the way to a brighter future for china v2

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THE WAY TO A BRIGHT FUTURE FOR CHINA Presentation by Michael Lee Serwetz, President, Prophet Business Services LTD.

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The KEY to success for China factories-PARADIGM CHANGE

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Page 1: The Way To A Brighter Future For China V2

THE WAY TO A BRIGHT FUTURE FOR CHINA

Presentation by Michael Lee Serwetz, President, Prophet Business Services LTD.

Page 2: The Way To A Brighter Future For China V2

THE OLD FASHIONED WAY-MUSCLES OF STEEL

Page 3: The Way To A Brighter Future For China V2

WHAT WE KNOW

RMB-USD exchange rate 2006=8.15; RMB-USD exchange rate 7/28/2010=6.779; Difference=16.8%

Approximate monthly labor cost 2006 (Zhejiang) RMB 750-1000; Approximate monthly labor cost to retain workers 2010= RMB 2000; Difference 100%+

Monthly labor cost translated to USD 2006=$92-$123; Monthly labor cost translated to USD 2010=$295; Difference=140-220%

China is a market with labor shortage so labor rates are not solely determined by government mandated levels.

Page 4: The Way To A Brighter Future For China V2

WHAT WE DON’T KNOW

Where will RMB-USD exchange rate land 2010-beyond. 6? 5? IF RMB appreciates to 6.5/USD and labor rate for 2011 increases only by the China Labor Contract Law of 2008 mandated 8.3%, monthly wage translated to USD will increase to $333, an increase of 13%.

This will also affect labor-intensive services such as trucking and transportation.

What will effect be on materials? In dollar terms, exchange rate appreciation will affect every part of the production process.

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The undeniable fact is that labor, which has been a nearly inconsequential factor for China, will become very dear for manufactured product, especially those of low FOB value such as textiles.

Page 6: The Way To A Brighter Future For China V2

CHINA’S “BAD HABITS:”

Built factories structure and process around cheap labor;

Growth accomplished with labor and equipment, NOT technology;

Because of cheap labor, efficient process flow not worth considering;

Plans assume growth can continue on this basis forever.

Page 7: The Way To A Brighter Future For China V2

CHINA’S QUALITY PROCESS:

Not built around inline or process control; heavily based on final inspection by customer;

Assumes some or all defects should be passed through in the hope that customer will not catch.

Both Money and Time are wasted when defects are caught.

Page 8: The Way To A Brighter Future For China V2

CHINA MYTHS:

“Endless Labor Pool.” In fact, there is a severe labor shortage in China at times, which will grow worse as time goes by.

“Cheap Labor Will Last Forever By Moving to Western Provinces.” In fact, most of China’s labor is migratory and labor price in Western provinces will also increase due to increasing standard of living and competition for labor. Young population increasingly reluctant to work in factories.

“Domestic Consumption Can Replace Lost Exports.” To some degree this is true, but much of the domestic consumption increase may be lost to imports.

Page 9: The Way To A Brighter Future For China V2

GLOBAL MYTH ABOUT CHINA:

• “If Costs in China Go Up, Other Countries Can Replace the Production and Maintain Costs.” There is no one other country (including India), that can replace either the capacity or the capability of China’s production. Therefore, IF capacity can be found (doubtful, at best will have to be built over many years), it will be fractured in many countries (increasing cost), materials will probably have to move from China (increasing cost), and transportation will be significantly higher (increasing costs). Bottom line: IF it can be done, it may not be the answer.

Page 10: The Way To A Brighter Future For China V2

GLOBAL MYTH:

• “Cheap Labor In Other Countries Will Always Be Cheap.” Granted, it will take years of development for other countries to match China, but wage pressures are already building in countries like Bangladesh, which just recently DOUBLED workers wages nationwide.

Page 11: The Way To A Brighter Future For China V2

The fact is, significant loss of export business and export-oriented jobs in China will not only cause economic and social disruption in China, but will have global consequences. The movement of production to other countries will not, in the short and medium term, answer the problem for importing countries. In fact, the consequences may be NO cost savings and product shortages, which will lead to inflation.

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Second, the development process always follows the same course: As GDP growth continues, consumption increases, wage demands become higher, and low-wage industries like textiles are squeezed. Resultant price increases reduce competitiveness on a global basis.

