Evolving Excellence

Still Waiting on the Whambulance...

By Kevin Meyer

Here I naively thought perhaps we had moved on.  Over the past several months we've had story after story of companies realizing the folly of following the the lemmings to supposedly cheaper overseas locales and coming home.  And over the past several years we've told you story after story of companies in all kinds of industries being globally competitive and successful manufacturing from North America.

Furniture, apparel, even toys - companies are succeeding from U.S. plants by focusing on improvement and creating customer value.

But leave it to Industry Week to jolt me back to reality, to how far we still have to go.  Another article on all the horrible hurdles and barriers American manufacturers face.  The usual stuff.

The single most significant drag on manufacturing competitiveness is the United States' high corporate tax rate -- an average federal-state statutory rate of 40% that has not changed in decades. On a trade-weighted basis, the U.S. rate is 8.6 percentage points higher than its nine largest trading partners. This represents the single most important piece of the total structural cost burden on U.S. manufacturers.

And as usual it doesn't take into account how the U.S. tax system, more than that of any other industrialized nation, has loopholes and offsets galore.  Right GE?  However I do agree that the U.S. system is also far more confiscatory of overseas profits that the others, and that does need to change.  And simplification would remove incredible cost.

The article goes on in similar fashion with regards to regulatory, legal, health care, employee benefits, and other costs.  Same old thing.  Bottom line?

While manufacturers face a host of challenges, the data demonstrate that domestically imposed costs --  by commission or omission of government -- further undermine our ability to compete by adding at least 20% to the cost of making stuff in this country.

Yes 20% is a big number and I'm not denying it needs to be improved.  If it's all valid in the first place, as I noted above.  Four years ago I suggested that companies should stop whining and start competing.  A bunch apparently took me up on the challenge as they are succeeding.  Some more have just recently come to the realization that cheap overseas facilities aren't as cheap - or risk free - as they thought and are coming back home.  Some have realized that if they focus on internal inefficiencies as well as the potential for value creation from the customer's perspective, even a 20% differential isn't that high of a hurdle.

And some are destined to just whine and complain some more.  We'll check back in another four years and see how they're doing.  Any wagers?

Simmons to Simmons to California

By Kevin Meyer

It took a few minutes to dissect this positive tidbit of news yesterday: Simmons opening a new furniture upholstery facility in the U.S. - and not just in the U.S. but in California no less.  Probably about the most business-unfriendly location around, and I should know since I operate a couple businesses here.

Long-time readers will recall when Bill took Simmons to task - or actually the revolving door of flippers sucking cash out of a once proud company.  Really a sad story.

But it's not the same company.  You see the Simmons that Bill referred to has licensed upholstery manufacturing to this Simmons - really "United/Simmons Upholstery" which is really United Furniture Industries.  It has its own convoluted history of bankruptcies and mergers, which is usually the case with companies that can't give a straight answer to "what's your name?"  But at least it seems to have some manufacturing sense - even if it includes California.

Full-line upholstery source United/Simmons Upholstery, headquartered here, has secured a 505,192-square-foot manufacturing and warehousing facility in Victorville, Calif., and says it will use the site to better serve its rapidly growing base of West Coast customers.

The strategic move will also enable United/Simmons to create new jobs. According to the company, plans call for it to immediately hire 100 additional employees for this site and grow that number to approximately 400 employees within the next 36 to 48 months.

Yep, trying to get closer to its customers.  Good call.  Even if those customers are in a state with ridiculous business regulations, fees, and taxes.

"UFI has a history of making every effort possible to procure goods and services in the local communities where we have a manufacturing presence," Cottam added.

Buying local to further support the local economies.  Another good call.

While acknowledging the ongoing challenges presented by the economy, George said that by investing in new items throughout its category lineup, United continues to equip its dealers for success. "According to our dealers, consumer reaction to our products continues to be very strong and we believe that the best way to support our dealers' ongoing success is by continuing to bring fresh looks and compelling values to the market," he said.

 

A focus on value from the perspective of the customer.  Good again.

Perhaps there is hope for U.S. manufacturing - even with consumer furniture.

