Competing with the Chinese Factory of 2017

During his presidential campaign and since moving to the Oval Office, Donald Trump has spoken a lot about manufacturing in the U.S. and its competition with China. Now that China is the hub of so many technologies, from cell phones to drones and solar panels, how do U.S. factories compare?

Harvard Business School professor Willy Shih has visited China many times over the course of a long career in business and teaching, and in January he returned from touring the country’s manufacturing center with a group of students. He spoke to MIT Technology Review about what he saw.

The following excerpts of that interview have been edited and condensed for clarity. Insider Premium subscribers can listen to the full interview here.

What stands out to you about Chinese manufacturing today?

Complex interdependencies. A smartphone typically has 2,000 components, and some of them are large—like the LCD touch screen—and a lot of them are much smaller, from tiny machine screws to capacitors to all kinds of discrete components that might go on the circuit board. The primary assembler of a product might have a number of suppliers who supply primary components, but then each one of those suppliers in turn has a next tier of suppliers, and sometimes a third and sometimes a fourth, and all of these suppliers provide components on relatively short notice. I think the strength of manufacturing in China is the density of suppliers and the ability to draw on them.

Many people are probably familiar with traditional Chinese markets where you can find clothing and toys and all kinds of other things. Well, the electronics market in Shenzen is really rather unique. You go there and you find many, many little shops who specialize in surface mount components for electronics. And it’s not like any market I’ve seen anywhere else in the world, because it’s really an industrial goods market. But what it does is it highlights the number of small shops who can do a quick turnaround. The strength of the supplier infrastructure providing all these assorted components that go into these products is actually quite, quite striking.

Are you seeing more automation? Are Chinese firms moving toward a Western factory model?

I’ve seen widespread adoption of automated guided vehicles for delivery of components. In the last two years almost everybody has replaced the factory workers running around with carts delivering components to replenish components on the line. Factory managers are trying to really raise their automation and replace workers, who are becoming more and more expensive and harder to retain.

We are in the midst of a debate in the U.S. over the future of work and jobs and the impact of robots and automation on that. When are they going to start worrying about that in China?

People are already starting to worry about it, because automation is replacing the low-skilled jobs first. Now in China the service industries are growing at a pretty good rate, so it still has the ability to absorb a fair amount of people. But I think the impact on people in terms of replacing semi-skilled or relatively low-skilled jobs is going to mirror what has happened in the U.S. over the last decade as well. It is happening now.

The skill level of the people who work in the factories is going to need to go up, and that will mean more training and education and so on. I don’t know how that’s going to play out, but that change is coming, and it is coming to China just as it has come to the U.S.

Is it possible to even make a smartphone in the U.S. today? (See “The All-American iPhone.”)

The biggest question will be the components supply. Because if what you have to do is import all the components from China—display screens and cases and circuit boards and so on—you’ll bring in kits and then assemble them in the U.S. The cost of bringing in all those components is likely to be more than the cost of assembling the phone and then importing the completed phone. The economics of setting up a plant in the U.S. if you don’t have the supplier infrastructure that I talked about earlier is really going to be rather challenging.

You argue strongly that there is a connection between manufacturing and innovation, that innovation comes from having the engineers and designers close to manufacturing and these groups all working together. China is well known for doing a wonderful job of manufacturing products originally invented elsewhere. Are we going to see more brand-new categories coming out of China because of this manufacturing skill they have?

Maybe initially what they did is they manufactured components, or maybe they assemble systems for Western brands. But what’s happened is they’ve honed their skills as they have built scale and built experience. They’ve captured a lot of that innovative capacity. Western companies helped them develop their quality systems, helped them to develop their knowledge of the materials engineering and the industrial engineering capabilities. And now we’re seeing rather formidable competitors. China has moved past that imitation phase, and we’re now starting to see a lot of innovation coming out of those firms. And a lot of it comes from their closeness to production.

Can you give an example?

Shenzen is kind of a hotbed of innovation for drones, with companies like DJI and some of its competitors. There are so many drone companies there now. And that’s a combination of local engineering talent and being able to draw on the supplier network [that was already there] for circuit boards and microcontrollers and small motors and things like that.