Ask These Questions Before Choosing a Manufacturing Location

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 has to decide They 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 lifecycles in 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 US and Chinese production continue to shift. But the case study and its larger lessons in supply chain strategy are as relevant as ever. Here it is.

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. 3 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.

So we are all sitting there in the classroom.

The professor walks in and— And they look up and you know what's coming. Oh, the dreaded cold call. Professor Shi 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?

Well, I've seen quite a few, so some people think I'm an expert.

And we're going to talk about that more today. Thanks for joining me.

Oh, my pleasure. Thank you for having me.

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. But let me ask you to start the way we always do. Tell us what's happening as the case opens. Who's the protagonist and what's on her mind?

The case is actually, uh, 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, they have opened this new factory in Moraine, Ohio. 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. So the question in front of her is, should they supply that new bid, which they priced very, 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?

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 Fiel? What prompted you to write the case? And how does it relate to the work that you do here at Harvard Business School?

What I was looking for is I was looking for a case that would teach about sort of the fundamental tenets of trade and globalization. Something that would illustrate those core issues, tradeability 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. Then the third question that we really wanted to teach was about the trade-off 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 in a setting 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've heard in America for the last 15 years in particular, except it's reversed, right? Here's a Chinese company offshoring jobs to the US. 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.

Yeah. Really, really interesting. 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?

Fuyao is an automotive glass maker, and so they focus only on the automotive glass market. Automotive glass is a little different than the type of glass that you have for windows. Window glass is normally just flat sheets of glass. It's made by a process called 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 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.

Splinters and gets that web-like.

Right. And so there's an assembly process associated with it, and then there's also a tempering process where you really try to change the physical properties of the glass through heat cycling so that it won't shatter on impact. It'll be stronger. You start with float glass as a 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 in there as well.

Even displays.

Even displays.

My side mirrors tell me if there's a car in the lane before I change.

Right. So then what you can do is you can embed features like that. So Fuyao is a specialist. And at the time of the case, they had almost 65% market share 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 US is typically Around then, around 16 to 17 million vehicles sold per year, but we only manufacture 11 million and change in the US, and the rest are imported. So from a manufacturing scale standpoint, China is actually a much larger market.

Yeah. 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 driving home after reading the case, and I thought, wow. This thing is probably 50% glass, it seems like.

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 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, a lot of curved 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 a 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 automaker will expect to work with that line and that factory for the life of that model.

Okay. What's it like on the manufacturing room floor?

So I've been in several of the Fuyao factories. For example, the one in Moraine is— that's an enormous facility. If you think about the processes that you need to make all these parts. You have raw glass coming into Moraine, and it's trucked in from a factory in Mount Zion, Illinois. But then you have cutting and you have washing, and you have a lot of automated tools which will handle those sheets because, you know, 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. You'll have, you know, initial cutting and washing. You'll have long lines where machines will handle the bending of the glass. Eventually you'll cut them to shape, and then you'll have 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 then 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. 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 more machine automation. And Ohio is also a newer plant.

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

Right. Labor is much more expensive in the US, so it's easier for a manufacturer to justify more investments in automation.

Yeah. How much more expensive is it? The case gets into this.

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

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

Raw materials are pretty basic for glass. It's basically purified sand, limestone, and some other materials. The key raw material for auto glass is something called float glass. That's something where you mix sand and other minor elements and you fuse them in a hot oven and then you pour it onto 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. That was a process developed by the Pilkington Company in the UK. It's called the Pilkington float glass process and 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 even have their own sand mines in China because they wanted to control all that.

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 set of questions specifically. First of all, I'm just curious about Wenli's background. I mean, this is a big job. Big decisions with big consequences. How did she prepare for that?

It is a big job. She actually started out as a consultant. 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. 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 a great great training for her. She told me that she had to do a lot of restructuring of that business and, you know, 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.

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?

Well, I think the key questions really revolve around the cost. 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 won, 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, right, or it takes them longer? Or do I go with the 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. So where should I put it?

So they have a lot at 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?

Well, that's one of the other challenges facing them, right? Because if I source this glass from Shenzhen. And by the way, they have been supplying U.S. and European makers for a while, even before they had this factory in Moraine. They have been shipping auto glass around the world, but it takes some amount of time, right? 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 US has an administration that decides that they're going to apply tariffs to it. So my costs go up.

That could happen.

If you're a company that is a supplier to one of the big 3 US automakers or to a number of other automakers, tariffs are the responsibility of the supplier. If you're General Motors, that's not your problem. Because in your purchasing agreement, you say to your supplier, If you have to pay tariffs, that's your problem.

You own it.

That's not what is in the cost that I will be prepared to absorb. 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.

Yeah, yeah.

In some respects, and I've talked to them about that, He was in a hurry to do it. And I would say they were ahead of the curve in that thought process.

Mm-hmm.

Mm-hmm.

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 in this? 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?

A company like a GM or any of the major automakers, they want a quality product at the right price delivered dependably. Mm-hmm. 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. 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.

Yeah.

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. 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.

How crowded is this marketplace? Like, who competes with Fuyao?

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 US would be companies like Guardian Industries 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 in that.

Yeah. 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, is pretty valuable.

Yes. I think it's very valuable in this industry in particular.

Yeah.

Yeah.

Have you discussed this in class?

We just taught the case yesterday. One of the surprises to me was a reticence among students to have long supply chains. 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 Apple or garment companies who have long used global sourcing. Garments are one of those lead products that always are one of the first that 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 and how that could impact your responsiveness to customer needs because of that kind of long inventory pipeline.

Yeah.

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 like, if I have high-value cargo, I might choose to assemble it in a low-cost country because I can save a lot, you know, 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 the 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.

And ultimately, the customer probably pays whatever that tariff is.

Well, we had that discussion in one of my classes about, you know, would you pay more to get this, you know, in a day instead of 30 days? And ultimately, most students agreed, well, you know, 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.

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.

It turns out there is 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 US 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 they need. So it'll be—

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

It gets to a lot of issues in the case. It's a very nice complement to the case.

And this film will be on Netflix eventually for—

It is already on Netflix.

Oh, it is? OK.

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. Oh. So— but they were still—

Very enterprising of them. Willie, thank you for joining me.

Thank you for having me.

That was Harvard Business School Professor Willy Shih in conversation with Brian Kenny on Cold Call. We'll be back next Wednesday with another handpicked 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. When you're ready for more podcasts, Articles, case studies, books, and videos with the world's top business and management experts, you'll find it all at hbr.org. This episode was produced by Anne Sanny and me, Hannah Bates. Ian Fox is our editor. And special thanks to Maureen Hoak, Erica Truxler, Ramzi Kabbaz, Nicole Smith, Anne Bartholomew, and you, our listener. See you next week.