A Few Thoughts on China, Consistency, and Standardization

By Kevin Meyer

I just returned from my annual trip to visit some customers and attend a trade show in Shanghai, China.  Always an interesting experience and I personally love Asia, although I prefer the respectful humility of the Japanese and the constant happiness of the Thai and Cambodians.  The latter always seem to be full of joy even though an entire generation of men was wiped out only a few years ago – and we think we have problems.

My thoughts on China change with each trip – perhaps just as the country is changing rapidly.  You can’t help but wonder about the true meaning of communism when you get off the plane and are hit with a barrage of ads on the jet way for various luxury items.  Today’s state-sanctioned Shanghai Daily even had a feature article discussing how many Chinese were on the list of the wealthiest in the world.  Unlike in the U.S. the article, and by extension the government, praised their success.  Go figure.

On my last trip I was amazed with the accelerating improvements in this potentially monster economy.  I visited medical device companies that had technology on par with the best in the U.S. and who were investing in their future growth by creating 10,000-student engineering universities of their own.  I noticed how discussions with trade show attendees had changed from “here’s a sample of a product from our competitor in America – can you back-engineer and build me a million” to “here’s exactly how we’d like to improve on our competitor’s product”.  Society had become, for better or worse, very westernized with teenagers wearing the latest fashions to a Starbucks on every block.

This time I’m not as optimistic.  I talked to a lot of customers as well as several expats running the local operations for foreign companies.  Times are changing, and not necessarily for the better.  Wage inflation is accelerating, restrictions on foreign control of local outsourced manufacturing operations are increasing faster than the ability of local Chinese to manage such complex operations, and the disparity between the upper and lower class is growing. 

Basic services are becoming very strained by growth, and one expat living in Shanghai told me that healthcare quality had significantly declined just in the past year – to the point that she now goes to Hong Kong or back to the U.S. for even basic care.  Technology does not create great service – knowledge and experience using the technology does.  The human factor, once again.   I fear significant social upheaval in China’s future, and the impact that will have on the world.

Local governments have monstrous infrastructure loans that are becoming a problem.  In the past they would seize property by eminent domain, sell it to companies to develop into infrastructure, and use the funds to seize more property.  Lots of homes and businesses seized with as little as 90 days notice, which is why a primary consideration for multinational companies building factories is to develop in an area where seizure isn't likely - i.e. not on a straight (potential rail) line between two cities.  The problem is that the amount of property that can be seized has dried up, thereby drying up the ability of local governments to repay loans.  Oops.

But what has really struck me on this trip is the lack of consistency and adherence to standards.  It is pervasive and makes me wonder if this is the goal, and then the hurdle, of great civilizations.  How’s that for a deep thought?

I don’t necessarily mean regulation-enforced standards, but simply an inherent desire to do things right, the same way, and an inner knowledge that consistency is efficient and practical.  It is also an awareness that something is wrong and needs to be changed.

A few examples to illustrate what I mean, beginning with the very basic.  In our hotel, a five star by local standards, light bulbs are inconsistent in the same type and application.  Overhead lighting cans may have incandescent, compact fluorescent, etc.   At the breakfast bar the coffee is in a different location each morning.  Sometimes there’s low fat milk, sometimes not.

Trivial?  Perhaps – it didn’t strike me as all that unusual or systemic until I came across or heard about the following other examples.

An expat I talked to who is running the local operations for a large U.S. multinational told me of her frustration mentoring her Chinese leadership team – and why she believes it will be a long time before the company entrusts the operations to them without an expat chief.  One example she gave was how on her gemba walks she noticed trash on the floor, every day.  Her management team simply doesn’t see it, let alone take action to improve it.  She then connects it to understanding the financial statements and data required to run the operations – if they can’t see trash on the floor, can they see the minor and what may appear on the surface to be trivial, but still potentially important, issues in metrics and data? Let alone do something to correct it?

Recognizing, digging into, asking why, then improving is a fundamental requirement for solid autonomous leadership.  In her opinion it’s not there yet.

A third and final example, one that will scare most people flying in and out of Shanghai’s Pudong airport.  A different expat was telling me about the amount of news that really is censored, especially including safety issues.  The world witnessed some of this recently with the derailment of a high-speed train in China and how it was initially covered up to the point even having train cars buried before an investigation could take place.  

