Low cost isn't everything (interesting analysis including Japan/Deming/etc.)

["Andre' Everett" <andre.everett@gmail.com>]

Hi, Jim,

Thought you might find this item of interest - and a few paragraphs perhaps 
worthy of DEN.
 
There are a couple of 
insightful paragraphs in here, and overall the analysis is on target.

351 lines of text follow.


====================

Low cost isn't everything

Asia Times Online (Hong Kong), Aug 23, 2006

By Benjamin A Shobert

Speaking Freely is an Asia Times Online feature that allows guest 
writers to have their say. Please click here if you are interested in 
contributing. < http://www.atimes.com/mediakit/write-for-atol.html >

The difficulties revolving around the introduction of the Jiangling 
Landwind sport-utility vehicle (SUV) in Europe demonstrate the need 
for Chinese companies to take the time to investigate how to 
penetrate export markets. While having a cost advantage is important, 
it must be balanced against sensitivities implicit in how foreign 
economies manage their intangible expectations and standards.

Not every Chinese business will be sensitive to this view, but those 
companies that are alert will be among the group of companies 
pioneering the next level of maturity and sophistication for the 
Chinese economy.

The Landwind entered the European market through a vehicle 
distributor in the Netherlands that saw an opportunity to grow its own 
business with an SUV that was about 50% cheaper than comparable 
European makes. Unbeknown to Jiangling, a number of Landwind 
SUVs had been purchased for crash testing by the Allgemeiner 
Deutscher Automobile Club (ADAC), a prestigious German 
organization whose rating system has become a widely accepted 
standard for vehicles sold in Europe.

The results of the testing were pointedly summarized in one German 
media outlet as "'catastrophic' ... In a frontal crash test the Landwind 
delivered the worst result ever in the history of ADAC crash testing ... 
Crashed against a barrier at a modest 64 kilometers per hour, the 
Landwind's entire frame collapsed, and stunned engineers had to 
'amputate' part of the crash dummy's legs to remove it from the 
wreckage.

"A separate side-impact crash, which is usually easy to withstand by 
heavy SUVs, showed that the Landwind's designers 'hardly wasted 
any thoughts on modern security standards' ... With no side airbags 
nor even padding, the dummy's head suffered what would have been 
serious injuries ... Summing up its findings, the ADAC said: 'The 
Landwind is as dangerous as a tornado'" (Source: "Chinese Landwind 
SUV panned in crash tests", Expatica.com, October 11, 2005).

Even a casual review of the numerous European articles covering the 
ADAC Landwind testing showed that little serious effort had been 
made to investigate what had actually taken place during testing. The 
first official press release from Landwind was forced from the 
company during a motor show in Frankfurt, where the company had 
to respond to crash results it was not aware had been completed.

The official Jiangling response was somewhat tepid and ineffectual: 
"Regarding the ADAC test, let me explain our official position. As 
we were not invited by the ADAC during the whole crash-test process 
and since we have not received any official information or summary 
test report from the ADAC until today [October 5], we cannot make 
any detailed or specific remarks on the test results."

The Landwind distributor from the Netherlands tried to fight its way 
back into the good graces of the European automobile buyer with an 
extended press event at the Frankfurt show. During the 
announcement, the company's officials and its sole distributor in 
Europe revealed how little it had known about the ADAC testing. 
Since the Frankfurt Auto Show, its damage-control mechanisms 
kicked in as it attempted to respond to allegations its product was 
unsafe for driving on European roads.

"After all, we as the official importer had not been informed before 
and we were not invited to be present when the tests were performed. 
Upon our request for further information, there was only silence. Our 
lawyers issued a formal request for further information but received 
no answer either. Let me repeat this information because it might 
sound weird; we have not seen any data from this crash test, although 
we have requested this over and over again ... We contacted the TUV 
[Rheinland, an international automotive servicing and testing group] 
and asked them to perform a comparable test with a similar vehicle, at 
short notice.

