How to Buoy Operations

While You Ride Out The Storm in China

By Marwan Emile Faddoul ( Managing Partner, NFG Consulting LLC) & Katherine Lange Johnson

A storm is coming to China. Unprecedented economic troubles are on the horizon, and whether this is the maelstrom that bursts the bubble or not, there will undoubtedly be a lot of wind knocking everyone around. What once seemed like unstopped growth has begun to slow, and this new pace will have international repercussions due to the interconnectivity of global markets. China's economy grew by 6.9 percent in 2015, the lowest level of growth since the mid-1990s. For a country that has been developing at a miraculous, if not breakneck pace, this growth level feels like hitting a brick wall. Moving forward, the government has announced the coming year's growth rate to be between 6.5 and 7 percent, signaling modest recognition of the deceleration of a major global market. Problems exists within the weakening of the export market, overcapacity in the steel market, an oversupply of underserviced factories, slowing investment saddled with growing debt, and a myriad of interrelated ramifications of these problems.

I recently met with a client who is unsurprisingly worried about what an economic downturn in China will mean for the US-China joint venture manufacturing company that he's managed for the past nine years. Below is a revised version of the conversation we had at our meeting:

Client: My company came to China more than a decade ago to benefit from the high availability of low-wage jobs, aided by encouraging infrastructure investments, and massive growth potential. We've been riding this wave of production for years, but recently our numbers look different and the mood from corporate has changed. Our operating costs are rising, which was fine when production was projected to double year after year, but now we find that demand has slowed, yet we're still employing a full floor of workers who work long hours. And the numbers I see in the news, the comments from economists portending doom-I'm worried about the economic future. We've invested so much here; it seems foolish to pull out now, but I'm not sure how long we can continue on as we have in the past.

Marwan: You've got good reason to be worried-I'm seeing the same numbers as you, and behind the scenes my team has been working on reports specific to your industry that are discouraging, to say the least. I won't lie to you-the times ahead are going to be tough in China. It seems the implications of the 2009 global crisis are lingering worldwide, which is hurting China's export competitiveness. Workers' wages are rising, though they don't seem to be offering more in return for the money. It may sound insensitive, but you can take advantage of a slowing economy by focusing on things you don't typically have time for when production is high. Now is a good time to reevaluate your factory's processes and reduce costs.

Working lean will be the crucial difference between the companies that succeed in the coming years and those that won't make it through the storm. Now is the best time to reassess what is working at the plant and what isn't. If you want to ensure sustainability during the economic slowdown, you'll need to reevaluate your processes, keeping your eye on the bottom line.

Client: Cost cutting, cost cutting. I hear that a lot from the guys at corporate, but I'm not sure how to proceed with that plan. Re-negotiating prices with suppliers? Massive layoffs? Whenever I hear cost cutting, I think of all the pink slips I'll be passing out on the factory floor to the workers who won't be coming back on Monday.

Marwan: Though decreasing your staff may be one avenue for cost cutting, there are other processes that can be modified to help you reduce costs. In fact, there are some studies that suggest reducing staff may provide only short-term results, and may in fact serve only as a strong indictor of future layoffs. I think you'll see great success if you mix waste minimization with increased productivity and efficiency.

I've seen some plants bring waste down by 20% by focusing on minimizing waste. Every plant is different, but I imagine there are several areas where there is waste at yours. Have you looked at your transportation costs? Is all the equipment operating, or are workers waiting around for repairs? Have you analyzed your inventory levels? Do they reflect current or projected demand? Have you tried implementing Six Sigma into your operations? Sometimes spotting these problems is hard because we become so accustomed to doing things the same ways, especially if they've worked in the past.

Client: It's hard to justify spending time and money on new equipment and analytics now that production is down.

Marwan: It seems like a paradox, spending time and money to increase productivity when production is down. This is a long-term plan that will help sustain your company for the next so many years as we wait for the economy to pick up speed again.

I was chatting with some friends who work at a multinational bank about what they think the future has in store for China. They think there will be about two years of turmoil before the dust settles and the economy begins to pick up again. Considering this, your business strategy may be to simply wait out your competitors, but I think your strategy should be longer-term. Take this down time to get leaner in your operations and processes, but also, use this time to develop your people.

Client: You know, I have been meaning to do some training with my staff for years. Maybe the bright side of this downturn is that I've finally got more time on my hands to focus on training.

Marwan: I could help you with that-we put together a report a few months back about how to foster creativity in the workplace. We discovered some interesting things about the brainstorming process, and ways to encourage staff to open up more often and honestly with suggestions. These findings helped staff to think outside the box, as well as to have more ambition and drive at work. Developing these human skills could have a huge impact at your plant when the economic situation changes. And it will-this slowdown may seem like the end of times, but it's important to remember that the economy in China is still technically growing, though at a slower pace than it has been. And the Chinese government still hopes to double per capita income by 2020, which is encouraging news from a body that has a history of accomplishing impossible goals.

Client: Up until now, my strategy has been to hunker down and wait for my competitors to go bankrupt so that I'll win in the end... if I survive. But I see now that it won't be only a matter of surviving the next few years but of thriving well into the future. I'm going to need to improve my processes through waste minimization, increased productivity and increased efficiency in order to sustain operations over the course of this slow-down. And looking forward from there, I need to develop human capital at work in order to come out of this stronger than before-I need to take advantage of the times in order to improve the venture in the long run.

---END---