According to a good friend of hers, a commercial pilot, the actions of planes around Pudong are scarily similar to the cars and buses on local streets – effectively a free for all.  Instead of the highly-ordered sequencing, positioning, and following commands of traffic controllers that you see at U.S. and European airports, in China commands are often ignored.  Just last week a Qatar jet had declared a fuel emergency and was given a direct approach into Pudong.  Still, on final approach, two local airliners dove in in front of the Qatar jet to land sooner.  Disaster was narrowly averted.  Perhaps this is why United turns off Channel 9 when landing in China?

Understanding the value of consistency and standards, regulation-enforced but more importantly an inner knowledge and understanding of the value of consistency and adhering to standards, appears to be a key to an efficient society.

Similar to that, understanding that standards can and should be changed and improved upon with appropriate review is also key.  Otherwise stagnation occurs.  I see the U.S. as having a high level of standards and consistency, but struggling with creating the ability to improve and move forward.

Creating and adhering to standards and standardization are both a critical goal, and a critical hurdle.  For both societies and organizations.

Boeing's Lesson in One Piece Flow

By Kevin Meyer

One piece flow is a core concept of lean and thanks to its counterintuitive nature also one of the more difficult ones to embrace.  We naturally want to group processes and activities together instead of completing one unit before starting another.  There are some great videos showing how even common activities, such as addressing and mailing Christmas letters, go faster one at a time rather than addressing all envelopes then stamping all envelopes etc.

Perhaps Boeing should watch one of those videos.  Now I don't pretend to suggest that building airplanes is the equivalent of mailing Christmas letters, and I also know that the ramp-up pre-approval phase of airliner production is incredibly complex, but there are still lessons to be learned.  Especially when the 787 design and manufacturing outsourcing adventure seriously complicated matters.

Here's what Boeing is dealing with right now, just as their 787 Dreamliner obtains approval for commercial operations:

That’s left the maker of the much-hyped, long-delayed aircraft with more than $16 billion in inventory tied up in planes under construction, forcing it to stash 35 nearly finished jets outside its plant in Everett, Wash., and at facilities as far away as Texas.

We've all been there during our early or non-lean days... inventory all over the place.  Cash just waiting to be dropped to the bottom line. $16 billion or so in this case.

However, most of the 787s in the works will be sitting on the tarmac for months more as they complete construction, eating into the returns of a program that’s already unlikely to log a true profit before the tail end of this decade. “This is like dinner in the anaconda right now,” says Bill Batcheller, chief investment officer at Tower Wealth Management. “It’s a big bulge in the middle of the balance sheet, and it’s got to work its way through.”

That's one way of putting it.  Perhaps even the birth of a new lean metaphor... the anaconda vs. the water moccasin?  The financial cost is significant - more than a simple little number like $16 billion suggests.

Counting all those mothballed 787s, plus four aircraft in the factory and six test jets, Boeing has more planes on hold than Virgin Atlantic Airways has in service. That’s put a crimp in the aerospace giant’s finances: Working capital as a percentage of sales is approaching 50 percent, vs. less than 25 percent in 2009. Explains Wolfgang Demisch, a partner at Demisch Associates, an aerospace financial consultant: “It’s like they’re dragging a boat anchor equivalent to 25 percent of their sales, which is at the expense of the profitability of their enterprise.” Boeing’s stock has fallen 34 percent since the first 787 delay in October 2007.

Anyone who has started their own business, particularly one dealing with real physical products, knows the hidden danger of working capital.  How many companies have literally sold themselves out of business - another counterintuitive concept of how rapid sales growth can strangle a company's finances to death?  Not that Boeing is anywhere close to that pickle.

So that's the direct financial side.  But consider how all that physicall stuff moving through the anaconda clogs up production systems - leading to indirect costs.

Struggles with new materials and manufacturing processes extended testing to 20 months instead of the eight originally planned. That meant about half the 787s in inventory were already built before Boeing pushed back deliveries again last year after a fire during a test flight.  Each of the partially built planes is in a different state of readiness, since Boeing kept improving processes after the jets began rolling out in 2009. They’ve undergone waves of repairs based on testing tweaks; many jobs remain, including replacement of electrical panels redesigned after the test flight fire.

