Foreign Concepts

Jeff Glaze remembers his adventures in driving.

In China, he said, the roads are similar in width and striping to those in the U.S., but there is simply more for motorists to negotiate. In addition to other cars and all manner of trucks, there are pedestrians, bicycles, vehicles called 'bicycle

"They all share the road," said Glaze, president of Decorated Products in Westfield. "As you're driving, you're weaving in and out and passing all these slowermoving vehicles. Often, you have to cross over into the other lane into oncoming traffic. At one point, we were all the way over on the sidewalk beyond the opposite lane trying to pass people, and you're doing all this at 40 miles an hour; it was pretty barrowing."

Such escapades were not the only eyeopening experiences for Glaze, who was in China recently on a fact-finding mission of sorts, a junket inspired by the loss of a large customer a year ago. His company is a manufacturer of nameplates, labels, and other products that identify companies or list part specifications. Among those items are numbers, bearing team logos, for club seats in many of the newer stadiums built in this country in recent years. Glaze was in China to explore opportunities for joint ventures and sourcing large contracts to that count

He came away convinced that "ChW - he used that one word to describe the many types of opportunities that might exist there - wasn't going to work for him now. He listed a number of reasons, including logistics, language, tariffs, the fact that his company deals mostly in small runs of products, while most of China's manufacturers are more suited to large orders, and the larger issue of quality. Indeed, Chinese companies are not held to the same standards as American companies, such as ISO and QS 9000.

But Glaze also came away with even more doubts about the future of manufacturing in the U.S. than he did before he left. He said China is building a formidable manufacturing infrastructure - and it has hundreds of millions of people willing (compelled may be the accurate word) to work for 10 or 15 cents per hour in horrible working conditions.

In many ways, Glaze's experiences and loss of business to China is a microcosm of what's happening to manufacturers across the country. Analysts fear not only the loss of more parts-making and product-assembly to China, but also toolmaking, which is the very heart of the nation's industrial sector.

"High-volume manufacturing in this country is gone, and what people have to understand is that these are manufacturing jobs that are never, ever coming back," said Glaze, who recounted his three-week journey in a wide-ranging interview with BusinessWest. He recalled an environmental nightmare and working conditions outlawed in this country a century or more ago. As he walked the streets of Shanghai, he remembers seeing very few older people. "There was no gray hair ... there were no old people because they were all dead."

And he also learned why the Chinese can manufacture goods for a fraction of what companies can here, and why so

much work is leaving this country for China. "It's basic mathematics," he said.

Since coming back, Glaze has briefed various business groups on what he saw and heard, and his experience has become part of an ongoing series of stories in The Wall Street Journal on China. His message is not uplifting.

"It's not pretty," said Glaze, who used that phrase that to describe both the environment and business practices in China, as well as the outlook for U.S. manufacturers. "We're going to be OK here at Decorated; we're going to survive. I'm working very hard to find different markets and find things I can manufacture without having to compete with China, but I'm not going to have 80 employees here again - I just can't see that happening."

Parts of the Problem

Glaze had about that many people working for him in 2000, when a combination of factors would conspire to eventually whittle that number down to 37. There was the recession, the terrorist attacks of 9/11, and a general conservatism among business owners that resulted in smaller orders. Stiff, by the fall of 2002, things were looking up for the company that was founded by Glaze's father 50 years ago.

The slowdown that followed 9/11 had eased tremendously, new orders were coming in, and Black & Decker, Decorated's largest customer, with more than $1 million in orders, had scheduled a year's worth of orders for a miter saw part called a detent plate, which identifies the saw's angle for the user.

Then, one day in early January 2003, the phone rang. There had been changes in leadership at Black & Decker, and these

individuals were calling Glaze to tell him that the company would take whatever detent plates Decorated had on hand, but it would not be ordering any more.

Glaze, who had already ordered steel and other materials to manufacture the parts, spent the next several months trying to get Black & Decker to honor its commitment, and eventually won some concessions from the company. But the larger issue was the long-term loss of what amounted to onequarter of Decorated's sales.

What Glaze didn't know in January 2003 - but would learn a few months later

- was that Black & Decker had taken its detent plate business to China, where a company would sell the parts for $2.10 each; Decorated charged $4.15. "1 can't buy steel for the same amount that they could make the part for," said Glaze.

Frustrated, curious about how the Chinese could produce parts so inexpensively, and determined to find ways to avoid losing such large-scale contracts in the future, Glaze, through some connections arranged by a second cousin, scheduled a trip to China for last summer. He obtained a six-month visa and arranged some appointments with many label makers in the Shanghai arm

What Glaze remembers from when he came into Shanghai, a city of some 20 million people, were all the cranes.

"They were everywhere; the Chinese were building every kind of building you can imagine - apartment complexes, office buildings, manufacturing facilities; everywhere you looked there was building going on."

That building is part of a push toward free enterprise in some parts of China, said Glaze, who told BusinessWest that the word free shouldn't be taken too literally. The government is still in firm control of all business ventures in the country, and in its current drive to make China an industrial juggernaut, the government is "making up the rules as it goes along."

