Modes Research

“China has grown by leaps and bounds during its quest for greater domestic innovation, becoming a world leader in sectors like robotics-based manufacturing and consumer software. But one of its most recent accomplishments is in an area that’s considerably more basic: ballpoint pens.

Today Chinese steelmaker Taiyuan Iron and Steel Co., also known as Taigang, formally announced (link in Chinese) that it had developed technology to manufacture the stainless steel tip cases found at the end of high-quality ballpoint pens. The feat shows how the Chinese government remains insecure about the country’s continued reliance on foreign technology, and the lengths it’s willing to go to overcome it.

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But that’s not the only pedestrian product public figures have held up in the name of bolstering innovation. Last March Xiaomi CEO Lei Jun appeared at China’s annual “Two Meetings” political gathering to lament how Japan’s rice cookers were superior to those made domestically. Weeks later, his company announced a wifi-enabled rice cooker.

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“Frankly speaking, it’s not that China was incapable of developing the technology,” Beifa CEO Zhang Xuelian told Beijing News (link in Chinese). “This type of steel part requires a special type of steel [to make]. The market for it is not big. Only companies that make pen tips will need it.”

“Only about 1.1% of the world population is German. However, 48% of the mid-sized world market leaders come from Germany. These firms, which I call “Hidden Champions,” are part of what makes German economic growth more inclusive: by my calculations, they have created 1.5 million new jobs; have grown by 10% per year on average; and register five times as many patents per employee as large corporations. And they are resilient: my estimate is that in the last 25 years no more than 10% of them disappeared or were taken over, a distinctly lower percentage than for large corporations. Nearly all of them survived the great recession of 2008-2009.

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Given this success, it’s not surprising that many non-German policymakers and economists have looked to the Hidden Champions, or more broadly, the Mittelstand, to try and chart a path to more inclusive growth in their own countries. But how replicable is their success? While other countries could try to emulate aspects of what makes the Hidden Champions so successful, the reasons for their success are the result of a complex network of factors, many of them historical.”

“A company’s manufacturing function typically is either a competitive weapon or a corporate millstone. It is seldom neutral. The connection between manufacturing and corporate success is rarely seen as more than the achievement of high efficiency and low costs. In fact, the connection is much more critical and much more sensitive. Few top managers are aware that what appear to be routine manufacturing decisions frequently come to limit the corporation’s strategic options, binding it with facilities, equipment, personnel, and basic controls and policies to a noncompetitive posture which may take years to turn around.

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In contrast, a manufacturer of high-price, high-style furniture with more exclusive distribution would require an entirely different set of manufacturing policies. While higher prices and longer lead times would allow more leeway in the plant, this company would have to contend with the problems implicit in delivering high-quality furniture made of wood (which is a soft, dimensionally unstable material whose surface is expensive to finish and easy to damage), a high setup cost relative to running times in most wood-machining operations, and the need to make a large number of nonstandardized parts. While the first company must work with these problems too, they are more serious to the second company because its marketing strategy forces it to confront the problems head on. The latter’s manufacturing policies will probably require:

Many model and style changes.

Production to order.

Extremely reliable high quality.

These demands may in turn require:

An organization that can get new models into production quickly.

A production control group that can coordinate all activities so as to reduce lead times.

Technically trained supervisors and technicians.

Consequently, the second company ought to have a strong manufacturing-methods engineering staff; simple, flexible tooling; and a well-trained, experienced work force.

In summary, the two manufacturers would need to develop very different policies, personnel, and operations if they were to be equally successful in carrying out their strategies.”

“The Toyota Production System is a paradox. On the one hand, every activity, connection, and production flow in a Toyota factory is rigidly scripted. Yet at the same time, Toyota's operations are enormously flexible and responsive to customer demand. How can that be?After an extensive four-year study of the system in more than 40 plants, the authors came to understand that at Toyota it's the very rigidity of the operations that makes the flexibility possible. That's because the company's operations can be seen as a continuous series of controlled experiments. Whenever Toyota defines a specification, it is establishing a hypothesis that is then tested through action. This approach — the scientific method -- is not imposed on workers, it's ingrained in them. And it stimulates them to engage in the kind of experimentation that is widely recognized as the cornerstone of a learning organization.”

"There is a second dimension to the flying geese paradigm: It describes not only the movement of companies from country to country, but also a process of industrial upgrading from product to product within each country. First a few companies show up to try their hands at making a certain product. As they learn, their profits attract other manufacturers of the same product. But as the field gets crowded, intensifying competition and thinning profits, some companies look for something else to make—this time something slightly more complicated and thus harder to copy. As the cycle repeats, companies that started by copying and learning are inventing and teaching a mere generation or two later. An analysis of 148 countries shows that as GDP rises, manufacturers within a country predictably move toward ever more complicated products. In another decade or two, factories in Africa will be churning out computers instead of ceramics and clothing.”

“[...]  Sun is no economist, but he unwittingly hit upon a theory in development economics called the flying geese paradigm. Originating with Kaname Akamatsu and recently popularized by Justin Yifu Lin, it posits that manufacturing companies act like migrating geese, flying from country to country as costs and demand change. According to this analogy, factories from a leading country are forced by labor-price pressures to invest in a follower country, helping it accumulate ownership and move up the technology curve. This movement shifts the bulk of economic activity in the follower country from low-productivity agriculture and informal services to high-productivity manufacturing. The follower country eventually becomes a leading country, spawning companies in search of new production locations. The paradigm offers a convincing model of how Asian economies developed—in a chain from Japan to the Asian Tigers to China. “