Capability building in China

All too often in the UK we hear senior business leaders and politicians bemoaning the lack of skilled labour.  But China 30 or so years ago had very few skilled staff.  So how did they progress to be the world's leading manufacturer and exporter?

Abbreviated from: http://www.mckinsey.com/insights/asia-pacific/capability_building_in_china?cid=china-eml-alt-mip-mck-oth-1307

Article|McKinsey Quarterly

Capability building in China

Skill building must be rewards-based, rooted in real work, and tailored to local conditions.

July 2013 | byKarel Eloot, Gernot Strube, and Arthur Wang

Capability building—leadership, managerial, and team-based skills rather than technical ones—has become an urgent imperative for many companies in China. As the country loses its extreme low-cost-labor advantage, businesses must look for ways to increase productivity and internal collaboration, to better understand consumers, and to develop a more sophisticated appetite for risk.
Companies in China face many of the same challenges—a lack of up-front planning and inadequate resources—that bedevil capability-building exercises everywhere. But certain “China factors” stand out. For starters, the demand for managers with strong leadership skills and international experience is growing significantly faster than the supply of qualified candidates. That imbalance makes it more difficult to pull off successful skill-building efforts, even for multinationals that typically invest more in training than Chinese companies do. (Indeed, one implication of China’s white-hot war for talent is that outside trainers brought in by multinational companies to set up and run new programs often move on before relevant tools and internal processes are in place.) Another perennial challenge for multinationals: the Chinese context and culture, which may require local tailoring of global approaches.
Then, of course, there are China’s state-owned enterprises. Many of them only recently converted from government departments into commercial entities and are still working to adapt to a competitive environment and adopt a true business mind-set. These companies generally lack a systematic approach to nurturing employees moving up the organizational ladder. They misconstrue capability building as a classroom activity, missing the impact of linking it to actual business. And they are too inflexible either to fire underperformers or to reward and promote employees, including managers, who change their behavior and adopt the necessary mind-sets.
While the challenges facing multinationals and state-owned enterprises differ, our experience with leaders at both kinds of organizations (as well as with private-sector Chinese companies) has highlighted the importance of some common, broadly applicable principles. In this article, we describe three that should help companies overcome many of the obstacles that have frustrated capability-building efforts in the past.

1. Relate capability building to real activities

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2. Instill incentives and create opportunities for promotion

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3. Don’t forget China’s unique culture

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The solutions may sound obvious: developing Chinese teaching materials to help solve problems, building day-to-day business problems around products that participants would find in the Chinese market, and localizing global training materials through culturally appropriate metaphors and examples. But we know from experience how easy it is to overlook these issues. In our own work, we routinely use a case involving a coffee machine to teach managers about the seven types of waste and how a “lean” perspective can address them. When we recently used this case at a Chinese state-owned enterprise, however, the managers couldn’t make sense of the story, because they had never used a coffee machine. We have now adapted the context to tea making.

About the authors

Karel Eloot is a director in McKinsey’s Shanghai office; Gernot Strube is a director in the Hong Kong office, where Arthur Wang is a principal.

What business should do to restore competitiveness

Extracted from Fortune - http://management.fortune.cnn.com/2012/10/15/porter-rivlin-economy-fix/

Although written with an American audience in mind, the advice is applicable to any company.

Rivkin and Porter's advice about taking care of the "commons" makes me think of one of the main excuses many UK companies make when trying to staff up. They blame the lack of skills amongst the workforce.  But think of China which had no significant industry 20 years ago and is now chasing global leaders in many areas including cars, electronics, steel making, oil refining, etc.  It had no workforce at all - skilled or unskilled. Yet the companies did not complain, but set up training facilities and got farmer's sons and daughters, who were literate and numerate, to learn brand new skills. So, instead of moaning and groaning and hoping someone else will train the staff, large companies should spend some of their profit in training staff to the requisite skills.  Yes, some will leave for competitors, but sooner rather than later you will have a large pool of skilled resources in the "commons".

How companies can get America's edge back while advancing their own interests.