Production has been stalled at a rate of two planes a month for more than a year, and Boeing repeatedly has frozen the final assembly line in Everett for catch-up sessions, including a four-week pause last month. “Anytime you’re building an airplane out of sequence, the amount of work that’s required probably goes up by a factor of 10, because they have to unbuild all the things you built on top of whatever you have to change, and then build it all back,” says Demisch. “It’s cost that will be added to production and make the likelihood of a profit on this program over the next half-dozen years very, very low.”

Waves of repairs, "unbuilding", retesting.  "... the amount of work that's required probably goes up by a factor of 10."  Nope, we're not talking addressing envelopes anymore.

One piece flow.  Boeing just helped you learn why it's so important.

Non-Manufacturing in America - Kindle, iPhone, and Software

By Kevin Meyer

This past week has seen a trio of articles explicitly lay out the crisis, misperception, and opportunity of manufacturing in America.  Two great articles by Steve Denning sandwiching a piece by software venture capitalist Marc Andreesen.  If you get a chance I'd suggest you read them in this order, but I'll do my best to summarize below.

1. Why Amazon Can't Make a Kindle in the USA (Steve Denning, Forbes)
2. Why Software is Eating the World (Mark Andreesen, WSJ)
3. Does it Really Matter that Amazon Can't Make a Kindle in the USA? (Steve Denning, Forbes)

So to kick it off, let's tackle the first article.  Steve Denning bluntly lays out the problem, building on a previous article of his on How Do You Explain Radical Management to a CFO.

Decades of outsourcing manufacturing have left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Garry Pisano and Willy Shih in a classic article Thus in “Restoring American Competitiveness”. The US has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the US, even if Amazon wanted to.

- The flex circuit connectors are made in China because the US supplier base migrated to Asia.

- [article goes on to detail five additional key components]

Pisano and Shih continue:

“So the decline of manufacturing in a region sets of a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

In the same way that cost accounting and short-term corporate profits don’t reflect the true health of corporations, the economists’ reckoning of the impact of outsourcing production overseas misses the point. Americans are left with shipping the goods, selling the goods, marketing the goods. But the country is no longer to compete in the key task of actually making the goods.

Denning goes on to list a host of industries that have already been lost - too lengthy to appropriately duplicate here.  He then details what various types of leaders and functions need to do.  Here are just a couple:

Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.

Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”

Next, Marc Andreesen tries to convince us that all of this doesn't matter.  Software innovation will save the day, as software is supposedly the linchpin of everything in life.

This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I've observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.

In short, software is eating the world.  My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.

Ok... anyone else have visions of SkyNet?

Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.

He goes on to describe how every major industry - from book selling to music to health care to defense to even oil production - now has software as the supposed key component.

Instead of constantly questioning their valuations, let's seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.

That's the big opportunity. I know where I'm putting my money.

It's all about the software, stupid! But keep in mind Steve Denning's original article on how the receptacle of the miraculous software can't be built in the USA.  Which is why he quickly followed up his article.

Marc Andreessen’s article in the Wall Street Journal is certainly right to point out that software development is a huge part of both the present and the future economy.

But software per se is not the solution. Saying that “software is the solution” is like saying that the winning firms of the early 20^th Century were successful because of electricity. The difference wasn’t electricity. The difference was more imaginative management that took advantage of the opportunities that electricity presented.

In any event, the idea that software development is immune from the experience of being undermined by disruptive innovation from low cost producers is a comforting but dangerous illusion, particularly in fields where software and hardware development is intimately intertwined.

Similarly, the idea that the USA has a perpetual lock on software development is as solid as the idea that Detroit owns auto manufacture or that the IBM [IBM] owns the PC.

Bingo.  So what's the solution?

I agree that the idea that there is a lot of outsourcing going on is hardly news. The idea that it is irreversible and destructive of the economy’s ability to grow is less well known. Even so, it’s not exactly new news: the HBR article that I cite is two years old.

What is really new news is that (1) these fairly obvious truths haven’t yet dawned on economists at the Federal Reserve Bank of San Francisco, CEOs, accountants, politicians, among others and (2) the way to manage in a radically different way to deal with these issues is now more fully articulated than it has been before.

The issue is not hardware or software. The issue is how the firm is managed. Traditional management is killing both the firm and the economy. The statistics of the decline are well-documented.

