China Maglev Metaphors

I had the opportunity to ride the Maglev train this weekend in Shanghai. The train races to a Shanghai subway station from the airport in less than it takes the shuttle service to go from most US airports to the parking lot. Reaching speeds in excess of 425 KPH, there's nothing else quite like it in the world. For those who fly into Pudong airport -- or for train buffs like me who have an hour to kill in the city -- it's a ride that should not be missed. At around 50 RMB, the maglev is not cheap by Chinese standards (the cost is roughly 18 times the fare for a ride on the modern Shanghai subway). But for less than the cost of a good beer in a New York bar, it's a bargain by my entertainment standards.

What I found most interesting about the Maglev was not its speed, but the metaphors it presents for modern China -- especially from a global supply perspective. As my wife remarked during our week of visiting suppliers, China is incredibly sophisticated in many ways, but not quite ready for prime time, so to speak in others. In other words, there's still a number of kinks to work out of the system, but as the Maglev shows, it's clear that the current state of thinking in the region is only a small sign of things to come. For example, the Maglev, despite its great speed and frequency (it runs more often than many airport train links in North America), is a bit inconvenient -- it only runs to a distant Pudong subway station, not the center of Shanghai. It is then necessary to transfer to a subway line to ride the rest of the way downtown which can take another twenty minutes or longer, including waiting time (not to mention taking luggage up and down many flights of escalators and stairs). London’s and Hong Kong’s rapid airport trains are slower, but far more convenient and easier to take from the airport to the heart of each city.

Like the Maglev, many Chinese suppliers often appear sophisticated on the surface from a machinery and process perspective, but lack basic capabilities that can create unanticipated inconveniences (and added costs). One example we saw this week was a very sophisticated and high quality textile supplier that lacked the ability to palletize shipments because they do not have forklifts to stack and load goods from their warehouse onto trucks. Despite spending millions of dollars on modern production equipment, they do not have what is considered an absolutely core packing and loading capability. Though this problem can be addressed by "adding more labor" if a US customer wants his goods on pallets, he ends up paying for it -- which needs to be factored into the low-cost equation. My head-scratching was not isolated to this one supplier. At another manufacturer, we saw a surprisingly good production process -- a clean shop floor, small production cells and though not automated, a means for evaluating quality on each and every good. But production was done in two facilities less than three hundred meters apart, requiring that the partially finished parts be transported via truck from one facility to the other (this in an area where fuel and transportation are at a premium and land and labor is inexpensive).

Like the Maglev, it's clear that many Chinese small and medium sized manufacturers are incredibly sophisticated by developing economy standards -- and sometimes even world standards -- but there are still some big areas for improvement. One wonders in a country where in one city (Shanghai) it's rumored that one fifth of the world’s building cranes reside, how fast the capabilities of Chinese suppliers will rise in the next ten years. But the big question mark will be how fast labor rates -- and prices -- increase along with supplier capabilities. China may have a centrally planned economy, but it will be impossible for the country's unbelievable economic boom to come without significant wage inflation throughout the process. While the Maglev is a great symbol of China's economic progress, perhaps its high relative cost -- both to build it and to take a ride on it -- is a more important signal of things to come than just its speed.

Jason Busch

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