By Michael Porter and Jan Rivkin

FORTUNE - America's feeble economy reminds us every day that our global competitiveness is in trouble. Whose fault is that? As usual in today's political environment, most opinions are extreme. One camp holds that national competitiveness is the responsibility of policymakers, not business leaders, who need to focus on running their companies. The opposite camp says companies owe loyalty to the country that supports them, and executives who move "American jobs" overseas are "Benedict Arnold CEOs." Both positions are deeply flawed, reflecting simplistic views of how competition and economies really work.

We offer a third perspective. Managers must run their companies well. But every firm draws on the business environment in the communities where it operates, or the "commons" as our colleagues Gary Pisano and Willy Shih call it. Government has a profound impact on the health of the commons and must do its part to make the U.S. attractive for business. At the same time, business leaders influence the commons on which they draw. In doing so, they open up a valuable opportunity: When a firm improves the commons, it often boosts its own profitability while also advancing the prospects of other U.S.-based businesses. That means business leaders shouldn't simply accept the business environment as a given, set by government. They can -- and should -- enhance the commons in ways that boost their own long-run profits.

To understand why that's critical to America's future, we need to be clear on what competitiveness means. The U.S. is competitive to the extent that firms operating here can compete successfully in the global economy while supporting high and rising living standards for the average American. Doing one without the other means we aren't really competitive. A high-wage economy like the U.S. can achieve both only by being a highly productive location, one where firms can create innovative, distinctive products and produce them efficiently.

In Harvard Business School's project on U.S. competitiveness, we and other faculty have examined how business can lead in restoring U.S. competitiveness. Our own and our colleagues' work point to three ways.

Pursue productivity

First and most important, managers must run their U.S. operations well, vigorously pursuing productivity and profitability within the rules set by society. In part, this means positioning U.S.-based activities to draw on unique American strengths. For instance, La-Z-Boy has avoided head-to-head competition with low-wage Asian furniture manufacturers by emphasizing the customization and faster delivery that its U.S. location and worker skills make possible.

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Build the commons and the business

Many companies overlook such opportunities because they think too narrowly about the potential impact of their communities on their own success. Companies used to invest naturally in the commons, but globalization weakened the connection, and many companies forgot the importance of local conditions for their productivity and growth. But now a growing number of business leaders are rediscovering the critical role of the local business environment. They're relearning that without available skills, for example, companies have to bear the full cost of training or even relocate to find qualified employees at a reasonable cost. Without an adequate supplier base, companies may be forced to relocate operations or bear higher costs of bringing in components, machinery, or service providers from elsewhere.

The welcome news is that companies can strengthen the commons, without waiting for government, in ways that are good for themselves and for America. The work of our colleagues Pisano and Shih, Bill Sahlman, Bill George, and especially Rosabeth Moss Kanterpoints to several opportunities.

Improving skills. Many companies rely passively on high schools, vocational-technical programs, community colleges, and universities to create a pool of skilled labor, and then supplement those with internal training. But that approach isn't producing the talent business needs. Despite national unemployment above 8%, many companies can't find workers with the skills to fill open jobs.

Now some companies are getting far more proactive. Individually and collectively, as Rosabeth Kanter and our MIT colleague Tom Kochan have emphasized, they're partnering with educational institutions and providing curricular guidance, mentoring, instructors, equipment, and even facilities so schools produce workers these companies would love to hire.

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Siemens and Southwire see their efforts as ways to build their businesses, not as community service. But both will strengthen the commons in their communities.

Upgrading supporting industries. Businesses rely on the local commons for a vibrant network of suppliers and other supporting actors. Many U.S. companies have long viewed suppliers the way the old Big Three automakers did -- mainly as adversaries in price negotiations. Beaten down to thin margins, suppliers often failed to invest in knowledge and innovation and then lost out to offshore vendors. As suppliers atrophied, downstream firms declined or relocated.

Now sophisticated companies are finding innovative ways to upgrade their U.S. supplier networks. For example, firms such as John Deere (DE), Caterpillar (CAT), and Harley-Davidson (HOG) offer in-person courses, online resources, dedicated staff, and joint projects that improve lean-manufacturing skills in their huge domestic supply bases.

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Supporting innovation and entrepreneurship. Research shows that innovation accounts for a large fraction of growth in national productivity, and the knowledge gained by one firm frequently spills over to others. Entrepreneurship is also key to job creation: Startups account for 3% of U.S. employment but 20% of gross job creation.