Good work Steve.  There are a bunch of Evolving Excellence readers equally convinced that this situation needs to change - and can change.

Chopsticks and iPhones

By Kevin Meyer

Cheap, low margin, low tech.  Made in America, exported to China.  It can be done, even with a product that has comparatively zero demand in America.

Enter Georgia Chopsticks. Jae Lee, a former scrap-metal exporter, saw an opportunity and began turning out chopsticks for the Chinese market late last year. He and his co-owner, David Hughes, make their chopsticks from poplar and sweet-gum trees, which have the requisite flexibility and toughness, and are abundant throughout Georgia.

In May Georgia Chopsticks moved to larger premises in Americus, a location that offered room to grow, inexpensive facilities and a willing workforce. Sumter County, of which Americus is the seat, has an unemployment rate of more than 12%. Georgia Chopsticks now employs 81 people turning out 2m chopsticks a day. By year’s end Mr Lee and Mr Hughes hope to increase their workforce to 150, and dream of building a “manufacturing incubator” to help foreign firms take advantage of Georgia’s workforce and raw materials.

If it can be done with chopsticks, why not with iPhones?  What if Apple's innovation genius was applied to manufacturing and the supply chain, not just product design?

What if?

Accenture and Hindsight Consulting

By Kevin Meyer

Well another of the big five (or is it four or three by now?) consultancies has figured out that offshore outsourcing doesn't work.

The strategy embraced over the past decade by U.S. manufacturing companies to shift production to countries with cheap labor may no longer be appropriate, according to a consulting firm that has been a big promoter of offshore outsourcing. "Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs," according to Accenture analysts John Ferreira and Mike Heilala, who head the company's North American Manufacturing practice.

Now correct me if I'm wrong, but I thought consultants were paid the big buckaroos to use their immense insight and experience to help guide companies into the future, not restate the obvious of what has already happened.  What's next?  A flash of brilliance that the housing market was overvalued a couple years ago?

Bill and I and a huge number of other lean consultants have been saying that offshore outsourcing, especially to chase cheap labor, was a ridiculous proposition for many years.  I bet companies could have had us for a tiny fraction of what it cost to retain the likes of Accenture.  You still can, by the way.

Just for giggles let's take a look at some of Accenture's insight:

Having surveyed 287 manufacturing companies, Accenture found that 61 percent are considering moving some of their manufacturing back to their home market. Ferreira and Heilala describe this as being a "secret shift" and a "quiet trend."

And a "trend" we have been reporting on for a couple years, but ok.

Many manufacturing companies that shifted production offshore "likely did so without a complete understanding of the 'total costs,' and thus, the total cost of offshoring was considerably higher than initially thought," write the two analysts. "Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise."

Brilliant, simply brilliant.  Who would have thunk it?

Companies have found that managing their supply operations from afar has weakened their "overall operational planning, forecasting and general flexibility, while in some cases also driving up costs with the need for complex network management," according to Accenture. "In some cases, this situation has limited the companies' competitive advantage causing limitations on growth and revenue."

Almost half of the companies Accenture surveyed said they are facing issues regarding poor cycle and delivery times and product quality due to offshored manufacturing and supply operations. There have also been "dramatic" increases in many of the costs that first enticed them to move their production overseas.

Really?

Companies have not done a good job of determining the true cost of offshoring. They tend to look only at direct costs, such as logistics, product unit costs, supplier costs, manufacturing overhead, labor, material and packaging costs. But there are many other costs that have not been considered when shifting production to a foreign country, such as local taxes, regulations, customs duties, VAT taxes, the agility and speed of suppliers to respond to customer demand, poor quality inspection and validation, operational risks, inventory, safety stock, broker fees, infrastructure costs, tooling and mold costs, networks needed for plant material handing, training costs, organizational communications costs, local operations staffing, capital amortization, terms and exchange rage fluctuations.

"The overreliance on direct costs to the exclusion of other legitimate cost factors distorts the business case for offshoring and likely many decisions to offshore were incorrectly made," say Ferreira and Heilala.

Ok, sorry, I simply can't quote any more of the article without smacking my head into the wall.  Go to Manufacturing News to read more.  And think about whether you want a consultant that guides you into the future, or one that is exceptionally proficient at hindsight.

