Thursday, September 18, 2008

Bull in a China Shop...

Consumer electronics are coming to the end of the age of deflationary pricing, and also the end of affordable, innovative cosmetic design.  Because of circumstances in China, the last 10 years have been an industrial designer's dreamland.  We have been spoiled, and we take it for granted.  Cool designs will still be possible but at increasingly higher prices, well out of the reach of most of us.

I recently returned from the Shenzen area of China where most of NHT's manufacturing partners reside.  Shenzen is only an hour from Hong Kong by ferry.  I am told that the area was historically marshland and fishing villages.  30 years or so ago, the Chinese government opened the area to foreign investment offering low cost leases for factory locations and now the population is 60 million and growing.

In most places in the world, very little changes over the period of a year or two.  China is not like most places and the changes are constant and remarkable.  Where there were jumbled, unpaved roads, there are now wide, tree lined boulevards.  Traffic lights and road signs abound, and more importantly the local populace is paying attention to them as if they are rules instead of loose guidelines.  Bicycles and feet were the main form of transportation for most workers two years ago, now its motor scooters and cars.  Highways and toll roads have appeared connecting the area to other major urban centers.  The typical office worker has gone from dull, company supplied uniforms to modern fashion that rivals most places in Hong Kong.  The government has recently introduced reasonable minimum wage laws with benefits, and consumerism is growing rapidly as the standard of living increases.

The amazing thing about China is the speed at which it caught up in manufacturing and design capability.  By 2001 you could find some of the finest craftsmanship the world has ever witnessed, and on a huge scale.  It was intoxicating.  Factories were going up in a matter of weeks throughout the province.  You could discuss an idea for a new part in a morning meeting and it was not uncommon to find a prototype, still warm from manufacturing, on the conference room table upon returning from lunch.  For the first time in years we were no longer bound by cost constraints.  Any design, no matter how complex, was possible to produce and often at mass market prices.  It was so easy.  We got lazy and complacent.

In 2008 the hammer fell.  Costs in our industry increased by 30% or more this year. Consumers have not even seen the impact of this yet, but soon will.  A substantial part of the sudden increase is due to the rising standard of living in China, but it also came from the rising prices of the world's dwindling natural resources.  Some believe manufacturing companies will move to the next low cost, underdeveloped country.  I think not.

In my opinion there are a specific set of circumstances that made China the powerhouse it is and those same circumstances are also the reason we have run out of practical places to go next.

Western Europe and the US watched Japan's prowess in manufacturing efficiency emerge over a period of 30 years.  As the standard of living rose in Japan, the crown moved to Taiwan where efficiency met lower cost labor.  This lasted 15 years or so, then it all moved to China where the investment and skills of the automated world met the largest, untapped and under paid labor pool.  This combined with the existing logistic infrastructure in the Pacific Rim and the proximity of Hong Kong, the world's largest free port, makes China the perfect location.

Certainly there remain countries with abundant low cost labor.  However most of them have little or no infrastructure in place to support mass manufacturing and are geographically difficult to get to.  The investment required would be many times the amount used in building China.  And don't forget that our declining and increasingly expensive  natural resources only exacerbate the problem, making costs higher no matter where products are made.

So what does all this mean to you and I?

It means that manufacturers are going to have to become clever again about design. We are going to have to choose what is important and give up on the "nice to have" features if we want to remain affordable.  It means we are going to have get smarter, work harder and maybe for the first time learn real marketing.

For consumers it means mainstream products are going to be more expensive, or they are going to lose desirable cosmetic and feature elements to which we have become accustomed.  It means that people will have to make choices that they will live with, not throw away.

Any upside?  Possibly.  It is my personal belief that this can be good for all of us in the long term.  Hopefully costs will equalize geographically, creating more local jobs and local industries.  While more expensive, product quality should improve and rapid obsolescence should diminish as we hold onto products for longer periods of time.  Brands should become more differentiable than recent times, which should allow for more market stratification and improve the "gene" pool.

Like diminishing oil reserves are forcing us to re-examine our choices in the cars we drive, the trips we take, the food we eat and the clothes we wear; my guess is that people will look at electronic purchases in the same way and begin to buy more intelligently and less impulsively.


epaul said...

Hey Chris,

It's Paul and I just got back from Shenzhen last week. Totally relate to your blog, since I saw the same thing. It's amazing how much Shenzhen changed in 2 years.


audioexplorer said...


I've been thinking that the overly cheap hi-fi coming from China for a while. You've articulated my feelings more accurately that I could have done.