Asia as a great threat to the West?
Fear of China -- one could get it if one were to believe the media. In the headlines of
many newspapers, you can read the topic almost daily:
Help, the Chinese are coming
Pressure from the Far East
Battle about prosperity
Asia unstoppable
etc., etc.
In most of the articles, Asia is viewed as a great danger for the West, above all due to its
cheap labor.
Cheap labor as the greatest danger for Germany?
Cheap labor that calls into question our competitiveness?
Cheap labor that leads to strengthening Asia and to the weakening of the West?
The question should be permitted:
Is China with its cheap labor really a threat to us all?
It sound somewhat helpless when our German politicians admonish their Asian
counterparts:
“We can no longer accept extremely low wages, rock bottom salaries and critical working
conditions and now we (and here he probably means the Asians) should finally stop to
bring ourselves to our knees through competition.” That hardly anyone actually reacts to
attacks such as this is obvious.
Without closing our eyes to the at times imperfect working conditions and the living
conditions in countries like China or India, we should be clear about one thing:
The history of industrialization is repeating itself here in essential aspects. Because
workers were exploited in the course of industrialization in the 19th century in Europe
also, before unimagined prosperity was unleashed in the aftermath.
In view of the discussion concerning working conditions in China, sometimes I can’t help
but think that for some admonishers it is not at all primarily a matter of improving the
living conditions and rights of people in China, but rather of improving one’s own
situation by prescribing higher labor costs to the others.
Otherwise, why doesn’t anyone get upset in the same way when it’s a question of
countries such as those in Africa? Their conditions are bad, and they’ve been that way for
decades.
Don’t get me wrong:
It’s important to talk about these topics. It’s important to point out abuses and to demand
corresponding standards. But it’s also important that something changes, that living
conditions improve. And precisely that is happening in China.
China could rise to world power no. 1
In 1980, more than 50% of Chinese still lived below the poverty line and had less than 1
US dollar per day. Today, this is true of fewer than 10% of the people in China.
These figures show: Something has changed here, even if one is still a long way from
European standards (source: United Nations Poverty Report).
I am firmly convinced: The Asians will make their way and further expand their
economic strength -- and it looks like China will become world power Number 1.
And what about us? Where are we?
First of all, I want to emphasize something:
I am of the opinion that the excessive discussion about cheap wages in China and the
worries we have about them often obstruct the correct way of seeing things for us. We
draw false conclusions from the discussion about cheap labor and misjudge our
competitiveness. With the consequence that we forget to ask ourselves where our
strengths lie and how we can develop them in order to maintain our position in the world.
Thus for me it is not a question of whether the new strength of the Asians leads to the
weakening of the West.
I ask:
How can we take part in Asia’s dynamic economic development and secure our market
share in these gigantic markets? How can we be and remain competitive from Germany?
The answer to this question is essential for all of us: Every third job here depends directly
or indirectly on foreign business.
I concede immediately:
With technological products, it’s much easier to find positive answers to my questions
than with mass consumer goods, such as textiles.
That is in part due to the fact that the investment for a sewing machine is not comparable
with the investment in a large machine tool and the associated know-how about operating
it efficiently.
Thus for me, it’s a matter of technological products and not of textiles or sneakers.
With technically sophisticated, high-quality products, cost advantages can hardly be
attained by transferring their production to countries with cheap labor. The cost saving
potential in China is considerably overestimated.
This is not due solely to the risks of doing business abroad that are difficult to assess, but
rather to the fact that the cost accounting of a relocation simply does not add up.
What’s wrong with the calculation?
1. The material costs in China are, as a rule, just as high as here. There are world market
prices for steel and all other raw materials. So one doesn’t save anything here.
2. We have a markedly lesser value creation per employee in China.
3. The investments in relation to achievable value creation are clearly higher than in
Germany.
4. We have high additional costs for logistics and a high support expenditure due to
expatriates.
All that together compensates to a large extent the cost advantages of wages.
The calculation doesn’t add up at all if one has to stop production in Germany as a
consequence of the relocation. Then one has to bear, along with the full depreciation
costs on the new investments in China, the closure costs in Germany.
Relocation of production of technical products in low-wage countries with the aim of
saving costs thus doesn’t work, in my view.