Maybe I'm being just a tad harsh.  Even in hindsight Accenture still realized how misguided their previous prognostications were ahead of most other management consultants who still tell companies that chasing cheap labor is the magic pill.

And We Wonder Why We're Losing Manufacturing Jobs

By Kevin Meyer

I haven't exactly been Boeing's best friend over the past several years, regularly taking them to task for their nutty 787 Dreamliner outsourcing idea that has predictably led to delay after delay, not to mention the transfer of knowledge to competitors.  However all along I was also rooting for them, especially when it appeared they learned their lesson, as a stronger, smarter Boeing meant more North American jobs.  Good jobs.

So now that they've decided to build a new full assembly operation in the U.S. who decides to attack them?  The U.S. government no less.

On Wednesday, the National Labor Relations Board filed a complaint against Boeing, seeking to prevent the aircraft manufacturer from opening a second production facility in Charleston, South Carolina for its new 787 Dreamliner.

The NLRB alleges that Boeing violated the law, opening the non-unionized South Carolina plant in retaliation against union workers for past strikes at its facility in Everett, Washington and also as part of an effort to discourage future strikes. The NLRB wants an administrative court to force Boeing to relocate its second production line back to a unionized plant in Washington.

Seriously?  How blatant can this administration get in pandering to its donors?  There's even already settled Supreme Court level decisions on this.

Boeing's lawyers slammed that claim as "legally frivolous" and said the NLRB's effort to restrict the company's business represents a "radical departure" from precedent. They were quick to point out two 1965 Supreme Court cases affirming employers' right to consider potential strikes in making business decisions, and they refuted the union's claims of intimidation by pointing out that in the eighteen months since the announcement of the South Carolina plant, Boeing has added more than 2,000 union jobs in the Puget Sound area.

Senator Lindsey Graham called the NLRB's complaint "one of the worst cases of unelected bureaucrats doing the bidding of special interest groups that I've ever seen."

On the other side, the International Association of Machinists District 571, which filed the grievance in March of last year, predictably hailed the filing as "a victory for all American workers."

Well "all" with the exception of those workers in South Carolina.  I guess they don't matter as much since they don't contribute to certain coffers.

I don't know, my friends.  One of the nation's few remaining exporters of high-value manufactured products, employing tens of thousands of high wage people.  And we're doing our best to make them reconsider opening a new plant in the U.S. and perhaps instead go someplace more hospitable.  Like China?  Italy?  Korea?  Or maybe they'll follow Halliburton's lead and say screw it, pick up the whole kit and kaboodle, and move overseas.  It's stunning and sad how many already are.

And then those same folks that make these inane decisions will moan and groan about jobs moving overseas, U.S. companies hiring more at their overseas facilities than their U.S. facilities, why our tax base is decreasing, why our balance of trade is shifting, and so forth.

Anyone have a mirror they'd like to send to the White House?

Still thinking about China?

By Kevin Meyer

Although the wave of companies running to China in the mistaken belief that direct labor is their largest cost has slowed, there are still some lemmings with blinders on. Fortunately there are more and more companies realizing the only valid reason to move overseas is to be closer to their customers and, yes, there are a multitude of potential customers in China.

Yesterday The Wall Street Journal published one of the best articles on China that I've seen in a while in terms of the potential future social upheavals.  Something else to keep in mind when considering the supposed labor cost savings.  The numerous comments on the article are almost if not more informative than the article itself, including several Chinese apologists with thought-provoking ideas such as "the Western idea of mistaking irresponsibility for freedom."

The premise of the article was whether a Middle East style uprising could happen in China, with the succinct answer being "perhaps" - but the discussion brought up many points that outsiders should consider.

Over the course of three short months, popular uprisings have toppled regimes in Tunisia and Egypt, sparked a civil war in Libya and created unrest in other parts of the Middle East. They also have raised a question in many people's minds: Are all authoritarian regimes now threatened by this new democratic wave? In particular, is China, a rising superpower, vulnerable to these forces?

The Communist government in Beijing is clearly worried. It has limited news coverage of the recent uprisings and has clamped down on democratic activists and foreign reporters, acting pre-emptively against anonymous calls on the Internet for China to have its own "Jasmine Revolution."

So what are the chances for a similar uprising in China?

