Ask These Questions Before Choosing a Manufacturing Location

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.

In today’s global economy, what are the factors that go into choosing a production location? That’s the strategic decision facing Wen Li. She’s the global sales manager for Fuyao Glass, the world’s largest automotive glass producer.

She must decide where to fulfill upcoming contracts: In Fuyao’s new Ohio factory, where production rates are lower due to a newer employee base? Or their factory in Tianjin, China, which produces faster and cheaper but would incur shipping costs and require enormous inventory management?

Today, we bring you a conversation about a core strategic question facing managers who oversee supply chains, with Harvard Business School professor Willy Shih.

In this episode, you’ll learn how to account for product life cycles and the length of your inventory pipelines when you select a manufacturing location. You’ll also learn how to assess other possible risks that could cause delays or increase production costs – like customs delays, labor strikes, and political conditions that could lead to tariffs.

Since this episode originally aired on Cold Call in January 2020, global trade and U.S. and Chinese production have continued to shift. But the case study and its larger lessons in supply chain strategy are as relevant as ever. Here it is.

BRIAN KENNY: During the run up to the 2016 presidential election, candidate Donald Trump promised to reinvigorate the economy by bringing American manufacturing jobs back to the U.S. It was the cornerstone of his Make America Great campaign. Three years later, the results are mixed. The New York Times reports that companies have relocated just under 145,000 factory jobs to the U.S. On the other hand, the administration’s trade war with China may have undercut those gains by compelling some U.S. companies to move their manufacturing operations from China to other Asian countries with low-cost labor and easier access to Asian markets. In a highly polarized political environment, there is considerable debate over how to measure the effect of any reshoring trends by U.S. companies. But this isn’t just a concern for U.S. business leaders, the repatriation of American firms and the U.S. China trade war, have business leaders around the world grappling with the complexities of moving operations in a tightly woven global economy. Bottom line, it’s really complicated. Today we’ll hear from professor Willy Shih, about his case entitled, Fuyao Glass America: Sourcing Decision. I’m your host, Brian Kenny, and you’re listening to Cold Call, recorded live in Klarman Hall Studio at Harvard Business School.

BRIAN KENNY: Professor Shih is an expert in manufacturing and product development who also spent 28 years in industry at some of the largest technology firms in the world. And you know your way around a manufacturing floor. Is that right, Willy?

WILLY SHIH: Well, I’ve seen quite a few, so some people think I’m an expert.

BRIAN KENNY: And we’re going to talk about that more today. Thanks for joining me.

WILLY SHIH: Oh my pleasure. Thank you for having me.

BRIAN KENNY: We’ve had you on the show before, so I’m glad that you came back. I thought this case was really interesting because it kind of flips the script a little bit on the repatriation of companies to the U.S. Because here we have a Chinese company making the very same complicated decision, but from the other side of the Pacific. So I thought that was kind of an interesting flip on this. But let me ask you this, to start the way we always do, can you tell us what’s happening as the case opens? Who’s the protagonist and what’s on her mind?

WILLY SHIH: The case is actually Wen Li, who is the protagonist, who is the global sales manager for Fuyao Glass and she is preparing for a meeting with the chairman. And the question is really, they have opened this new factory in Moraine, Ohio and they are a Chinese company. Most of their other factories are in China and they’ve made some ventures abroad. But this factory in Moraine was really their stake in the American market. And so the question in front of her is, they have just won a new bid, which they priced very aggressively, should they supply it out of Ohio, which is more expensive at the moment or should they supply it out of China, where they actually have very established, mature facilities and they can deliver it at a much lower cost.

BRIAN KENNY: And that raises a whole host of issues that we’re going to get into that I thought were really interesting and sort of unintended consequences of some of the decisions that business leaders are being forced to make these days in the current environment. But I’m wondering, how did you hear about Fuyao? What prompted you to write the case and how does it relate to the work that you do here at Harvard Business School?

WILLY SHIH: What I was looking for as I was looking for a case that would teach about sort of the fundamental tenets of trade and globalization. Right, so we were looking for something that would illustrate those core issues, tradability of goods, to what extent do I need to manufacture something locally that I’m going to consume locally or can I make it in some other part of the world? The notion of labor arbitrage. When I have labor costs in one part of the world, which are very different than where I might want to sell, does it make sense to ship product long distances to do that? And then the third question that we really wanted to teach was about the tradeoff between using more labor or using more capital. And this is heavily influenced by your local labor costs and market conditions, to what extent do I invest more in automation? Or would I rather do more with labor because labor is less expensive and more flexible? We wanted to illustrate those three concepts. Okay. And what appealed to me about the Fuyao setting is, it’s the traditional offshoring narrative. It’s about a company that is trying to move jobs and manufacturing from its home base to another country. And it faces all the same challenges. The very popular narrative we heard in America for the last 15 years in particular, except it’s reversed. Here’s a Chinese company offshoring jobs to the U.S. and the chairman in China, by the way, is facing the same type of political issues there. How could you be shipping Chinese jobs to America? But it illustrates all those same key concepts that we wanted to in a narrative that’s just backwards.

