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Semiformalishmaybe

Locating the Hands

Recently got some hardware in the mail that's going to be the basis for a product for a company I've occasionally helped out with. In particular, this is a low-cost Android tablet. The hardware was made in china (the entepreneur who runs the company bounces between China and the US). It's pretty neat, but the software needs work - the interface is more than a bit sluggish (I might see if there are smallish tweaks I can make that will help). It's also running a lightly modified vesion of Android 1.x; if it meets the requirements it'd be very nice to get 2.x on it. Other than having fewer hardware buttons, it's a lot like a giant version of my NexusOne.

I'm curious about that manufacture in China. I'm not particularly loyal to the United States (except insofar as it is a suitable place by my values, which some other nations do just as good or better a job on), but I wonder why the special economic zones in china and some other parts of Southeast Asia are technology powerhouses, what the nuances of that are, and what the implications are for the US.

Note: I probably don't know as much about some of the topics ahead as I should. I try to stay reasonably well-informed by reading current events journals for that part of the world, many of which cover business pretty well, and I keep in touch with some people online who are more business-y than I am, but take my thoughts here with a deerlick of salt.

As I understand, China's Special Economic Zones have negligible taxes and in some cases were specifically constructed to meet the business needs of an industry. While since Deng Xiaopeng China can't be considered communist anymore, they've embraced limited-to-moderate central planning in very deliberate ways that have advantages over our much-more-limited central planning in the US, and their legal climate supports that. The cost of labour is very low, and while their productivity per labourer is (probably) lower than ours by capital tools, long hours and less expense on care for those workers compensate, even for reasonably skilled labour. Result: a lot of high-technology industry is based in China.

Is this just competition? In theory, in the US we would/could compete by capital investment - factories that rely far less on manpower, compensating with roboticisation and superiour tools. However, I suspect that China has access to all the technology that we do (technology transfer, university system, etc), and even as they have cheaper labour, if the most efficient methods right now were in roboticisation, they'd be on it.

What are we missing? First, two categories of that - absolute minuses and relative minuses. I suspect most of the minuses are relative - there is no absolute barrier to us producing all of the devices that we need ourselves - we have the needed people, technology, and expertise to make them. Rather, it's that for various reasons, other nations are better - they decide not to make those businesses contribute to the public good (low/no taxes, either as part of a long-term strategy to have all the industry there so they can eventually tax, or as a permanent status), they decide to allow those businesses to treat workers poorly and damage the environment, they've organised these areas to be completely modern in ways difficult to match by undirected/piecemail retrofitting of western cities, they provide more coherent/consistent legal codes to aid business, probably other things. We probably do some of these things too, to some extent, and are reluctant to do others.

As principle, I believe we should accept certain economic inefficiencies - high labour standards, good wages for workers, and good ecological protections are worthwhile by our values, even if competition would tell us to get rid of them. We may want to use non-economic (or at least anticompetitive) measures to attempt to make it harder for other nations to benefit by not doing these things - the economic forces are pushing against things we've decided to care about. Could we have the government take more of an active role in supporting these businesses? Perhaps (although the political baggage we have might make that difficult, and there are dangers in doing so). Better national infrastructure would help (lower-cost higher-speed internet, a better national rail system, etc). There's a risk that the competition for these businesses would just intensify (but doing nothing may be worse).

In some areas the US is still doing reasonably well, I think - I think China may mostly be at a stage now where the same criticism can be levelled at it that has often been levelled at the open-source movement - plenty of incremental improvements but not a lot of far-thinking innovation. A lot of the really big new ideas, architecture, and software come from the US and western europe. I don't think that will remain true for much longer.

Comments

I am having a hard time deciding whether you are pro-China manufacturing and R&D. I do feel compelled to respond to your claim that China is a "technology powerhouse". Some things that I have seen in competing with China include the following:
- Specs are optional. Any R&D coming out of China may or may not do what they claim it does. That can include things like regulatory claims.
- Defects don't exist. Test labs over in China have a terrible reputation for ignoring defects on the product.
- Stealing is no big deal. If you believe in Intellectual Property, this is an issue.
- Materials are not important. This applies to ROHS issues as well as more insidious things like putting poison material in medicine. If it looks the same, why not substitute.

Maybe China will become a major player in coming up with new ideas, I just don't think they will be able to execute on it.
Do you see a major difference between American companies using Chinese labour and Chinese companies making inexpensive knockoffs?

I don't believe in IP.

The other concerns are real concerns, alongside the lack of protection of labour interests I mentioned in my original post.

I wouldn't say I'm pro-China, particularly as there's a race-to-the-bottom game going on (several fronts) here. I value the advances organised labour have brought the world, and the idea of those being swept away in competition is not one I relish.

I believe that some companies are better than others - the people I know who work for companies that do business in China suggest that they usually have to shop around to figure out who's reputable.

Given your travel and work experiences, I'd be very interested to hear more of your thoughts on this matter.
I do see a major difference between American companies using Chinese labor and Chinese companies making knockoffs.

I am not a fan of either practice. In the case of American companies using Chinese labor, you have a situation where a bunch of stressed out american engineers travel and teleconference tons to message and train on what they need to have happen for manufacturing or R&D. IF they do get traction on this, it is short lived on account of the fact that mobility is extremely high and you lose that training within 2 years. In addition, when that person in China leaves for another position, they take all your IP with them with impunity. They could go to Chinese knockoff company or a competitor and often they even take the drawings and tools. OFTEN, American engineer doesn't get traction in training due to lack of communication or cultural differences like the defect thing I mentioned before. That leads to shipping buggy items and expensive reworks. If the item doesn't pass regulatory, you get expensive fines.

As a disclaimer to this explanation, most of my experience with CMs is in Mexico and Malaysia. These have their own set of problems which are not the same as China. My understanding of Chinese CMs and JDMs is from comparing and contrasting amongst my peers.

Chinese knockoffs are insidious and evil. When your IP leaves and your tools leave, you end up not being able to tell the difference between your product and a knock off from the packaging. Seriously. I have taken the quiz and failed it. The product is often very poorly engineered and fails. Here are some examples of how: If you leave out an ESD diode, you can zap your ASICs at any time. If you don't write to memory correctly (randomly), you can burn up that memory within months. This causes your company to lose their quality reputation. Your call center gets calls on sh-- they didn't make. You may lose a customer forever, but that's just electronics.

The medicine thing I mentioned did actually happen and people died. (Well, the media said that, and I can no longer vouch for any media facts.)

So, yes, there is a big difference between the knockoff and the CM or JDM. I am definitely not a fan of either.

As for the shopping around to see who's reputable, I have seen that too. But, for all the audits that you can do, the stories that I hear are: American shows up in China for audit. The first company fails miserably. All following companies pass gloriously with a welcome sign. You as an electronics company have things that you try to do like keep hazardous substances out of products and treat labor well (even in China). If ou can't have a surprise audit because it rapidly gets around that American is in town, how do you develop any kind of trust? I commend your friend if he has found a way to trust a company over there, but I don't think I am there yet.