Page 13: The Way To A Brighter Future For China V2

WHAT CAN BE DONE?

Page 14: The Way To A Brighter Future For China V2

MOST IMPORTANT: PARADIGM SHIFT (Paradigm=A philosophical or theoretical

framework; a way of thinking) Government and business MUST change

their way of thinking; the old way of thinking will NOT work any more. It will only result in erosion of export business and the consequences of that.

Labor MUST be replaced by technology, and any cost that does not add value must be eliminated; in Kaizen they call it MUDA-waste.

Page 15: The Way To A Brighter Future For China V2

WHAT ARE SOME OF THE STEPS NEEDED?

Page 16: The Way To A Brighter Future For China V2

Every step of the process must be examined in terms of its three elements:

People- How many people are involved in the process and what do they do?

Process- What steps/method do they take to accomplish the process AND keep proper records?

Technology- What technology is available/used to help them accomplish the process?

Page 17: The Way To A Brighter Future For China V2

TYPICAL AREAS TO EXAMINE:• How is each step and activity of the manufacturing

process performed (People, Process, Technology) and how can costs be reduced by eliminating waste (labor and process, and/or adding supporting Technology)?

• What is the process flow? How do the steps of the process flow into each other? Is there any time and effort waste BETWEEN the steps?

• Materials Management-How much waste is there in the purchase and usage of materials needed for the process itself and to assist the process? What records are kept and how?

• Materials Purchasing and Planning- How much cost can be taken out of the materials process by resourcing, relocating, verticalizing?

• Transportation cost-How well is transportation maximized?

Page 18: The Way To A Brighter Future For China V2

• Quality- The entire quality process must be reunderstood and reformed to be PROCESS-ORIENTED. Wasteful quality process like AQL must be replaced with efficient one like Six Sigma or SQC.

Page 19: The Way To A Brighter Future For China V2

SUSTAINABILITY

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This is a different kind of waste-waste of our future. Any and every effort must be made to add steps and process that do not eat our future resources—Alternative power, non-polluting dyestuffs, recycling, etc.

MANY retailers like M&S are specifically calling attention to green elements on their product, and, over time, buyers and consumers will demand these. China should take the lead in this effort, but surely any factory that has “greened” a significant part of their process will be preferable to buyers in the future.

Page 21: The Way To A Brighter Future For China V2

PROBLEMS/SOLUTIONS-

China factories are not used to paying for knowledge, and some will be shortsighted in not making the small investment to insure their future. The investment in making these changes is a small fraction of the savings that can be achieved, especially over the longer term.

Reeducation of an long-standing and ingrained process will be difficult. Many will not believe. If Management thoroughly support these changes, the rest will follow.

Page 22: The Way To A Brighter Future For China V2

??????????????

So ask yourself: If Japan, USA, Germany, Korea and Taiwan had not found efficient way to manufacture and had continued to depend on cheap labor, where would their economies be today? China is expected to be the worlds #1 economy soon-this growth CANNOT be sustained if the changes needed are not made.

Page 23: The Way To A Brighter Future For China V2

This CAN be done.

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WHAT CAN PROPHET BUSINESS SERVICES DO FOR YOU?

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HOW WE WORK

First, we will carefully and thoroughly review ALL processes and operations in the factory;

Then, we will compose a report with recommendations and costs;

If accepted, we will supervise any and all work.

Once complete, we will measure all improvements to be sure they are as recommended.

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HOW WE WORK

If changes/improvements need to be made, we will recommend and supervise;

When you are satisfied, we will finish our work and return 3 months/6 months/one year to review progress and be sure everything is followed and on track.

Page 27: The Way To A Brighter Future For China V2

HOW WE WORK

We understand that these improvements are not cost-effective unless recognized by buyers. We also understand that there is little or no growth business in today’s market for new suppliers. Therefore, once the factory is ready, we will personally help you to gain new customers by presenting the DIFFERENCE between your factory and your competitors.

Page 28: The Way To A Brighter Future For China V2

THE MAGIC FORMULA

Lower Costs + New Customers= A Bright and Profitable Future.

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REMEMBER THIS? THIS IS OUR WORKING WAY

Page 30: The Way To A Brighter Future For China V2

THANK YOU.