Even unpredictable things take place in a certain context, and the present-day situations of China and the Middle East are radically different. Most of the evidence suggests that China is pretty safe from the democratic wave sweeping other parts of the world—at least for now.

Perhaps, but lets dig into the reasons for uprisings.

Mr. Huntington noted that increasing levels of economic and social development often led to coups, revolutions and military takeovers. This could be explained, he argued, by a gap between the newly mobilized, educated and economically empowered people and their existing political system—that is, between their hopes for political participation and institutions that gave them little or no voice. Attacks against the existing political order, he noted, are seldom driven by the poorest of the poor in such a society; they tend to be led, instead, by rising middle classes who are frustrated by the lack of political and economic opportunity.

And indeed, the protests in Tunisia and Egypt were led in the first instance by educated, tech-savvy middle-class young people, who expressed to anyone who would listen their frustrations with societies in which they were not allowed to express their views, hold leaders accountable for corruption and incompetence, or get a job without political connections.

Now comparing that to current day Chian.

It is certainly true that the dry tinder of social discontent is just as present in China as in the Middle East. This issue dogs all regimes that have neither the rule of law nor public accountability: The authorities routinely fail to respect the dignity of ordinary citizens and run roughshod over their rights. There is no culture in which this sort of behavior is not strongly resented.

This is a huge problem throughout China. A recent report from Jiao Tong University found that there were 72 "major" incidents of social unrest in China in 2010, up 20% over the previous year. Most outside observers would argue that this understates the real number of cases by perhaps a couple of orders of magnitude. Such incidents are hard to count because they often occur in rural areas where reporting is strictly controlled by the Chinese authorities.

Though corruption in China does not reach the predatory levels of certain African or Middle Eastern countries, it is nonetheless pervasive. People see and resent the privileged lives of the nation's elite and their children. The movie "Avatar" was a big hit in China in part because so many ordinary Chinese identified with the indigenous people it portrayed whose land was being stolen by a giant, faceless corporation.

There is, moreover, a huge and growing problem of inequality in China. The gains from China's remarkable growth have gone disproportionately to the country's coastal regions, leaving many rural areas far behind.

So inequality exists and some uprisings are occuring, but will they take root into a larger movement?

According to Mr. Huntington, however, revolutions are made not by the poor but by upwardly mobile middle-class people who find their aspirations stymied, and there are lots of them in China. Depending on how you define it, China's middle class may outnumber the whole population of the United States. Like the middle-class people of Tunisia and Egypt, those in China have no opportunities for political participation.

But China's middle class has a somewhat different perspective than those in the Middle East.

Like the middle-class people of Tunisia and Egypt, those in China have no opportunities for political participation. But unlike their Middle Eastern counterparts, they have benefited from a dramatically improving economy and a government that has focused like a laser beam on creating employment for exactly this group.

To the extent that we can gauge Chinese public opinion through surveys like Asia Barometer, a very large majority of Chinese feel that their lives have gotten better economically in recent years. A majority of Chinese also believe that democracy is the best form of government, but in a curious twist, they think that China is already democratic and profess to be satisfied with this state of affairs. This translates into a relatively low degree of support for any short-term transition to genuine liberal democracy.

Indeed, there is some reason to believe that the middle class in China may fear multiparty democracy in the short run, because it would unleash huge demands for redistribution precisely from those who have been left behind. Prosperous Chinese see the recent populist polarization of politics in Thailand as a warning of what democracy may bring.

On top of that the government is a bit more sophisticated.

The fact is that authoritarianism in China is of a far higher quality than in the Middle East. Though not formally accountable to its people through elections, the Chinese government keeps careful track of popular discontents and often responds through appeasement rather than repression. Beijing is forthright, for example, in acknowledging the country's growing income disparities and for the past few years has sought to mitigate the problem by shifting new investments to the poor interior of the country. When flagrant cases of corruption or abuse appear, like melamine-tainted baby formula or the shoddy school construction revealed by the Sichuan earthquake, the government holds local officials brutally accountable—sometimes by executing them.

The bottom line?

The bottom line is that China will not catch the Middle Eastern contagion anytime soon. But it could easily face problems down the road. China has not experienced a major recession or economic setback since it set out on its course of economic reform in 1978. If the country's current property bubble bursts and tens of millions of people are thrown out of work, the government's legitimacy, which rests on its management of the economy, would be seriously undermined.

