A Tale of Two Tenneco’s

A recent article in Fortune (9/18/2006) chronicled the differences in two muffler factories that Tenneco owns. One in Michigan and one in Shanghai.
Workers in the Shanghai factory make $1.56 per hour. Workers in the Michigan plant make $14.10 with benefits. There are 225 workers in Shanghai that turn out 400,000 mufflers per year while the US plant turns out 1.4 million mufflers per year with 296 workers.
Gross margins at the USA plant are a third higher than the Chinese plant.
The reasons that the USA plant does better:
1. Better automation in the USA plant
2. The vendor supply chain is better at the USA plant. The China plant has 51 suppliers. Many of the Chinese suppliers have poor quality control.
3. Workers in the Chinese plants are used to working for state owned factories and are very resistant to change.
4. It is very hard to fire a Chinese worker. They have 1 to 3 year contracts.
5. Chinese suppliers are likely to sell material with Tenneco’s specifications to a knockoff manufacturer. Tenneco has filed three lawsuits against Chinese manufacturers.
What I take away from the article is this; China’s main advantage is cheap labor. Wages in China are rising about 10% per year. Slowly China’s advantage will erode. It is yet to be seen whether or not large investment in technology will be made to keep China competitive as wages rise. The three reasons that companies will be resistant to make large investments in automation is the ability to adjust the work force, law and order is low in China and it is hard to protect proprietary knowledge, and finally to grease the wheels in China you have to partner with a local company. Those that go it alone face the possibility of reprisal from local governments.