China, high tech, and the “high tempo cost out” revolution

In their seminal book The Machine that Changed the World, James Womack, Daniel Jones, and Daniel Roos described the very dark days for the U.S. auto industry in the 1980s when the sector’s once unassailable market dominance had been thoroughly eroded by the Japanese. At the time, Americans were full of contempt for their new competitors from Japan. The Japanese, it was asserted, had no capacity to innovate. They were just mimickers, or even worse, thieves, and ones abetted by a strategically focused, mercantilist, and protectionist state. How could Americans—despite so obviously possessing the most advanced knowledge, the best managerial practices, and the best products—compete against such cheaters?

The Japanese reorganization of production

Of course, as Womack, Jones, and Roos demonstrated, American auto producers by the 1980s neither embodied nor even understood industry-wide best practice. The Japanese were competing on the basis of far more than just mimicry. Rather, they had pioneered a whole new way of producing, one that involved activities not just on the factory floor, but rather across the whole range of tasks needed to manufacture a high technology product, everything from market assessment and product design all the way to supply chain coordination and after-sales service. Japan’s auto firms didn’t invent wholly new products. Rather, they revolutionized how production itself was organized. In so doing, they established a whole new pathway for realizing commercial value, one that today, under the rubric of “lean manufacturing,” is understood to constitute best practice across the manufacturing sector. Indeed, it is no longer seen as connected in any particular way to Japan, Japanese culture, or Japanese industrial policy, but is instead taught to firms worldwide by a vast industry of (mostly non-Japanese) consultants.

Today we are witnessing something analogous with China. Just as American-style mass manufacturing supplanted European-style craft manufacturing in the early 20th century, and just as Japanese-style lean manufacturing upended mass manufacturing some fifty years later, a revolution of comparable import is emerging from present day China. It is manifested across a wildly diverse range of high technology products: smart phones, solar PV cells, construction equipment, telecommunications equipment, production line automation, wind turbines, food processing equipment, and so on. In each of these product areas, the global incumbents being threatened by new entrants from China raise accusations—sometimes justifiably—about Chinese IP violations, government subsidization, or inattention to labor, environmental, or product safety standards. But, just as the case with the Japanese thirty years ago, those accusations totally miss the point. The Chinese story today is not about factor costs. Rather, it is about know-how and the pioneering of new paths to realizing commercial value—what most people would take to mean “innovation.”

Call it what you will—“hustle,” “high tempo manufacturing,” “high velocity cost out”—Chinese producers of everything from smart phones to capital equipment have figured out a new way of doing things. As with the “lean manufacturing” it is supplanting—or at least complementing—Chinese “high velocity cost out” involves more than just behavior on the shop floor, and it most definitely involves more than just copying. In all cases, the new Chinese entrant indeed begins with somebody else’s product, generally a mature piece of advanced technology that, given the high costs involved, has a defined but somewhat narrow global market. The Chinese firm then throws massive amounts of engineering talent—sometimes its own, and sometimes that of partners in academia—into understanding how the product was designed, and how it can be redesigned for lower cost and easier manufacturability. In some cases, lower cost is achieved by understanding what in the original product was “over-engineered,” and what then can be swapped out for much simpler, locally available components. In other cases, entire supply chains are localized to take advantage of the high density and intensely competitive supplier networks available in a number of Chinese municipal ecosystems. New, simpler designs are then sped to the shop floor, where detailed designers and production engineers work quickly to iron out bugs and scale-up production rapidly. Whereas an incumbent organizationally may require months or years to do this—checking, and rechecking, and assuring quality from day one—the Chinese entrant may take just days or weeks, achieving quality not from the start, but rather later in the game through trial and error. What results is often a simplified, much lower cost version of an existing global product, but one that because of its price, is now available to customers who never previously thought they could afford it.

Creating new markets for old products

The Chinese entrant, as scholars Loren Brandt and Eric Thun have pointed out, creates a middle market where none existed before. The simplified, low cost, and sometimes quite buggy product gets introduced to a customer who him/herself needs to be trained by the Chinese producer in how to use it. Through close interactions with the customer, the producer develops an additional high-tempo skill — rapid debugging — again doing in days what an advanced industrial incumbent would have taken weeks or months to accomplish. These close interactions, though focused on debugging, allow the producer to understand what types of new functionality the middle market customer seeks (and what types of additional middle market opportunities might suddenly become available). Then the producer develops the further high-tempo skills of delivering new functionality through quick product redesigns that can be sped through an in-house R&D (or more accurately, product development) team, and implemented on the manufacturing shop floor. Here, we witness movement from the one-off delivery of a lower cost product to a more forward-leaning pattern of rapid delivery of follow-on innovation and incremental improvement.

As with lean manufacturing, none of this constitutes rocket science. Yet, just as in the earlier Japanese case, Chinese manufacturing does embody advanced learning, accumulated know how, and sheer organizational determination. High tempo manufacturing capabilities are complex and difficult to replicate. Each of these methods present particular challenges for organizations—whether European, North American, or Japanese—that have long stood at the forefront of their respective industries, and assume themselves still today to be repositories of global best practice. But, as in the case of lean manufacturing, none of these capabilities is tied intrinsically to a particular national culture, national set of factor endowments, or national industrial policy. When confronted by the kind of production practices emerging from China today, the smart move by observers in advanced industrial nations is to stop worrying, stop accusing, stop making excuses, and instead start learning.