Moreover, Mr. Huntington's scenario of rising but unfulfilled expectations among the middle class may still play out. Though there is a labor shortage among low-skill workers in China today, there is a glut of the college educated. Every year into the future, China will graduate more than seven million people from its universities, up from fewer than a million in 1998, and many of them are struggling to find work suitable to their self-perceived status. Several million unemployed college graduates are far more dangerous to a modernizing regime than hundreds of millions of poor peasants.

I tend to agree that China is different but will most likely have significant socioeconomic problems over the next couple decades.  I would add one more factor that will play a powerful role: the rise of Chinese entrepreneurship, especially in a global world.  The government has effectively tip-toed around this issue by allowing and even encouraging limited and sometimes overt capitalism, but at some point they will have to identify boundaries.  At the same time a growing number of Chinese technology entrepreneurs are becoming increasingly powerful on a global scale.  How will those boundaries affect entrepreneurial desires?

So when you consider moving to China for reasons other than being closer to a billion potential customers, are you factoring in what may happen to and within that society over the next few years?  Where does a traditional P&L capture that potential cost?

Yes, There is Manufacturing in San Francisco

By Kevin Meyer

And I don't mean San Francisco, Mexico.  This is "high cost" San Francisco in nutty "high cost" California in the "uncompetitive" United States.  I used to talk a lot about American Apparel as an example of a manufacturer of traditionally low margin clothing products that was also successful in California, but I've held back lately due to some of the... uh.. "controversial" aspects of the CEO.  Maybe I've found a few more examples to embarass the pants off of companies that think they can't compete from the U.S.

Thanks to regular reader David for pointing out this recent article in The Atlantic.

There are 200 to 300 businesses that actively manufacture products in San Francisco. I work for one of those companies - Timbuk2 Designs. Timbuk2 has been making custom bags in San Francisco since 1989.

We were started by bike messenger Rob Honeycutt, who became fascinated with just-in-time manufacturing and applied the Toyota model to the making of messenger bags. He hired a team of highly skilled sewers, several of whom are still with the business. One of Timbuk2's sewing leads, Hui Wu, has been with Timbuk2 for thirteen years, and she and her 15 person team - 13 sewers, 2 cutters - can make up to 400 bags a day in our San Francisco factory. Wu and her team are fully cross-trained so they can work on any machine, and their skill is incredible.

You can probably already see the threads I'll weave in describing why they're successful - a knowledge of Toyota principles and practices, hiring for experience and talent instead of just a pair of hands, cross-training.

It may not sound modern or even possible, but local manufacturing is happening in American cities and it's actually working. Here's why.

Kate Sofis of SFMade - a non-profit dedicated to supporting and growing manufacturing in San Francisco - explains, "Companies here share a few very noteworthy traits. They are almost all consumer-products companies [that are] design-driven, intensely customer focused, increasingly sell direct, and often marry technology in their business model."

Larger companies, specifically Nike and Converse, manufacture their products in Asia and FedEx them directly to the customer. The model works well for everyone but the customer who has to wait 3 - 6 weeks to receive a product. But because Timbuk2 is local (i.e. in the USA), we manufacture and ship custom bags in 2 - 3 business days. And if the customer is in San Francisco, we can do same-day manufacturing and delivery.

Units of one shipped fast.  As opposed to having to wait for a container load(s) and hope the design is still in style.  WalMart fell victim to that problem last year.  The ability to rapidly test new designs is another competitive advantage.

Low minimums and speed to market are other huge advantages. We can make and sell one unit of a bag to see if anyone bites. Betabrand, another company that designs and manufactures in San Francisco, similarly benefits from producing locally. Betabrand's founder Chris Lindland explained, "Quick lead times and limited batches allow Betabrand to test out new ideas in a snap and quickly follow up when they have a hit."

We see that story time and time again.  Smaller and smaller batches creating the ability to rapidly incorporate new designs and get them into customers' hands in days or even hours.  Lower inventory, especially inventory at risk from a quality issue or style change.

If clothing and other consumer goods manufacturers can compete from higher cost and even highly regulated areas, then anyone who thinks they have to chase supposed lower labor costs overseas should be embarassed.