and sell upscale pillows in uk, buying pillows from Chinese makers.
Well! 2012 and there is a follow-up video on the pillow fellow (two parts). We don't get many chances like this. In fact, I cannot remember a case in which I've ever seen one of these happy-talk stories go back to examine the inevitable wreckage. The 2012 video does not mention the 2008 videos.
Before I watched the follow-up video, I had forgotten Duncan had pressed me four years ago on my commentary of the original videos. I am a little surprised at just how perspicacious my comments were. My critique in 2008, plus my predictions, seem to run spott on, but you watch read, and judge. It's Sunday, it'll take about 3 hours to watch all the videos, including the 2008 ones, but they are very good BBC quality productions.
As to the follow up videos, I'll share my notes from watching them today (I had forgotten that this fellow was a subject from 4 years ago). This post is sort of a study guide to the videos.
First here again, why do the state-subsidized video-makers portray bad examples as success stories? As I predicted four years ago, the pillow guys (Tony) China escapade did not work out as hoped, but now they turn his efforts into a video on "bringing manufacturing back into the UK!"
The 2012 video starts out with a new tack, this time it's all about war, and "a battle taking place" where the pillow guy is taking on China. He is going to try to compete against cheap Chinese imports by bringing back production Liverpool.
Wait, what!? In the video, he is competing against himself, not China. His factories in China! He is the one who shut down a Liverpool factory in 2004 and moved it to China. At 33 seconds into the video, the narrator notes that Tony believes he can get his pillows made "quicker cheaper better..." in the UK. That is exactly why Tony went to China 8 years ago, and exactly why he failed in China, as I mentioned four years ago. Now, this time it will work?
As I stated four year ago, never try to compete on price. I recommended (although no one asked me) for Tony to go up market, and abandon the cheap pillow business. China is the #1 underwear manufacturer in the world, but the Italians make as much selling high end stuff. After dwindling away in China for the last four years, Tony's plan is to make high end stuff in the UK (good!), and try to continue the cheap stuff made in China (bad!), "until he can sell his factory in China." I mentioned this four years ago, and I'll say it again now, I sincerely doubt Tony owns a factory in China, but I do not doubt he sincerely believes that he does.
My argument is Tony is still fighting the wrong fight. He should be making more money for less work. Why not develop advanced materials? Why not keep coming up with new designs, instead of Union Jack, American flag and "stop sign" image pillows, which, ahem, has been done? Because with a state, you can set up trade barriers which give you a few months reprieve to a problem that when it settles on your business, will last forever. Adapt, grow or die.
I entitled this post "labor shortage..." because that is the critical factor in China trade, and it is the blind spot in calculations. Those people who went to China thinking cheap labor all fail. It is why in my classes I stress it as a particular danger area in critical thinking. I demonstrate how cheap labor is not a factor in international trade (nor could it be in fact or theory) and how what we exploit overseas is cheap management, not cheap labor. I purposely left this point out in my first book because the error in thinking is so deadly, and widespread, that I'd build a second book around it, and other points. (Give me time...) I could make such (in retrospect) spot on predictions as to Tony's progress using essentially that insight. In 2008 I note Tony is betting cheap labor matters, I predict Tony will fail. Bingo.
A side critique, the narrator poses all in terms of war, and nothing in terms of competition or cooperation. This too is misleading, and the film contradicts the narrator as Tony is helped by competition and cooperation.
Perhaps it's just the Celt in me, but listening to the Mersey accents was delightful. It is painful to see so many able bodied people in the videos unemployed, and scrabbling for minimum wage jobs. There are 14 applicants for every one job. Yet, Tony is having a terrible time retaining people in Mersey. No jobs being created, he is trying to hire from a pool of 2nd generation unemployed. But that is the fruits of capitalism with its limited prospects. And the progressive programs of prisons and schools (or do I repeat myself) has about reached its maximum in the West. The video introduces some of the UK hires and follows their progress.
For the sodden permeation of state intervention in the economy, neither 19 year old girl needed to produce pillows could thread a sewing machine. IN fact, for all of the education on offer in England, no one can sew. In the 1970s, a Chinese girl wanted "3 things that go round: sewing machine, watch and bicycle." The Chinese mom in the video is working to get her kids a better education... China's economy has been booming, the UKs has been dwindling.
Working for minimum wage can be disheartening. The video follows some of the new hires to a pub after work. One of the lads says "I work for my family, not for the company..."
So far so good..
"I work so there's money for the ice cream man and for my kids to have the playstation..."
ungghh... well, maybe that is why there is 2nd generation unemployment. Another fellow notes at minimum wage, it is better to "be on the dole than working."