"Fortunately the TUV saw a possibility in its tight schedule to repeat 
the crash test under clinical conditions. This was completed ... and we 
are here to report back to you what they found. The result of this 
crash test is very encouraging. The crash-test measurements for both 
driver and passenger confirm that this vehicle is fully compliant with 
current EU regulations ... We have been hit very hard by this 
publicity, and we think that not all has been fair. Today we have 
informed you about the prudent and professional approach that we 
have towards issues such as these."

Chinese automobiles do have a reputation, as one might expect given 
the sector's developing status, for not being as safe as their North 
American or European equivalents. Some studies suggest Chinese 
automobile-related fatalities are 2,000% greater than in the US; 
whether this is entirely due to product design, the comparative 
abilities of Chinese versus American drivers or of basic infrastructure 
needs in China has not been established. Landwind's safety issue 
makes sense given the economic design limitations that many 
Chinese businesses currently labor under.

But as Jiangling ultimately proved, the Landwind product passed the 
necessary European Union testing with only the slightest of 
modifications - the addition of a bar to the undercarriage. 
Unfortunately for Jiangling, this simple modification was only found 
to be necessary and implemented after the devastating public relations 
problem that occurred during the Landwind's European market 
launch.

Unfortunately, what was an inexpensive fix came at the cost of an 
expensive PR nightmare. Jiangling's failure was not solely product 
design. It was the manner by which it entered the European market 
and its insensitivity to those factors that European consumers would 
look for and European competitors would fixate upon.

Jiangling badly needed export-market expertise working on its behalf 
at least 18 months before its European launch. Such attempts would 
have focused not solely on price analysis, but also on regulatory 
requirements, coordinating the necessary testing of the products, 
addressing aspects of styling and overall product design, as well as 
interviewing potential distribution partners - not merely settling for 
the one partner that had shown the initiative to contact Jiangling.

People on both sides of the China debate have strong opinions about 
the entry of Chinese-made automobiles into European and US 
markets; some believe China's participation, even on the basis of 
depressed cost inputs and deflationary market prices, is good for the 
global economy. Others believe its participation is bad for global 
stability because it is predicated on unrealistic and unsustainable low 
prices.

The Japanese model

The model par excellence for automobile manufacturers becoming 
globally competitive and successful in export markets is the Japanese, 
although making broad comparisons between China and Japan in 
regards to these questions can be somewhat deceiving. The obvious 
similarity is that the Japanese economy overall was perceived post-
World War II as being capable of producing only the simplest and 
lowest-quality goods, including cars.

Today, China has matured in many industries beyond this status; 
however, within the automotive sector, the comparison to Japan in the 
1960s is stronger. Japan's vehicle production in the '60s was nominal 
at best, and of dubious quality. But as the Japanese economy 
developed, its competitive strengths took on some uniquely Japanese 
characteristics.

Japan's success was not entirely the result of its commitment to 
principles of manufacturing efficiency that had previously gone 
uncared for by North American industry. The Japanese automobile 
industry profited greatly from its design of much smaller and more 
fuel-efficient vehicles than their American competitors. With the oil 
crisis of the 1970s, American consumers became much more willing 
to accept smaller and more fuel-efficient vehicles as a way of keeping 
an automobile, albeit with concessions in terms of style, size and 
substance.

This is the intangible part of any market's development, for the best of 
plans to go from moderately successful to wildly world-changing (an 
assumption too many people casually make concerning China's 
growth), an underlying attribute of a product must become a core 
need to the global community. In Japan's case the oil crisis made its 
compact and fuel-efficient designs relevant within a time frame no 
amount of progressive marketing ever could manage.

Simply to chalk up Japan's success to the tangible benefit afforded it 
through its dedication to the late W Edwards Deming's manufacturing 
principles or to the intangible benefits that opened up to it at the onset 
of a global oil crisis would be an incomplete analysis (Deming was an 
American professor generally credited with introducing the Japanese 
to quality assurance).

Japanese auto manufacturers, Toyota specifically, made very wise 
choices when the time came to elect how to enter the US market. This 
part of the Japanese automobile industry's success story is too often 
overlooked but was central to its success, just as similar choices will 
be equally essential for Chinese businesses seeking to export their 
way to success.