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Bolstering regional strength. Working together, companies can dramatically improve a region's business environment. Sometimes a cluster of related firms can upgrade capabilities in areas such as skill development, environmental responsibility, and export promotion. Our colleague Bill George has highlighted the energy cluster in Charlotte, where major employers, city leaders, and nonprofits aim to make the city a hotbed of development for sustainable-energy technologies. Early efforts center on university curricula, skills training, and stimulating innovation by committing to reduce energy use in the city's center by 20% in five years.

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Rein in self-interest

The third way business can and should improve U.S. competitiveness is by stopping self-interested actions that weaken the commons. Many such actions involve government relations and corporate lobbying. When firms seek special permits, tax breaks, or regulatory exceptions, they distort competition and raise regulatory complexity. Each plea seems profitable to the company or industry involved. But taken together, such pleas have created an exception-riddled corporate tax code, a rat's nest of earmarks and subsidies in the federal budget, and delays in crucial legislation. Self-interested efforts by one company make others feel they must do the same. The overall cost and complexity of doing business rises. More important, in the long run, the resulting public cynicism erodes society's support for business. Business should advocate policies that improve the U.S. business environment rather than pursue narrow self-interest, which often backfires.

We're at a turning point for American business and for America. Our competitiveness is declining while trust in business erodes. Those developments are not independent. With companies moving operations abroad as the business environment weakens, and reporting strong profits even as opportunities for Americans diminish, a dangerous dynamic emerges that shows itself in America's dysfunctional political discourse. Trust in business declines, U.S. policies turn against business, companies leave America, and trust erodes further.

Business has contributed to the problem by underrating the importance of the commons. In failing to revitalize their U.S-based operations and communities, companies are undermining their own opportunities for productivity and growth.

It's time for business to lead in restoring U.S. competitiveness rather than wait for Washington. More and more companies are seizing opportunities to restore the commons in ways that power their own success. As business steps up to this broader role, it will turn the tide of cynicism that threatens the very core of America's prosperity.

--The ideas we present here have been shaped by our work with the core faculty team of HBS's project on U.S. competitiveness: Mihir Desai, Bill George, Robin Greenwood, Rosabeth Moss Kanter, Tom Kochan, David Moss, Nitin Nohria, Gary Pisano, Bill Sahlman, David Scharfstein,Willy Shih, Dick Vietor, and Matt Weinzierl. Interpretations and any errors remain ours alone.

Professor Jan W. Rivkin is head of the strategy unit at Harvard Business School and co-leader, with Michael Porter, of the U.S. Competitiveness Project. 

This story is from the October 29, 2012 issue of Fortune.

Apple charges $649 to $848 (unsubsized) for each iPhone 5, but it costs only ($207 to $23*) - of which the Chinese assembler earns $8!

What connects the riot in a Chinese factory - http://chindia-alert.org/2012/09/25/working-conditions-the-persistence-of-problems-in-chinas-factories/ - 

and Apple's highly successful iPhone 5? 

It is reliably rumoured that the Foxconn factory assembles the iPhone 5. And that it earns US$8 (yes eight dollars) per set (that's the profit for assembly, excludes parts and shipping etc). 

But the iPhone retails for several hundreds of dollars and Apple is believed to make 40 to 50% per phone.  See - http://www.forbes.com/sites/darcytravlos/2012/09/28/apple-ignore-the-noise-around-the-iphone-5-launch-focus-on-four-near-term-catalysts/  - "Recent tear down analysis of the new iPhone 5 estimate that the cost to build the iPhone 5 at $207 to  $238, depending on the size of memory.  With retail prices (unsubsidized) of $649 to $848, Apple makes $442 to $611 per phone, or 70% on average. "

So why can't Apple pay Foxconn - say - an extra $2 per set? This would only be at the noise level for Apple.  In return, Apple should demand that its factory workers are paid $1 more per set. which will probably translate to some 15% rise as the Foxconn's labour cost per phone is $6.50 (see http://thesocietypages.org/socimages/2011/12/29/the-innovation-trap-how-the-iphone-isnt-saving-america/). That still leaves Foxconn with a 12.5% uplift in its iPhone margin?

To a person on the high street the above may make sense. But I'm sure Apple and Foxconn  will have a different view on this idea.

