While some companies are outsourcing to China to cash in on labor savings, others are there for the long haul, and they have made automation a priority.
China may be the low-wage manufacturing capital of the world, but not every company comes here to save money on labor. Instead, as China develops its own economy, companies are opening plants here to be close to customers, to be close to raw materials, and for other strategic reasons.
Clariant, for example, a leading specialty chemicals company, is close to finishing construction on a state-of-the-art pigments plant in Hangzhou, about three hours from Shanghai. Many of Clariant’s customers are located in and around China — from leading global manufacturing firms to local Chinese companies. Clariant is not in China because it is a convenient source of cheap labor. The company has made a long-term commitment to the country, and the advanced manufacturing technology it will use at the new facility is a major part of that.
“This is the first advanced technology pigment plant that we have built in China,” says Gary Fielding, president of Asia Pacific for Clariant. “It’s at least as advanced as anything we have in Europe.” The plant combines the best of the different processes that Clariant uses around the world, Fielding says, including SAP systems to run the enterprise and Siemens technology to help run the factory floor. The company has even made process improvements, pushing this plant out even further onto the cutting edge. (Since Clariant has applied for patents for these processes, Fielding could not discuss them in detail.)
The high level of automation means that the plant needs only a third the number of employees as a conventional plant of the same size, he notes. But the real benefit of the automation is that it guarantees a high degree of process control, which improves quality. It also improves production speed and flexibility. “Changeover times will be quicker, and actual production batch time will be faster,” Fielding says. Of course, the fact that the plant uses only a small number of employees is a benefit as well. “China won’t stay cheap forever,” Fielding says. “And we have to stay competitive.” Clariant now counts more than 1,300 employees in the Greater China region, with manufacturing facilities in several Chinese cities.
Automating for Efficiency
Labor costs weren’t an issue for global chemicals giant BASF when it opened a modern facility in Nanjing, China, about two hours from Shanghai. Company officials say that chemicals plants are not labor-intensive and, moreover, that the cost of building advanced facilities is beyond comparison with the labor costs. The plant, called BASF-YPC, is the product of a 50-50 joint venture between BASF and the government-owned China Petroleum & Chemical Corp. (SINOPEC). Emerson is the main automation vendor, according to company spokeswoman Mingxia Li, and SAP provides the plant’s ERP system.
“BASF plants in China have the same automation grade as its plants globally,” said Michael Kuczaty, BASF’s director of investment and strategies for Asia Pacific, in an e-mail interview. The Nanjing site, for example, is modeled on the “Verbund” concept that originated in BASF’s headquarters in Ludwigshafen, Germany, the world’s largest single-company chemical production complex.
“By linking manufacturing plants, the company can use products, by-products, and energy in the most efficient way,” Kuczaty said. This results in lower costs and less environmental impact, he added. The primary goal of automation, he said, is to improve quality and safety. “In some cases, it also reduces headcount,” he said. BASF has developed its own company-wide standards and templates for automation solutions and functions, he said, sometimes in close cooperation with suppliers.
“For advanced control and higher-level solutions, BASF has competence centers to provide the specification, engineering, and later implementation supervision, if we cannot do it by ourselves due to the scale of the project,” he said. “An ERP system is very extensively used for all functions of BASF and we have links from the automation systems to the ERP for inventory control and production planning.”
BASF has more than 4,000 employees in China, of which about 1,500 work in the Nanjing facility. The company invested approximately $2.9 billion in the plant. The largest single investment in BASF’s history, the plant began production in the fall of 2005 and is expected to produce high-quality chemicals and polymers that will be shipped to customers in China. Like Clariant, BASF says it is in China for the long term. According to Andreas Kreimeyer, a member of BASF’s Board of Executive Directors with oversight for Asia Pacific, by 2010 BASF wants to generate 20% of its global chemicals sales and earnings in Asia Pacific — with 70% of that coming from local production.