One makes an even bigger mistake if one tries to improve the calculation in favor of the
Chinese location by simply building a cheap production line there. There are many such
cases. Often old, inefficient, second-hand machine tools are used or cheap, local machine
tools that can hardly maintain the required tolerances. In addition, the building is
equipped with only the most indispensable things and is frequently of dubious quality.
In most cases, one already sees from the outside that everything is done cheaply.
The disastrous thing about this is that this results in products that are more inferior and
are far from achieving a global quality standard.
And that is the crucial point:
The quality costs can be considerable and have to be seen in such cases as a systematic
risk. Apart from that, inferior quality only results in low prices, even in China – as in all
other markets of the world. Economic disaster is thus predetermined.
Reasonable prices are only achieved if the quality of the products is right -- that is no
different in China than anywhere else in the world. We machinery and industrial
equipment manufacturers thus have to become unmistakably clear about something:
The production of technology on a world-standard quality level in China is at least
as expensive as in Germany
Many today still don’t see it this way:
Many Chinese customers urge us to increase the local procurement share in order to
lower the investment costs for a new paper machine. Incidentally, this request is made not
only by Chinese paper mills but also by Western paper companies. We are virtually asked
to relocate our manufacturing to China in order to be able to cheaply build large
machines there for the world market. Some of our customers seem to have the idea that
everything is cheap in China and money is lying in the street, so to speak.
But we have to realize:
In our business, what is cheap doesn’t meet the requirements for quality and reliability.
We at Voith today know that quality has its price, even in China. Voith quality produced
in China costs just as much there as it does here in Germany.
Voith quality produced in China costs as much as here in Germany
We already made this realization once several years ago. Voith went to Brazil 40 years
ago and built a manufacturing plant there for paper machines and turbines. Today, we can
produce a quality there that corresponds to the European level.
But we also have to realize that, seen over time, we never had a significant cost
advantage vis-à-vis Europe at our location in Sao Paolo. Expensive training and
development measures and finally also quality problems exhausted the expected
advantage. There was occasionally an apparent cost advantage solely due to differences
in the exchange rate. Today it is even reversed. Due to the Brazilian Real having risen in
comparison to the Euro, producing something in Brazil is, if anything, more expensive
than here in Germany.
Even if South America is not comparable to China, it supports the notion that it isn’t
cheap labor that we have to fear. If that’s the way things are, why are we going to China
then and building local facilities there?
Our decision to go to China and build a plant in China with local manufacturing is not
supported by cost-lowering considerations but rather by the necessity of having optimal
market access and strong customer loyalty.
Our fundamental strategic orientation is to be near the customer, to build high local
competence in order to thus achieve optimal market access. We also have to at least be
aware of the local patriotic attitude of our customers, which is in part promoted by state
taxation systems. We have consistently built up our manufacturing in China according to
these strategic considerations.
Our own value creation in China is essentially oriented to service, parts manufacturing,
engineering and assembly. Key components such as headboxes, complex rolls such as
shoe presses or calenders and winders continue to come from our main factories in
Europe. It doesn’t make sense to manufacture them in China. As I already said, with such
high-tech components the costs would be higher than in Germany. In China, we
manufacture the less critical parts such as framing parts and simple rolls, which we also
frequently outsource locally.
The machine is then assembled in our local assembly plant. That is economical and thus
the best solution for our customers. In addition, in this way we prevent the know-how of
our key components from getting into the wrong hands through product piracy.
For service, spare parts and consumables such as fabrics and roll covers, we have
additional plants and service facilities in China. Today, altogether 600 persons in China
work for Voith Paper. For Voith Paper, Voith Siemens Hydro, Voith Turbo and Voith
Industrial Service taken together, it is actually about 1500 persons.
Since the production costs in China are at least as high as in Germany, we also have the
same price level. A paper machine in China costs the same as in Germany.
In comparison to Germany, our customers have lower costs solely in the case of building
costs and the local labor-intensive provision of service. But at present we observe that
even here the costs are rising rapidly and the cost advantage is becoming increasingly
smaller -- especially in the case of building costs.
Today we are in a position to meet the quality standards of Voith with our Chinese
deliveries and services and to live up to our slogan, “Engineered reliability.”
