2 Million Resistors
In the summer of 2011, during my time in consulting, I made a business trip to Taipei, Taiwan to visit Xinyi Electronics (not their real name). Xinyi manufactured and supplied circuits to my client, a solar energy systems manufacturer based in the US. One component made by Xinyi Electronics was resistors.
Taking a quick flashback to high school or college physics class…Resistors are electrical components that are used to reduce or regulate the flow of electrical current. In this physics class application, they are small devices about 4” in total length, made up of nearly 2” metal leads on each end and a 1/4” long by 1/16” diameter wide metal element in the middle covered with insulation. Thinking about the lab assignments in our physics class, the bands of various colors printed on the insulated element told us the resistance value (measured in ohms) of the part.
In the 1960s, multinational electronics companies had begun to locate assembly operations in small business enclaves in Taiwan. By the 1970s, Taiwan’s local government decided to make electronics manufacturing a core industry. Specializing in the production of a specific product and its internal components can enable a company and region to become quite skilled at it. Success gives them a lot of practice, and the more they practice, the more productive and efficient they become. Quality improves, costs go down, prices can be lowered and market share can rise. Industrial optimization creates a virtuous cycle on the cost structure and income statement of a business.
Fast forward forty years to my 2011 visit to Xinyi Electronics. With great focus, by this time they had achieved over 70% of the global market share for resistors. The high-speed manufacturing equipment and technical know-how developed over the years gave Xinyi the capability, scale, and capacity to build two million of these resistors per day! Seeing so many of a particular product being built at that speed is an amazing sight.
The raw materials, skilled labor, machinery, and government support were all in place for Taiwan to industrialize resistor and electronic circuit production. Over the years, Xinyi had optimized the application and use of these production factors and had achieved a high degree of customer acceptance (the 70% global market share) and outstanding financial performance. Xinyi and its founders were also known to have great relations with the local community in Taipei. Their overall strategy towards environmental stewardship was less obvious to me at the time, but their track record for building and selling products for the alternative energy sector was a positive indicator. Xinyi had achieved sustainable industrialization, or was on the path to do so.
The definition of industrialization does not stop with the manufacturing of a raw material into a product and the assembly of multiple products into a finished good. Developing and newly industrializing nations should aspire to go further up the value chain. While manufacturing adds value to a material, the desirability of the end product increases the magnitude of the value ascribed by the customer. That is, customers are willing to pay more for products that are tailored to their needs and products that they love! After mastering the stages of being assemblers and manufacturers, businesses that industrialize must next work to develop the requisite skills to move to the stage of being innovators and designers of products that customers love. Imagine if the African ingenuity and resourcefulness used to keep those decades-old Japanese taxis on the road in Ghana were trained and applied to vehicle design and vehicle systems engineering. African ingenuity has historically been absent from industrial sectors. How many more devices like the engine stop-start (to conserve fuel like our taxi drivers in Ghana) are in Africa waiting to be invented?
For developing economies like those on the African continent, sustainable industrialization strategies are not just preferred, they are imperative. They are a plan to maximize value creation as opposed to a plan to simply participate. As various African nations begin to industrialize production in various sectors, they must leapfrog traditional industrialization approaches and go all-in on sustainable industrialization. As a country begins a cycle of learning to produce products in a given industry, it is important to learn the tools and processes that are aligned with where the industry is headed in the future, as opposed to where the industry has been in the past. Also, many of the advanced manufacturing tools–such as 3D printing and computer numerical control (CNC) machining–currently in use in developed markets require less up-front capital investment and less production volume scale to pay for them. These tools make manufacturing a more accessible economic alternative. Employing and mastering sustainable industrialization strategies and techniques can help give local companies the opportunity to not only succeed over time, but also become industry innovators and disruptors.
| Conclusion: Going all-in on industrialization can change a region’s position from an industry participant to a potential industry leader. |
Chapter 2 — Why Industrialize Sustainably?
No matter how small the part, our Chinese partners wanted to build it locally.
The first new vehicle developed and launched by my team, during my time as executive chief engineer for GM's global crossovers, was the replacement for the world’s best-selling Cadillac, the SRX, which was renamed XT5. Crossover vehicles combine the high seating position, space, and utility of a sport utility vehicle (SUV) with car-like levels of refinement. Crossovers continued to grow in popularity in the US and were starting to also take off in China and other parts of the world, especially luxury-branded models. Global sales of the SRX were 99,397 units in 2015 1 , and with the launch of our XT5 replacement, this total would grow by 45% to 143,905 units in 2017 2 , the first full year of production. While the vehicle would be designed and engineered primarily in the US, it would be built in both the US and China.
Under Chinese law, non-Chinese automakers like Honda, BMW, Ford, or GM cannot build and sell vehicles in China on their own. Parts can be manufactured and sold by foreign companies, but not cars and trucks. Global automakers are required to form joint ventures that are at least 50% owned by a local Chinese company in order to produce and sell vehicles. The government must approve of the partnership, then the JV can receive the license. 3 The Chinese government views the automotive industry to be of key strategic importance to the country. One of the expected outcomes of the legally required joint ventures is the transfer of technology and know-how from global automakers to the local Chinese manufacturing business partners. As these new car-making ventures have come online, global parts makers scramble to develop the supply chain needed to produce the parts for these vehicles. These suppliers are not required to form JVs to obtain production licenses, making the opportunity to serve the Chinese market accessible to businesses ranging from multinational Tier 1 suppliers (sell major assemblies and parts directly to the automakers) and Tier 2 suppliers (sell smaller parts to the Tier 1 suppliers) to international and local entrepreneurs looking to capitalize on this sizable auto market. GM’s joint venture in China was with Shanghai Auto Industrial Corporation (SAIC), which is owned by the government of the city of Shanghai. The JV is called SAIC-GM or SGM.
A car is made up of approximately 30,000 individual parts. While the largest parts of the car, like the engine and body structure, are typically made by the automakers themselves in their own plant facilities, the vast majority (60-70% of the value) of these parts are actually manufactured by independent parts suppliers. Under the direction of the automakers product development team, these suppliers build various parts of the vehicle and ship these parts to the automaker’s assembly plant for installation on the vehicle. In some cases, suppliers partner with the automakers and complete portions of the part or vehicle subsystem design and engineering work as well. Under these scenarios, the automakers' engineers still maintain responsibility for the systems integration of the parts. This includes ensuring that the part fits with the adjacent parts on the vehicle, performs as expected, and has the expected aesthetics, i.e., looks good.