The video shows the problem is so dire, Tony tries out people who can’t get work elsewhere, ex cons etc... 3 get hired... zero show up... could've told him that.
One key problem on the UK side is the minimum wage laws and pay after taxes. The film is full of people in the government who have jobs "helping people find jobs." So these people who do get jobs have to pay for people to try to find jobs when unemployment is high because the taxes are so high, and minimum wage laws exist. It is a downward spiral. The film inadvertently compares what a Chinese unemployment office looks like. (No state required.)
I could not help but think of how minimum wage laws are beat in the USA, by piece rate... when an excellent potential employee has a sick grandfather to care for, why not give her a sewing machine and let he work piece rate from home? Nope. Something like 70% of the garment workers in USA do it that way. Illegally.
The problem with minimum wage laws is they interfere with the right to contract, the freedom to contract. It is clearly too little to live on, so people who need to make a living cannot work. The best make other arrangements rather than take minimum wage. Minimum wage laws so limit the pool.
Without minimum wage laws, the market of unemployed would clear to near zero, and people too smart or creative to accept minimum wage would be pulled into new opportunities from fuller productivity. China has "minimum wage laws" on the books, unenforced, and the Chinese have seen their wages rise by a factor of five since the time this fellow first started producing in China.
We can see this would be true in the UK as well. Name one industry at which the UK excels...
Waiting....
Can't think of one? Defending England to the last Scotsman? Well, there is that.. but I was thinking music. And it is the one industry where there are no minimum wage laws, no age limits (even Keith Richards is still working)... Music thrives in the UK because it is largely left alone. The UK needs to get rid of its minimum wage laws, fire the govt workers and cut taxes concomitantly.
"I can't pay more because of competition..." He could pay more if he was not trying to sell exactly what the competition is selling... because he could charge more.
So with these challenges, he hopes to "steal jobs back from China..." as the narrator tells us. But wait... Tony was the one who brought the jobs to China, 8 years ago... o well, anyway...
In the second of the two videos from 2012, the drama shifts to a trade fair in Frankfurt where the showdown happens. Tony has two booths, one with cheap Chinese goods, and the other with higher end UK goods. Both are his. Let them compete.
As a veteran of countless trade shows, this is where I started screaming to the screen, like a Man Utd hooligan at a Liverpool match. The narrator ominously notes the China booth generates twice the leads as the UK booth, like this is good for China. Twice? What a disaster, the cheap booth should be running 5 times the expensive booth.
As I teach in my book and every class, the first question every specialty buyer asks is "What is new?" In video part 2, at 12 minutes 43 seconds, the first question out of the USA buyer's mouth in the UK video at a Frankfurt trade fair is “what is new?” If you plan to start up a business, you better be competing on design.
So what is new? Made in UK designs for the 2012 London Olympics... so these orders will be a one shot deal... I am listening to the buyers...
“Do you have any in stock... how quick can you ship...?"
Tony! Take the safety off your gun, the buyer is going in for the kill!
Two minutes later... the buyer says...
“What we want is not terrible... you can make these '(junior buyers) look good.'"
"We need a 40% discount..."
I told you Tony...
“So we can keep buying more...”
“We can help you get rid of some of your back stock...”
(Recall when the buyer asked... “Do you have any in stock... how quick can you ship...?")
Afterwards the sales manager says of the USA buyers “I didn't think so many would spend so much time... order so much”
You got snookered!
At 15.08 look at buyers body language... shaking head “no” while asserting
“I could use Caldera (Tony's brand) tomorrow... I could use it on the floor tomorrow...”
and then shaking head yes while saying
"But if three months, that is ok...” Nonsense, flattery, smoke screens, Tony’s sales manager is getting taken.
Prediction... the USA buyers cut orders way down from 20,000 pieces but keep their 40% lower price...
So now, can the UK factory competes with the China factory...
Tony visits with another UK company bringing manufacturing back. This guy is competing on design. I think he will do well. Tony is a nice guy, the other is, well..tough guy... and his thesis is.. "labor shortage in China..." I told you....
Tony takes his two top sewers to his factory in China, so they could see what they are up against.
Look at the infrastructure in the factory... no way the pillows are going to pay that off... the UK sewers meet Chinese factory worker...they sit, she stands... common courtesy!!! People, show each other respect!
The UK workers note the Spartan conditions in China. What they didn't notice...their standard of living dropping, China’s improving... Obviously the China operations are organized China around cheap labor... not cheap management. The factory Tony has set up looks like nothing I have seen in China. Tony is wasting the Chinese resources.
