Factories go onto autopilot: LETTER FROM … SHANGHAI

The New Zealand Herald

By Maria Trombly

March 27, 2006

China’s drive for better manufacturing quality is encouraging businesses to invest in machines C HINA may be the low-wage manufacturing capital of the world, but not every company comes here to save money on labour.

Instead, as China develops its domestic economy, companies are opening plants here to be close to customers, close to raw materials, and for other strategic reasons.

Clariant, for example, a chemicals company, is completing a state-of-the-art pigments plant in Hangzhou. The city is located about three hours from Shanghai.

Clariant is not in China because it’s a convenient source of cheap labour. It’s made a long-term commitment to the country – and the new facility helps it prepare for the future.

Using the most advanced manufacturing technology is one way to do that.

“This is the first advanced technology pigment plant that we have built in China,” says Gary Fielding, the company’s Asia-Pacific president.

“It’s at least as advanced as anything we have in Europe.”

Plant automation means it needs only a third the number of employees of a conventional plant of the same size.

But automation’s real benefit is that it guarantees a high degree of process control, which improves quality. It also improves production speed and flexibility. But having fewer workers doesn’t hurt, either.

“China won’t stay cheap forever,” Fielding says. “And we have to stay competitive.”

Chinese companies, too, are starting to automate.

Beijing’s Sungari Woodworking, for example, is among the top five furniture companies in China when it comes to automation.

About 500 employees make 1000 sets of cabinets a month, says Qi Mei, the company’s director of sales.

“We are using the most advanced machines in the industry,” he says. Automation improves quality and accuracy, he says, but some artisan craftsmanship is still required – such as for decorative trim.

Except for that, the company is heading for 100 per cent automation.

After beginning the process of automating three years ago, the company was able to triple output while maintaining quality levels.

Machines are expensive – one machine cost Sungari RMB2.6 million ($520,000). Such investment isn’t worth it unless outputs hits a certain level.

However, as volumes for Chinese manufacturers continue to increase, more and more of them will invest in machinery, he predicts.

“If a company is well-run and sales grow, they will improve their level of automation. And as they automate, sales will increase further – it’s a virtuous cycle.”

For companies that produce products used by other businesses, another reason for automation is that the customers are demanding higher quality – and they want to see systems in place that can guarantee it and provide some measure of transparency.

Leland Lewis is a partner at Key Principal Partners, which owns a rubber processing plant in Wuhu, China. The plant is part of Beijing-based Asimco Technologies, one of KPP’s portfolio companies and makes rubber products for the automotive and truck industry.

“It’s a very demanding industry,” Lewis says. “We can’t just throw labour at it.” Instead, he says, automation is required in order to meet customers’ quality and delivery demands.

“We just built there a truly world-class rubber compounding and mixing facility that’s very automated,” says Lewis. “You would find that in only the most industrialised countries in the world.”

Many of the systems have never been used in China before, he says.

“It’s new technology,” he says. “We had to import people from around the world because there’s no one in China who would know how to do it.”

One obstacle to automation in China is that the Government is more interested in putting people to work.

“Automation will cause job loss in the factories, which the Government is reluctant to see,” says Huiyuan Guan, a professor of furniture design at Nanjing Forestry University.

Automation also requires large investments, and requires trained people to use equipment properly.

However, it’s a growing trend, even in traditional industries like furniture manufacturing. And in the developed areas, such as the eastern seaboard of China, factories tend to be more automated than in the western provinces.

For example, varnishing lines and panel furniture production processes are starting to be automated, he says.

“When it comes to quality control and uniformity, hand-made products can’t come close to matching those by machines,” he says.

But manual labour can allow for greater variety, says Jack He, director of the product department at Beijing’s Kebao & Boloni Kitchen & Bathroom Furniture Co. The company, which has 3000 employees, makes sofas, cabinets and other furniture. It began to invest heavily in machinery last year, but realised quickly that simply importing European technology into China doesn’t work.

“We combine automation with hand crafting,” he says. “It’s the normal option in China.”

Automation does improve efficiency and accuracy, but the big investments in equipment mean it’s hard to switch from one model to another, or to tailor products to particular customer needs. And, so far, automation hasn’t enabled his company to reduce headcount. Instead, as the factory buys more equipment, it also hires more workers to operate it.

“However, automation can improve production efficiency and accuracy.”

Xiaotong Zhang, foreign trade manager at Aim Furniture Group, confirms that automation isn’t likely to result in job losses in the Chinese furniture industry – although it may slow the rate at which factories have to hire new people.

“It’s not what’s happening in Chinese furniture now,” he says.

Eventually, as the industry matures and the break-neck growth of the Chinese economy slows to the levels of industrialised countries, actual job losses will occur as well.

“That’s what Germany and Italy experienced,” he says. “Output increased but using automation reduced costs and resulted in job losses.” * Wendy Yu contributed to this report. Maria Trombly is the China bureau chief for Securities Industry News, a New York City-based newspaper that covers the operations of global securities and financial markets. She has previously covered the dot- com boom at Computerworld and, in the mid-1990s, was a war correspondent in the former Soviet republics.