For example, there is considerable investment in China, as evidenced by all the building in Shanghai, but the capital doesn't trickle down, he said. Meanwhile, the government still owns all the land, and the country's one bank is very restrictive about where capital goes and how it's used.

The government also ignores copyright laws, which explains all the knock-off products made there, while it is also very restrictive on the importing of equipment and both raw and finished materials.

"They're very restrictive on importing anything," said Glaze, adding that this is

one of the many barriers he found to outsourcing work to that country. "There's a particular alloy of aluminum that is the industry standard for aluminum nameplates, but in China they have their own steel mills and aluminum mills, and they don't produce to the same quality standards that we do.

"If I need them to import the aluminum I need from Germany, which is where I get it from, the Chinese government will mark it up 400%, which means the Chinese nameplate company can't be competitive in supplying me in the United States with these products."

When asked where the capital was coming from to generate all the development in China, he said, "go to Wal-Mart and look at all the items that say 'made in China.' There's the problem. Everything that used to be made here - toaster ovens, small appliances, clothing - all of those things are made over there. Wal-Mart has 10% of the GNP in China."

Another factor contributing to the problem is the willingness of American companies to sacrifice quality for price, even in an era when customers are becoming ever more demanding.

"If you had asked me a year ago if I thought any of our customers would go to China, I would have said, 'no, they're too fussy about quality,"' he said. "The standards that Black & Decker held us to are not being held to in China; what they're saying is, 'if we can buy for half as much, we'll sacrifice our strict requirements.

Name of the Game

A few hundred miles south of Shanghai,

said Glaze, is a small community with a name that translates into "Label Town."

There, dozens of label and nameplate manufacturers are clustered, following a pattern used across the country to concentrate skilled workers in various industries and thus keep labor costs down. Within the town of 75,000 people (small by Chinese standards) are row upon row of small shops that usually consist of an area, no bigger than a common garage, that houses one press or machine. The family running the business usually lives above it.

Glaze looked at using some of these smaller shops to make parts for him, but determined that the logistics were daunting, and, perhaps more importantly, there would be no accountability with customers.

"One of the possible concepts was to send orders to someone in that town and have them go around to the various shops and get the work done and then send them to us," he said. "And that was by far the cheapest alternative; they were producing our products for about one one-hundredth of what we're selling them to our customers for.

"The problem is traceability," he continued. "With my customers, if there's a failure, they want to know what lot of adhesive it was, who made it, where the product came from - and I knew I couldn't provide all that under those circumstances."

Glaze said he also looked at sourcing work to some of the area's larger manufacturing facilities, but told Business West that at the end of the day, he considered this "aiding and abetting criminals."

Indeed, he said he saw working conditions and hiring practices that in this country would be immoral and illegal.

"If those plants were operating here, OSHA and EPA would shut them down and people would be behind bars in minutes," he said. "I saw children 12 or under working in areas where they would be exposed to chemicals, and people operating machinery with no guards. The equipment they were using was horrible and unsafe, but in China, there are 1.2 billion people, so they really don't care - if they lose one, it doesn't matter."

Meanwhile, most of the companies in China have relatively few permanent employees, said Glaze, who noted that when these plants have large orders, they supplement their workforce with people off the street. Wages for most workers are in the area of 10 cents an hour, he told BusinessWest, adding that he came across one die cutter, a 14-year veteran he called the fastest he's ever seen, who made 50 cents an hour, which was considered the high end of the wage scale.

"So it's easy to see how they're doing it," he said of the Chinese and their ability to destroy the competition on price. "When these plants have orders, they go out on the street and hire everyone temporarily And then they work 24 hours to get the job done."

In the end, Glaze decided that the "Chinese game," as he called it, just wasn't going to work for him, or for Decorated.

"If you're going to take that route, you have to jump in with both feet," he explained. "You probably have to get a place to live over there and spend at least half your time there. And you have to develop a relationship with these people, and that's not easy because they're very distrusting, and I don't blame them they've been screwed over by every country there is.

"You need to work with them long enough so they develop a personal trust in you, and then, hopefully, you can work out a long-term relationship in some shape or form," he continued. "If I did that, it would be possible for me to live in China or have some of my people live in China and work over there and maybe scrape something out. But when you look at the quality of life and all the hassles, I just didn't think it was worth it."

Driving Force

Glaze said the driving in China is so perilous that he and others in his party would dive for the back seat when they were heading for various destinations, hoping to avoid being the one left behind the steering wheel.

Unfortunately, there is no avoiding what's happening in China when it comes to that country's efforts to become an industrial powerhouse.

It's up to individual manufacturers in this country to find ways to survive, said Glaze, adding that there are lessons to be teamed from Motorola, which opted not to take the China option, and instead looked for ways to produce products more efficiently and inexpensively. Others, like Decorated, will have to become more agile and look for niche markets.

Glaze said his company still has a future, but it will never have 80 employees again - not as long as China stays on the road it's now traveling.