If China's automobile industry is to achieve the same measure of 
success as Japan's, it must offer the global community something it 
does not already have: a technology or product with a deliverable and 
quite tangible benefit that other auto manufacturers have overlooked. 
It will not be enough for China simply to make an equivalent to an 
Isuzu SUV at half the price. Both inside and outside the auto sector, 
Chinese manufacturers must innovate, or any growth they do 
experience will ultimately be short-lived and cannibalistic.

Without innovation, competitors will be doing exactly what the 
Chinese do, and both will be forced to compete only on price. If this 
happens within a market, it will further de-emphasize the potential for 
innovation because companies cannot afford to invest in research and 
development when their margins are eroding. Most troubling is the 
idea that the potential for China's contribution to the world could be 
stymied as a consequence of too many business models focused 
purely on price and not on innovation.

The irony that much of the Japanese competitive strength in the 
automobile sector was predicated on ideas that were uniquely 
American in origin has been lost on most people. Culturally, the 
Japanese mindset and approach to business easily accommodated a 
mastery over details other business cultures deemed too trivial and 
unimportant to track. The culture that saw intense beauty in the 
intricacies of a finely landscaped garden or miniaturized bonsai tree 
was ideally positioned to see similar depth and nuance in the mastery 
of those quality-control details that others were unwilling to pay close 
attention to.

In a similar way, the ultimate realm of competencies that China will 
develop will doubtlessly build on ideas that already exist, but whose 
adaptation has not yet gone forward because the ideas do not fit 
within the way other companies and cultures approach business. 
Within this realization lies much of the paradigm-shifting potential 
for China. Its success may ride on the back of a similar adoption of 
undeveloped, unapplied and unappreciated concepts of doing 
business.

More likely still is that as the growth of China continues it will be 
able to shake loose of entire technology paradigms and launch into 
areas of development not yet conceptualized. As just one example, 
the uniquely Chinese solution that unfolds in the automobile market 
may incorporate entirely new technologies that circumvent the 
established means by which people transport themselves in Europe 
and the Americas.

More practically still, there is a historical lag between the invention of 
an automobile safety feature and the time that it becomes available for 
consumers. Existing but unexecuted solutions may provide 
incremental opportunities for a particular Chinese manufacturing 
sector to establish the worthiness of its own products, ideas and 
thereby its brands.

In the US, the automobile has become a cultural icon or, at the very 
least, a somewhat adolescent fixation. The American ideal of personal 
freedom is innately tied to the autonomy afforded a person with a car, 
representing his very real opportunity to go anywhere he likes, at any 
time he wishes. Within China, the automobile represents the broader 
ideal of progress. But because the archetype of the automobile is 
somewhat less clearly formed in China, the potential exists for new 
technologies that significantly change a part of the driving or auto-
ownership experience to be accepted.

Couple this potential for easier adaptation of new technology with the 
cultural ability of the Chinese people to appreciate the need to think 
collectively, and the opportunities for new advances in personal 
transportation exponentially increase. Within a still-developing 
country like China the significance of personal transportation, and the 
untapped creative potential of its business people and technicians, 
coupled with its openness to new technologies, the opportunity to 
introduce an entirely paradigm-shifting technology is in many ways 
greater than now exists in the US and Europe. But as Jiangling's 
experience has shown, such market-shaping greatness will not be 
found on price alone.

Benjamin Shobert is the managing director of Teleos Inc 
(www.teleos-inc.com), a consulting firm dedicated to helping Asian 
businesses bring innovative technologies into the North American 
market.

(Copyright 2006 Benjamin Shobert. Used by permission.)

Speaking Freely is an Asia Times Online feature that allows guest 
writers to have their say. Please click here if you are interested in 
contributing. < http://www.atimes.com/mediakit/write-for-atol.html >

Copyright 2006 Asia Times Online Ltd. All rights reserved. Head 
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, 
Hong Kong

Source (on 27 August 2006): 
http://www.atimes.com/atimes/China_Business/HH23Cb01.html


Andre' M. Everett, Dept. of Management, University of Otago
Box 56, Dunedin, New Zealand; tel 64 3 479 7371; fax 64 3 479 8173
------------ aeverett@business.otago.ac.nz ---------------