Another recent addition to the local chemical scene is a manufacturing facility built in Shanghai by Schenectady International, Inc. (Schenectady, NY). It produces phenolic resins, which are used to make coatings and adhesives that Schenectady sells to rubber and adhesives manufacturers. It also makes zinc calicylate, used in carbonless copy paper. According to company president Bob Carr, the Shanghai facility is a sign of the company’s commitment to the Asian market. Schenectady has 25 operations in 14 countries around the world. In a unique twist, Schenectady didn’t bring advanced automation technology with it to China; it bought it here, and then deployed it around the globe. It’s not as strange as it sounds.
Though China’s domestic ERP market is still in its infancy, a major development came in 2004 when Chinese software company CDC Corp. acquired Ross Systems, Inc., an Atlanta-based ERP vendor that specializes in the process manufacturing sector and the chemicals industry in particular. Schenectady decided to switch to the iRenaissance enterprise software system from Ross in January 2005 because of its close fit with the chemicals industry. According to Allen Look, Schenectady’s director of global information technology, the product helps the company manage information from across the globe in real time while also consolidating data. The company was able to reduce 12,000 database tables to just 2,500, eliminate a third-party quality control system, and save more than $300,000 a year.
“Our software helps them manage their entire operation, from the receipt of goods and ordering of raw materials from suppliers [to] putting them into inventory, consuming them into manufacturing, managing the whole manufacturing process, and fulfilling customer orders and getting goods shipped out,” says Scot McLeod, marketing VP for Ross Systems. Before switching to iRenaissance, Schenectady was using a more general ERP system, and was forced to spend a lot of time customizing it for the specific needs of the chemicals industry.
“They were internally turning into a software company, trying to make this work,” McLeod says. The process-oriented nature of the chemicals industry means that production must be meticulously managed — minute quality differences in ingredients or a poorly timed mixing step can produce a completely unexpected end product. A flawed production process won’t simply result in a part that must be sent back for rework — it may blow up the entire plant.
“Managing that variability is a key problem in process manufacturing,” McLeod says. Most ERP systems, he asserts, can’t handle that. “We give them the ability to track all the ingredients going in, all the process steps, all the way to finished goods,” he says, “so that they can know what their profits are on a product-by-product basis.”
McLeod says that Ross has about 150 customers in China, 25%-30% of which are local Chinese companies. The rest are foreign multinationals. He confirms that labor cost savings are not a primary driver for automation in China. Indeed, he says, “In China, it may be cost-effective to solve some problems with people rather than automation.”
Native Chinese companies are starting to automate. One driver is international customers, who demand quality and systems that can guarantee it, as well as some measure of transparency.
“The system of record gives you the visibility and control needed to demonstrate to customers that you have produced a quality product, to the specifications that they insisted on, that you haven’t cut any corners, and that it’s a safe product,” McLeod says. In China, those assurances are very much needed. McLeod says that Ross employees, visiting factories in China, once felt that they were stepping from one world to another.
At one factory, they could have been anywhere in Europe, North America, or Japan — it was clean, quiet, and everyone wore a uniform. Across the street, it was the third world. There were no uniforms, and cleanliness and quality-control standards were suspect, to say the least. International chemicals companies coming to China are usually fairly well-automated already, and want their Chinese facilities to match those elsewhere in the world. This was certainly the case for BASF and Clariant. But sometimes a company finds that it needs to upgrade its systems due to conditions specific to China. Being in China adds an additional element of risk to global operations. A company that has previously done business only in North America, Europe, or Japan might not have systems prepared to manage a higher level of complexity and unpredictability.
“The last thing you want to do is call up your customer and apologize that you can’t meet their order, that you’ve become less reliable after setting up a plant in China,” McLeod says. In addition, a plant in China might need to be more complex than a similar one in the West.
According to John Vande Vate, executive director of the Executive Masters in International Logistics master’s-degree program at the Georgia Institute of Technology, the supply chain isn’t as developed in China as in the West. As a result, a company might need to make some things from scratch that it would normally buy from a supplier. “In China, you’re having to build out the quality of suppliers at the same time as you’re building out the volume of operations,” Vande Vate says.
Plants sometimes look like European integrated plants — except instead of having the vendors physically present in your facility, you’re running the whole thing yourself. Another automation driver in China is that local or provincial governments sometimes set capital minimums for plant investment.