BRIAN KENNY: So let’s talk about Fuyao. They make glass, they make glass for cars, at least in the case they may make glass for other things as well.

WILLY SHIH: Fuyao is an automotive glass maker and so they focus only on the automotive glass market. Automotive glasses are a little different than the type of glass that you have for windows. Window glass is normally are just flat sheets of glass, it’s made by a process called Float Glass, The Pilkington Float Glass Process. When you make automotive glass, usually what you have to do is you have to first cut it and shape it to match the style of the vehicle. So every vehicle that’s produced, usually, you have to produce custom cut windows for that vehicle. And then the other thing you have to do is you have to treat it specially. So for example your front windshield is safety glass. So that’s actually two sheets of glass with a layer of a polymer in between so that if you strike it with some object, it won’t shatter, rather it’ll hold all the shards of glass in place. So there’s an assembly process associated with it. And then there’s also the tempering process where you really try to change the physical properties of the glass through a heat cycling so that it won’t shatter on impact, it’ll be stronger. So you start with float glasses, the raw material, and then you bend it and you cut it and you do these various processes. And then also you will add things like features, right? So for example, sometimes you want to embed heating wires in it so you can have defrosting. Or some of the newer windshields now will have moisture sensors embedded in them to trigger your windshield wipers and things like that. So there’s lots of features as well.

BRIAN KENNY: Even displays…

WILLY SHIH: Even displays.

BRIAN KENNY: My side mirrors tell me if there’s a car in the lane before I change.

WILLY SHIH: Right. So then what you can do is you can embed features like that. So Fuyao is a specialist, okay. And at the time of the case, they had almost 65% market share in China of all the automotive glass sold in China. Now that’s particularly significant because at the time of the case, China was already the largest automotive market in the world. At the time of the case, China was around 28 million vehicles produced and sold every year, whereas the U.S. is typically around 16 to 17 million vehicles sold per year. But we only manufacture 11 million and change in the U.S. and the rest are imported. So from a manufacturing scale standpoint, China is actually much larger market.

BRIAN KENNY: And I’m sure a lot of people listening to our conversation are driving in their cars. I would just say, look around you, there’s so much glass in a car. Until I read the case, I hadn’t really thought about that. And then I was still driving home after reading the case and I thought, “Wow, this thing is probably 50% glass it seems like-”

WILLY SHIH: Well, there’s a lot of glass, there’s increasing use of glass in fact, especially for skylights, there are some vehicles who have very large skylights. And so you can imagine the kind of the mechanical strength you need to have for that. But then also if you look at the side windows, there’s a lot of complexity. You have a lot of these corner cuts and a lot of curve shaping and stuff. So there’s actually quite a bit of manufacturing complexity because for each set of auto glass for a vehicle program, right. So for an individual model car, you have to do a set of molds and you have to do custom cutting and you have to make it match that particular vehicle. So each one of these orders and this case concerns the particular order for the glass set for a particular model. Once you win that, then you have to have a production plan and you then have to choose which factory you want to source it from because the auto maker will expect to work with that line in that factory for the life of that model.

BRIAN KENNY: What was it like on the manufacturing room floor?

WILLY SHIH: So, I’ve been in several of the Fuyao factories. For example, the one in Moraine is an enormous facility. If you think about the processes that you need to make all these parts, you have raw glass coming in to Moraine and it’s trucked in from a factory in Mount Zion, Illinois, for the case of Ohio, but then you have cutting and you have washing. You have a lot of automated tools which will handle those sheets because frankly, handling sheets of glass like that is not easy. And for the volumes that people are talking about, you like to have some automation. So you’ll have initial cutting and washing, you’ll have long lines where machines will handle the bending of the glass. And then eventually you’ll cut them to shape and then you’ll have a separate lines where you’ll say, I’ll make the front windshields, where I’m going to take two pieces that are cut to match. And then workers will grab first the first layer, and they’ll put a sheet of that plastic in between, they’ll put a second layer of glass on and then they’ll trim it and set it up to go into an oven where I can heat it to fuse everything together. So it takes quite a bit of space. If you look in the factory in China versus the factory in Ohio, because labor is more expensive in Ohio, they’ve chosen to automate more steps. In China, for example, there’ll be more workers handling windshields or window parts, whereas in Ohio there’s a kind of more machine automation. And Ohio is also a newer plant.

BRIAN KENNY: Which is another sort of dimension to the whole bringing jobs back to the U.S. Automation obviously is having a big impact on how many jobs, how many workers are needed to perform a produce a product or perform a task.