It wasn’t easy to achieve this. Capabilities that we take for granted here in Germany are
not present in China. An example: Quality-assured welding. We had cases where we had
to scrap locally welded machine parts, because the weld seam didn’t meet the
requirements. That resulted in considerable additional costs. For our local production, we
need stable conditions. To that end, we have to intensively train and coach people in
many basic capabilities. That costs money and time -- which one has to see as
investments in the future. These investments in people are the greatest challenge in
China. When you’ve trained good people, it’s difficult to keep them.
Nonetheless, we are succeeding fairly well. Incidentally, the rise of salaries in China --
10% in the past year! -- is not very surprising in this context. The question remains as to
what comes out for us on the bottom line from our involvement in China.
It is still unclear what is in it for us from our involvement in China all things
considered
Our new orders in China for Voith Paper are ca. 200 to 300 million Euros per year. Of
that, today close to 25% are produced in China (with an upward trend). The rest, that is,
75%, is produced in our plants outside of China -- mainly in Germany -- and exported to
China. Without these new orders from China, we would have considerable workload gaps
here in Germany and would not be able to keep the jobs.
And it is precisely for that reason that China is so important to us! But where do we go
from here and what does the future look like?
One thing is certain: China will continue to rise
But China is not becoming dangerous for us due to low labor costs. If anything, the
West has to fear the deployment of educated and hard-working Chinese.
Each year 200,000 engineers leave the universities there. They and other very motivated
people who want to lead a better life than their parents force us to consider how we want
to survive in the international marketplace and be able to keep our share of the export
market.
Thirty years ago, the West completely underestimated Japan’s rise and bitterly regretted
this mistake when many Japanese industrial enterprises began their campaign of conquest
in the world markets and in individual industry segments successfully completed it.
Just think of Grundig or Rollei. These companies didn’t go under because of cheap
imports from Japan, but rather because they clung to out-dated products and the Japanese
developed new and better products. I still remember this very distinctly. At the time, I
was an enthusiastic hobby photographer and bought myself a Japanese camera -- because
it could simply do more.
If we are aware of this and act properly this time, we don’t need to fear the Chinese.
We also have a huge potential here in Germany
We only have to use it. We have to have the most innovative products and at the same
time the most efficient and productive manufacturing.
In this connection, the 35-hour week is one of the biggest mistakes: How do we expect
to stand our ground against the Chinese if we send our skilled labor home instead of fully
making use of their service?
The stick-in-the-muds have to bid farewell to the erroneous belief that, despite sagging
performance, they have a God-given right to perpetual affluence. And ask the people on
the street and in the companies: many are hard-working, want to play a part in this
competition and are prepared to work longer for it without getting fully paid for the extra
hours.
But I don’t want to delve into this topic any further, but rather concentrate on the
possibilities and opportunities of our country. We have to reflect on our capabilities and
promote them in a targeted fashion. There are enough success stories, by no means only
in the high-tech area.
A perfect example is CT-Casting, a foundry in Wasseralfingen, near Heidenheim,
Germany. It is a real success story.
Many predicted that the foundries would have no future in Germany. CT-Casting is
proving the opposite. The recipe for success is simple: At the top is a manager who
understands his trade: Ulrich Servering. His recipe for success is as simple as it is wellestablished:
“First-class products in top quality and on-time delivery are our main
advantages,” says Servering, and continues: “They secure our competitive position not
only in comparison to the Eastern European competitors, but also in comparison to the
Chinese.”
That is an example of the fact that we don’t have to seek our salvation only in the hightech
end. We have to mobilize all our capabilities, those of our skilled labor in the
factories as well.
But our competitiveness will be decided in the future technologies. We need companies
that are forward-looking and have future visions instead of just worrying about
maintaining their current situation. We have to see innovations as our most important
task.
Companies that heed this have a long-term business strategy. They are technology drivers
in their profession. They have an iron will to make their ideas succeed. They know that
innovations only succeed by means of hard, continuous work. They are prepared to risk
something. They have courage and patience to realize their innovations and are
successful at market launches.
They are in a position to work in networked fashion, because they know that innovations
come about to a large extent at the interfaces between technologies. It is precisely here
that we have an enormous advantage in Germany, because leading companies from
different areas of technology are to be found here in Germany.