“If the government mandates that you spend a certain amount on the facility, then you might as well buy automation,” Vande Vate says. The downside to automating in China, especially if you’re a pioneer, is that there can be a lack of domestic talent. BASF isn’t the only company that has flown in experts from around the globe to set up systems.
Leland Lewis is a partner at Key Principal Partners (KPP), which owns a rubber-processing plant in Wuhu, China. The plant is part of Beijing-based ASIMCO Technologies Ltd., a KPP company that has 18 plants in China, plus three in the U.S., and makes rubber products for the automotive and truck industry.
“It’s a very demanding industry,” Lewis says. “We can’t just throw labor at it.” Instead, they built a highly automated rubber compounding and mixing facility that is the equal of those in highly industrialized countries, Lewis says.
The Technology Tools
For ASIMCO, the process of taking the various inputs and mixing them together is computerized and automated, Lewis says. Many of the systems have never been used in China before, he notes. “It’s new technology. We had to import people from around the world because there’s no one in China who would know how to do it.”
For the Wuhu facility, ASIMCO used a process control system built by Gumix, a family-owned company based in Barcelona, Spain. The system was a collaborative effort by Gumix and ASIMCO, says Scott Wellman, who runs the company’s NVH (noise, vibration, and harshness) unit. The system was designed to their specifications, he says. “It has a unique twist where it has automated processes, computer-controlled with the use of barcoding. It gives the ability for the equipment to function in such a high-quality manner that we have 100% traceability of all the constituents of the mix.”
The facility also has highly automated discrete manufacturing systems that build components for automotive braking systems. These too were designed in-house, Wellman says, and custom built by various Chinese vendors. “There are no off-the-shelf packages that do what we want,” he says. For example, each piece of equipment can conduct multiple inspections in one pass, improving productivity. It also gives customers total access to all data.
In addition to the more specialized technology, ASIMCO uses Fourth Shift from SoftBrands, a popular ERP package for mid-market companies. Because ASIMCO is the largest independent automotive-components manufacturer in China, it needs a more generalized ERP system like Fourth Shift. SoftBrands, which has been in China for 16 years, has fully localized its software, training, and support. In fact, when SoftBrands first arrived in China, it had to set up a kind of in-house university for employees to learn basic business skills, says Tim Farey, SoftBrands’ GM and vice president for Asia. Over time, local business schools started providing trained managers and SoftBrands was able to close its own facility. But the vendor still does another kind of training — teaching its customers’ employees how to use the systems. Because of its long-time presence in China, Softbrands now has a pool of trained local Fourth Shift users that companies can hire, Farey says.
Fourth Shift’s customers in China include Maybelline, Gillette, Kraft, Owens Corning, Caterpillar, and Pepsico. The benefits of having a localized ERP package include the support it can provide for Chinese tax and accounting rules. Fourth Shift’s most recent editions are compatible with SAP’s Business One mid-market ERP product, which should make Fourth Shift more attractive to firms of that size. Degussa AG, Germany’s largest chemicals manufacturer, for example, uses SAP, says Markus Mayer, Degussa’s vice general manager, as well as Emerson’s Delta V for its controls system. Mayer says that for his company, automation has not resulted in labor savings — in fact, if anything, it has added costs.
“Usually there is the myth that you can build factories very cheap in China,” he says. “But particularly in terms of automation, which is necessary for more sophisticated chemicals processes, that is not easy to realize in China.” A chemicals company setting up shop in China has to spend as much as — or more than — it would in the West, Mayer says. “There are no local manufacturers for automation systems — at least [none] qualified for dangerous processes,” he says. “Importing them costs money. Then you have to fly in experts and you have to train staff to operate these systems — and afterwards you have the problem of staff retention.”
Degussa has been producing specialty chemicals in China since 1988 and has about 1,400 employees there (out of 45,000 globally). Like ASIMCO, Degussa finds that training is crucial in China. Last fall, the company opened a training plant in Shanghai, using imported German technology. And, in the chemicals industry, the proper training in automation can be more critical than in any other sector. “The risk of fatalities or the possibility of an explosion in a plant requires foolproof and failsafe automation equipment for specific processes,” Mayer says.
This article was originally published in Managing Automation, which has since ceased publication.