WILLY SHIH: Right. Labor is much more expensive in the U.S. so it’s easier for a manufacturer to justify more investments than automation.

BRIAN KENNY: How much more expensive is it? The case gets into, does it?

WILLY SHIH: Well, the case talks about it and the case talks about the labor rate differential being about 7:1. It’s down considerably from the early 2000s when a typical labor rate ratio would be 10:1 maybe even 20:1. That gap has certainly narrowed.

BRIAN KENNY: What about the raw materials that are needed to make the glass?

WILLY SHIH: Well, raw materials are pretty basic for glass, it’s basically purified sand, limestone and some other materials. Okay. And so the key raw material for auto glass is something called float glass. Okay. And that’s something where you mix sand and other minor elements and you fuse them in a hot oven and then you pour it into a bath of molten tin. The glass then just kind of floats off that onto a line where you try to control the thickness and you use the molten tin as a way of having a very flat surface and not requiring a lot of polishing. And that was a process developed by the Pilkington Company in the UK, it’s called the Pilkington Flood Glass Process. It’s widely used by most glass manufacturers. In the case of Fuyao, they have their own float glass plants because they believe very much in vertical integration. So they’ll make their own float glass. They have their own sand mines in China. Right. Because they want to control all that

BRIAN KENNY: So, this becomes one of the considerations obviously, that they have to think about when they think about where to locate this plant. So why don’t we dive into that, that set of questions specifically. First of all, I’m just curious about Wen Li’s background, I mean this is obviously a big job, big decisions with big consequences. How did she prepare for that?

WILLY SHIH: It is a big job. She actually started out as a consultant, but her father had a family business in Shandong Province in China and he had a health emergency. And I’ve never delved into the details of that, but this family business was a printing and packaging business. And so when he had this health emergency, she had to step in, for a number of years she was running that business, which was actually great training for her. She told me that she had to do a lot of restructuring of that business and really get it into profitability. She then got recruited into Fuyao and as I mentioned, one of her early tasks was when the Beijing government told them they had to move this factory to Tianjin. So she really worked closely with the Tianjin government and then with the team in setting up that whole Tianjin facility.

BRIAN KENNY: So now she’s thrust into a different situation where she has to make a recommendation to the owner of the company about where to locate this plant, what are some of the things that she has to consider?

WILLY SHIH: Well, I think the key questions really revolve around the costs. If you look at the Moraine factory, it’s relatively new, it’s still in its ramp up phase. For this particular order that they want, that they are looking at, the cost to produce it in Moraine is roughly 50% higher than it would be to produce it in Tianjin for example. It’s considerably cheaper to produce it in Tianjin and ship it than it is to produce it in Moraine. But the Tianjin factory is quite mature. They’ve gotten better in their yields, they’ve gotten better in their labor efficiency and all those metrics which contribute to cost, whereas Moraine is still coming up the learning curve. And I think the key question is, do I bet that they’re going to get there? And potentially lose money on this contract if they don’t get there? Or it takes them longer, or do I go with a safe thing and stick with Tianjin and source it from China. Now they’re already doing other business in Moraine, so it’s not like there’s no work for the factory in Moraine. It’s more kind of an incremental order that they bid very aggressively for, and so where should I put it?

BRIAN KENNY: So, they have a lot of stake there though because they did bid aggressively for this and they’ve got to prove that they can do it. How guaranteed is it that those pieces of glass are ever going to get across the ocean and to where they need to be in time to meet the order?

WILLY SHIH: Well, that’s one of the other challenges facing them, right? Because if I source this glass from Tianjin, and by the way, they have been supplying U.S. and European makers for a while, even before they had this factory in Moraine. So they have been shipping auto glass around the world, but it takes some amount of time. So I am going to have inventory in my pipeline and that subjects me to a lot of risks. Maybe there’s a longshoreman strike that holds up my inventory clearing customs and coming into the country. Maybe the U.S. has an administration that decides they’re going to apply tariffs to it. Okay. So that my costs go up.

BRIAN KENNY: That could happen.

WILLY SHIH: If you’re a company that is a supplier to one of the big three U.S. automakers or to a number of other automakers, I know somebody who is intimately familiar with some of these contracts. Tariffs are the responsibility of the supplier. If you’re General Motors, that’s not your problem. Because in your purchasing agreement you say two years supplier, if you have to pay tariffs it’s your problem. That’s not what is in the cost that I will be prepared to absorb. Right. So, that’s a risk. In some sense you have to give the chairman of Fuyao some amount of credit for building this factory in Moraine, actually well ahead of when the trade war really got heated up. In some respects, and I’ve talked to him about that, he was in a hurry to do it. And I would say, they were ahead of the curve in that thought process.