Germany -- the world’s most competent technology cluster
I think that it isn’t exaggerated to speak of the most competent technology cluster
worldwide.
We have many such companies in Germany, but we need even more. With innovative
technologies, we have to be and remain the best in the world.
Only with innovative products can we be successful in the world market over the long
term
with products that are characterized by innovation, quality and reliability
characteristics that are more important than just the price.
At Voith, we too are attempting this. It took courage when Voith decided to build the
most modern paper technology center and invested 75 million Euros for it, or for the
construction of the first Voith locomotive -- the Maxima -- the strongest locomotive in
the world, or Voith’s entry into production of energy from the oceans of the world. From
Voith’s perspective, these are future-oriented innovations with which we will strengthen
our future competitiveness.
But we also need courageous politicians who pave the way for new technologies such as
genetic engineering, biotechnology, nanotechnology and many others. The doubters who
always only see risks have to step back and let those go in front who see opportunities --
without closing their eyes to the risks. The consideration of opportunities and risks with
the new technologies is not balanced in our society. The doubters prevail to a frightening
extent.
A rethinking is necessary!
Many countries learn from us. We ourselves can learn a lot from looking at how others
tackle it. For that reason, in conclusion I would like to show you, using the example of
the paper industry, how dauntlessly China proceeded with the build-up of industries and
the use of modern technology.
Example: Development of the paper industry in China
With some interesting photos of paper machines that were installed in China between
1995 and 2006, it can be shown what China has done in the last 10 years.
The pictures are self-explanatory.
Today, the most modern machines of the world are in China, after only a few years of
preparation -- incidentally, all machines from European suppliers.
Between 1999 and 2005, 20 million tons of new capacity were installed in China. Many
old, unprofitable machines were shut down in the same period. The 15 most modern
machines of recent times were almost all set up in China. Increasingly, the Chinese
paper mills are developing a competitive advantage vis-à-vis the rest of the world.
The main reason lies in the large modern systems that have emerged there. They are
simply more effective than the older machines in Europe and especially in the USA. Here
too, low wages play only a subordinate role. There is also the fact that the mills have
established their own energy supply and have secured sufficient fiber imports from South
America and Indonesia for themselves.
In addition, they have planted big tree farms in China that can be harvested in a few
years. Big local pulp mills and TMP mills are in planning and to a large extent have also
already been ordered.
For recycled paper needs, recycled paper collection systems are also being introduced in
China’s metropolises.
In Europe and especially in the USA, one has to ask how they will react. One of the
answers surely lies in the necessary modernization of existing plants. In the USA, we see
a huge amount of catching up to be done. A precondition for modernization is the
phasing-out of old units. That has already occurred in the USA and is currently
happening in Europe. But now the second step must follow: Investments in
modernization of existing plants with innovations and new technologies all the way to
complete replacement of old, inefficient machines.
It’s interesting that one has recognized this challenge in Japan. After ca. 15 years of
greatest restraint in new investments in the Japanese paper industry, since the beginning
of 2006 three large modern paper machines for coated paper were ordered -- Nippon,
Daio, Hokuetso. Oji Paper also plans to install a new paper machine, which will be
ordered very soon. In return, old, unprofitable machines are being shut down.
That should make us think.
If we have something to fear, it isn’t the low Chinese wages, but rather the lack of
readiness in our society to further develop ourselves.
We have to work at it! People in Germany can still achieve great things.
German engineers and many other German skilled workers are still at the top in
worldwide comparison.
So: Don’t be afraid of China -- if it’s a matter of cheap labor.
But I wish us all more courage and enthusiasm for new things!
About the Author: Born in 1953. Graduate plant engineer and passionate paper maker.
Joined Voith as a project engineer in 1982. Successful career in paper machine building,
Since 1994 Board Member of the head organization of Voith Paper. Since 2000 Member
of the Board of Voith AG and responsible for Voith Paper.
Contact: Voith Paper GmbH & Co. KG, St. Poltener Strasse 43
89522, Heidenheim, Germany
Tel. +49 7321 37 2752
Fax +49 7321 37 7227
info.voithpaper@voith.com
www.perfectfit.voithpaper.com