Social lending cuts out the banks

From FT: "Poor savings rates and a growing mistrust of high street lenders are prompting more consumers to bypass banks and do business with one another via peer-to-peer (P2P) websites." - http://www.ft.com/cms/s/0/852a2ae0-d00f-11e1-a3d2-00144feabdc0.html#ixzz21HW4hEQK

The growth of P2P lending is a sign that people are trying to seek alternative means to borrowing money than from the high street banks.  This is where individuals will offer to lend money to borrowers via an investment club - usually on-line. This growth is due to a combination of mistrust and the fact that the banks tend to be too demanding in their criteria for 'safe' lending - never mind the so-called casino mindset of the so-called investment banks.

Some of the main P2P investment clubs are:

• Ratesetter - 
• Thin Cats (editor: ha, ha) - 
• Zopa - 
• Funding Circle - 
• Squirrl - 
• Seedrs - 

Let’s get together to solve this crisis

By Julie Meyer, CEO of Ariadne Capital at The Times CEO Summit - http://www.thetimes.co.uk/tto/public/ceo-summit/article3442352.ece

“The Eurozone Crisis Is The biggest challenge that we all face. It is the thing that we have to fix, to sort out, to help restore growth right across the world economy,” David Cameron said last week in Oslo.

“Speed is of the essence.”

The British public, sick of being trapped in the longest economic downturn for a century and dizzy from the constant euro bickering, is waiting for the Prime Minister or European leaders in Brussels to swoop in, Superman-style, and “fix” the problems. Consider how many times you hear someone say: “What should the Government do?”

Sorry folks, it’s not going to happen. Waiting for our politicians to kick-start growth, to create jobs, to stem the euro rupture is like waiting for Greece to announce that it has paid off its debt. The game is up. Government has been found wanting in its role as leader of our financial assets and of civic society.

Trust the people instead.

Youth unemployment? Eminently solvable. There are 4.8 million small and medium-sized enterprises (SMEs) in the country and one million young people out of work: that means that only 20 per cent of SMEs need to hire one of these young people to fix that “problem”. Can we not come up with an incentive of lower tax or local award or benefit to encourage 20 per cent of the most durable firms in the country to take on a young person? People in their twenties are digital natives and therefore have a natural advantage in business. They instinctively understand the future because of how they engage with the world through their smartphones, social networks and digital games.

These SMEs subsidise big business today. Yes, you read that correctly: SMEs fund the big boys. SMEs are forced to pay on time. Routinely big business will give its suppliers 90 to 120-day payment terms. And it was reported earlier this year that Vodafone and Goldman Sachs did “special deals” with HMRC to reduce their tax. No SME can do that.

They pay tax where they operate; they can’t “arrange” their affairs to lower tax or channel it through another jurisdiction.

Why aren’t UK plcs — which are sitting on £64 billion of excess working capital — being given the incentive to invest in the country’s SMEs? Why aren’t there more innovative partnerships, such as British Gas and AlertMe, Visa and Monitise, or Yell and TrustedPlaces? If the “Goliaths” don’t embrace the “Davids”, they will be run over by them and then slowly drift into insignificance. Just look at what happened to Polaroid, a pioneer of photography, which had two near-death experiences over the past decade because it failed to embrace digital. 

Or Kodak, the 133-year-old inventor of the hand-held camera, which struggled to keep up with competitors who were quicker to adapt to the digital era, and filed for bankruptcy protection earlier this year. How different things could have been if either company had beaten Facebook to the punch and invited Instagram, a social photo-sharing application with huge momentum, to hop on its back. Instagram was in the same markets as Kodak and Polaroid, and yet there wasn’t any dialogue, much less a partnership. One of the chief assets that large businesses have is their distribution, and yet many don’t leverage that asset for the young digital businesses coming through who need precisely that: reach and scale.

As I argue in my new book, Welcome to Entrepreneur Country, David and Goliath must dance. The establishment and the challengers need each other to catapult new technologies into the heart of existing industry. That is how high-growth business will re-emerge to drive the economic engine.

Society is undergoing a structural change akin to the shift from horses to cars. Entrepreneurs are building the cars, but they need the corporate highways to gain speed. Those who get to the other side first are the winners. Throughout history, those who embrace change reap the benefits.