BRIAN KENNY: I want to talk about this from the customer’s perspective. So if I’m GM and I’m entertaining bids from different suppliers, do I have a say on this and how much do I care about where they’re sourcing the materials as long as I’ve got this ironclad guarantee that I’m going to get my stuff when I need it.

WILLY SHIH: A company like a GM or any of the major automakers, what they want is they want a quality product, at the right price, delivered dependably. So you can imagine every car out there needs its windshield and its windows. So if you are not able to deliver on time exactly when they need it, you’re going to stop their production line. So the major automakers often impose very stiff fines, if you’re unable to deliver. It could cost you $1 million a day if you shut down somebody’s production line. But if you step back and say, as a major automaker, what does that really mean? It means I need suppliers who can really be good partners for me. Oftentimes they’ll say, I want you for a particular model or maybe a range of models. I want you to source it locally. Some other automakers like BMW, for example, will say, I want you to source from these plants around the world to supply my plants around the world and they will designate ones that they have inspected that they’re comfortable with. Right. So your customers have actually a fair amount of influence in terms of where they would like you to manufacture a particular order or a particular set of products.

BRIAN KENNY: How crowded is this marketplace? Who competes with Fuyao?

WILLY SHIH: Well, Fuyao is a pretty big player in China. They’re relatively smaller elsewhere. They’re trying to grow to become a global player. Other companies that you would typically find in the U.S. would be companies like Guardian Industries. Okay. Or Saint-Gobain, which is a very large global player. Asahi Glass, Nippon Sheet Glass. So there are other manufacturers out there, many of them tend to be kind of regional rather than global. Saint-Gobain is fairly global, but you see a lot of regional players.

BRIAN KENNY: So, the experience of knowing how to operate in overseas markets, whether it’s in the direction of China to the U.S. or the other way around, it’s pretty valuable.

WILLY SHIH: Yes. I think it’s very valuable in this industry in particular.

BRIAN KENNY: Have you discussed this in class?

WILLY SHIH: We just taught the case yesterday. One of the surprises to me was a reticence amongst students to have long supply chains. Okay. And it wasn’t pervasive by any means, but I saw to me a surprising number of people who were not big fans of global sourcing and long supply chains. Now having said that, I also had students in my classes who have worked at companies like at Apple. Okay. Or garment companies who have long used global sourcing. Garments are one of those lead products that always are one of the first seek low cost countries for manufacturing. So it was a mix. But I was surprised by the number of people who are very conscious of the length of the supply chain in terms of distance and time in how that could impact your responsiveness to customer needs because of that kind of long inventory pipeline. On the other hand, if they were comfortable with the long inventory pipeline, kind of a reticence on paying for premium shipping. And one of the things I was trying to point out is if I have high value cargo, I might choose to assemble it in a low cost country because I can save a lot and then I’ll high value or high time value, I can ship it by air cargo and I can have it here, cleared customs in a store in 48 hours. I mean we have firms like Zara: Fast Fashion, who have built their whole business model on, I’m going to source in places which are attractive for various reasons. And then I will just get it into store very quickly using air cargo or somebody like Apple who predominantly ships iPhones and iPads by air cargo. Because my product life cycles are short and you know, I need to assemble it somewhere where labor is not expensive, but I need to get them to market fast.

BRIAN KENNY: And ultimately the customer probably pays whatever that tariff is.

WILLY SHIH: Well, we had that discussion in one of my classes about, would you pay more to get this in a day instead of 30 days and ultimately most students agreed, well, I probably would pay more. Right? But for a company, if they become a product manager somewhere someday and a lot of students aspire to those types of roles, these are the types of decisions you have to make every day about where do I source my product? What do I want to pay for in terms of supply chain flexibility and responsiveness? So those were the things that we were trying to explore.

BRIAN KENNY: There’s a little footnote to this case too that you let me know about which is that, this is the subject already of a documentary.

WILLY SHIH: It turns out there’s a documentary that has gotten very great reviews so far. It’s called American Factory. And it highlights kind of the challenges of a Chinese company coming into the U.S. where you have very different cultures. You have to span that cultural divide. You have a whole host of issues. There’s a union organizing campaign around the factory. There’s struggles getting the factory to the performance level that they need. So it’ll be a-

BRIAN KENNY: It kind of gets to a lot of the issues in the case.

WILLY SHIH: Gets to a lot of issues in the case, it’s a very nice complement to the case.

BRIAN KENNY: And this film will be on Netflix eventually for-

WILLY SHIH: It is already on Netflix. In fact, when we taught the case a number of students in each of my sections had seen the movie, and so but they were still–

BRIAN KENNY: –Very enterprising of them. Willy, thank you for joining me.

WILLY SHIH: Thank you for having me.

HANNAH BATES: That was Harvard Business School professor Willy Shih – in conversation with Brian Kenny on Cold Call.

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

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This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.