Chinese Manufacturers Face IT Challenges
March 15, 2011 Alex Woodie
China is often thought of as a powerhouse of manufacturing that is using its superior efficiency and innate competitiveness to win jobs from other countries and eventually dominate the global market. While some of that view may have truth, the reality is more complicated than that. According to a recent IDC report, Chinese manufacturers currently trail their American and Western European competitors in adoption of IT systems and business processes that will be critical to efficiently growing their operations.
For starters, let’s blow away the myth that China dominates the global manufacturing industry. The U.S. remains the biggest manufacturing country in the world, and made almost $1.7 trillion in goods in 2009, or 40 percent more than Chinese companies made, according to United Nation figures cited in a recent Associated Press story.
It’s true that millions of factory jobs have left the United States for China and other countries with lower costs of living (and intentionally deflated currencies, which keep the cost of Chinese goods artificially low). However, when it comes to making complicated high-tech products–such as computer servers, medical devices, and passenger jets–the U.S. remains the world leader in manufacturing.
As it turns out, many of the factory jobs that left the U.S., such as making clothes and cobbling shoes, require large amount of human labor, which is cheap and plentiful in places like China today, and Latin America and Eastern Europe in years past. American manufacturing has moved away from labor-intensive industries, as manufacturers adopted automation and computerization to make their operations as efficient as possible–and the least dependent on human labor.
These facts bear on a 2010 IDC study of more than 700 small and mid-sized discrete manufacturers in the U.S., Western Europe, China, Japan, and Brazil. The study, which was commissioned by Infor and IBM, looked at the rate of ERP adoption among the companies and the amount of business complexity reported by executives. The study also looked at the companies’ major business initiatives for the next two years.
Chinese and IT
Chinese manufacturers have a lot of progress to make in terms of IT adoption in general and ERP adoption specifically. According to the IDC study, a whopping 44 percent of Chinese manufacturers reported that IT plays “no role whatsoever” in their operations, compared to about 9 percent that said IT was vital, and 48 percent who said IT supports the organization. The study also found that 44 percent of Chinese manufacturers do not have an ERP system in place.
By comparison, 42 percent of U.S. companies and 64 percent of Western European companies said IT was vital. Only 4 percent of U.S. companies said IT has no role, while less than half of one percent of Western European companies said that. About 21 percent of U.S. companies and about 20 percent of Western European companies had no ERP system; many have multiple systems.
Chinese companies report a much lower level of complexity than their U.S. and Western European competitors. About 59 percent Western European and U.S. companies reported complexity to be a critical issue, versus only 28 percent of Chinese companies. One of the most surprising findings of the study was this: 35 percent of Chinese manufacturers report their operations are becoming less complex.
Mark Humphlett, director of ERP solution marketing at Infor, helped IT Jungle put into historical context some of these findings around Chinese manufacturers, their reported level of operational complexity, and their IT and ERP adoption. What it comes down to is the Chinese manufacturing phenomenon is still rather young, and the maturation process–as evident in adoption of IT and production automation, as well as the complexity level of products produced–hasn’t run its course to the extent that it has in the U.S., Europe, and other parts of the world.
“China historically has the benefit of being able to throw massive numbers of people at problems. They just continually throw more people at it, versus trying to understand how technology can impact some of those changes,” Humphlett says. “When it comes to manufacturing shoes for Nike or clothes for Wal-Mart, that’s where you’ve got a factory with tens of thousands of people in it, doing a lot more manual labor, versus using automated machines and equipment.”
“But I think as the product mix grows in complexity, as you see more industrial equipment manufacturers, the Caterpillars of the world, increasing their operations and building more plants over there–as they start increasing the number of complex manufacturing environments–then I think you’ll start to see a lot more of the complexity issues that have been running rampant in those types of manufacturing operations” in the U.S. and Western Europe.
A global pattern of manufacturing migration that began decades ago is playing out today on the Chinese stage. “A lot of the heavy manual, heavy labor operations have gone from being in North America and Western Europe to Latin America and Eastern Europe, and now to the Far East,” Humplett says. “Eventually you’ll run out of places to find cheap labor and then it’ll start to equalize around the world.”
The shift from labor-intensive factories to high-dollar product manufacturing will require an investment in IT that is not prevalent in the Chinese manufacturing segment today. Of course, that means growth, and that means China is currently one of the hottest sectors for IT solution vendors like IBM and Infor. These two partners have mature solutions (including many based on IBM i-AS/400 technologies) to help Chinese companies grow and become more competitive across a range of industries.
“We’re seeing tremendous growth in the Chinese market right now and over the last couple of years,” Humphlett says. “It’s one of our largest growth areas for ERP applications, as well as supply chain and production planning, and demand forecasting applications.”
IBM has gone so far as to introduce special versions of the IBM i-based Power Systems server to satisfy the particular demands of Chinese customers, and many third-party software vendors with supporting roles have recently set up offices in Asia.
Advancing the Advanced Operations
The IDC study also elucidated some of the challenges to improving operations cited by the more advanced manufacturers in the U.S. and Western Europe. For these companies, the number one barrier to improving their operations was the availability of skilled resources. Perhaps it’s ironic, or merely expected, that companies suffer from a lack of quality personnel when they take pains to automate huge swaths of human labor out of their operations. (When you rely on machines to do work for you, those who control the machines most effectively run the show.)
Other big challenges to improvement cited by the IDC study are the lack of visibility of information, and the inability to react to changes in a business environment. “Those are key aspects of where Infor has been focusing development efforts,” Humphlett says. “For starters, being able to increase our ability … to be that skilled resource pool for an organization to get up to speed as quickly as possible so they can get the return out of using the applications.
“But then lack of visibility into information, and the inability to react to change–our whole integration and reporting strategy right now is all about getting to that single version of the truth, and having that information pushed to the user based on that role,” he continues. “Whether you’re an executive or a production manager or a line supervisor, you’ve got the metrics and the reports pushed to you, as it happens, as you need it. Infor has been focusing its development efforts on solving a lot of the issues that are preventing organizations from being effective and being able to improve.”