So the two are compared: UK vs China factories. Wait... this is a terrible comparison. Both factories are managed by Tony. It is a mere comparison of Tony vs. Tony, not China vs UK.
You probably saw this coming: UK wins the contest. Yay, UK wins, China loses. What I saw was the Chinese managers throw the contest so Tony bails and they take over his business and operation in China. And the Chinese should take his business over because he is not maximizing Chinese efficiency.
And what is Tony expanding for? For one time sales at 40% off?! Based on the “success” regarding the UK factory expansion, the two sewers chat among themselves...
“He is not going to do it for nothing, is he?”
He did in China...why not UK? So the upshot is, China is over, bring manufacturing back to the UK. We have the same stories going in USA right now. What nonsense. Look at the facts:
Does that look like manufacturing is returning to USA? But watching all these unemployed and the capitalist system, I began to reflect.
Tony owns a business. Tony gets to travel around the world. Do what he wants when he wants. He has scores of people who work for him. They pay taxes and suffer under the onerous rules and regs.
Tony and I and others are exempt from taxes because that is how the modern western states have arranged matters. If we were subject to the same onerous taxes that workers were, and the same regs, we'd leave. And we would not create any jobs, which creates taxpayers, who are the unhappy ones in the videos.
We self-employed are given exemptions by the state. We are like the Jews in Nazi Germany who were given exemptions by the Nazis as long as they brought in other Jews, who were valuable to rob, ransom off or work to death. Many of these Jews survived the war. We who start up businesses are like such Jews. Or the Irish Catholics working for the Brits. We start up businesses and then bring people in for the state to rob, ransom off or work to death. If you think this is extreme, remember our wars are paid for by workers taxes. We really must recognize this and recover the rule of law that is buried there under the chaos of the state. Clear off the state and return to free markets. In the meantime, start a business. It is the best way to survive the war.
Feel free to forward this by email to three of your friends.
2 comments:
Very happy to see a follow-up posted, after seeing the original a few years, ago. A few things caught my eye:
- if everyone had a boss like Tony, they would be unlikely to wander, what a nice guy
- I liked the flooring factory owner talk about "observing how the Chinese do things", then bring these ideas back and also take some costs out. Shows that they are using the Chinese' own tricks, and do not suffer from Western hubris that would prevent such learning
- excellent in-depth look at the challenges of individual workers in an industry that I had no knowledge. Loved the responses of the UK sewers to their counterpart's living/working conditions. Spot on and honest.
- while there is no doubt some malinvestment and mismanagement in Tony's factories, the nugget of truth remains: while Chinese wealth and standard of living increases, they are/will be on parity with the West in a short time. Then, why deal with the 12 hour flight, nasty attitudes, and language challenges? Make it at home. The much heralded triumph of China over the West has been a 30 year "blip" of success built on the back of workers that clawed themselves out of a cave dug by political catastrophe. And as their wage advantage disappears, we'll see for the first time if they have an inherent advantage as opposed to a price advantage created by a billion idle laborers. Judging by the latest crop of youth in China raised on excess by overcompensating parents, I see them at a serious disadvantage.
I just finished working in China for 2 years and had an upfront and personal view of a JV with a blend of Chinese and Western managers. Maybe they were at the bottom of the barrel (both sides), but I wouldn't let them be in charge of making pillows, let alone the passenger aircraft they are trying to build. So they are not a successful example of a company that has gone to China to find good and cheap management. I would like to see a better example.
Well, I've seen well run Chinese factories, and I know Apple does not run Foxxconn factories, and Nike tried 1.5 times to JV with China, so I am wondering if the problem may be JV. Somehow Walmart is doing billions in product up to Walmart snuff, and hitting that note can be as hard as hitting the Apple note. My experience in China has always been positive because I was taught "due diligence." A few weeks ago I abandoned a project into which I had maybe 100 hours and $500 because although all looked very good, a principal could not/would not warrant one obscure claim. I am done, again.
State your specs, get the price, go/no go. This JV stuff is for the birds.
Yes, the flooring guy is very different. I suspect he pressed the Chinese to do their best, and then reverse engineered them. Ruthless! Exactly what could tony reverse engineer from his factory? Hand stacking pillows?
And apparently he lost his entire crew each year. I think each year his crew sandbagged him, and they went to work where they would be better utilized.
The problem with Westerners trying to observe China is they are not observing China, they are observing Chinese who are being observed. The observations can be distorted. Better to leave the China side to the Chinese.
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