Operations Management

in China
Operations Management
in China

Dr. Craig Seidelson

Operations Management in China
Copyright © Business Expert Press, LLC, 2020.

All rights reserved. No part of this publication may be reproduced, stored

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First published in 2020 by

Business Expert Press, LLC
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Business Expert Press Supply and Operations Management Collection

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 Abstract
Leading business schools routinely offer undergraduate and postgradu-
ate degrees in operations and supply chain management. Yet 200,000
U.S. jobs in supply chain management go unfilled each year owing to
lack of talent. The talent that U.S. companies need, and that this book
provides, is understanding how to make and buy products from China.
How important is China to U.S. operations? In 2018, U.S. imports
from China reached $600 billion. Half of these imports were bought
by U.S. manufacturers. A dependency on Chinese goods is even greater
when looking at U.S. supply chains. Sixty cents of every dollar that
U.S. consumers spend on goods made in China go to U.S. workers and
companies.
Successful operations and supply chain managers understand manu-
facturing in China. This book takes readers inside Chinese organizations
and shows how factories are built, labor is managed, goods are sourced,
quality is controlled, and logistics are handled. Through this immersion
experience readers are able to see the opportunities and pitfalls manufac-
turing in China.

Keywords
Chinese business; supply chain management; operations management;
manufacturing in China
 Contents
Preface ................................................................................................. ix
Abbreviation ........................................................................................ xi
Chapter 1 Introduction .................................................................... 1
Chapter 2 Factory Investment........................................................... 5
Chapter 3 Factory Construction ..................................................... 23
Chapter 4 Labor ............................................................................. 47
Chapter 5 Management .................................................................. 69
Chapter 6 Sourcing......................................................................... 83
Chapter 7 Logistics ........................................................................ 95
Chapter 8 Opportunities and Threats ............................................117

About the Author ............................................................................... 129

Index .................................................................................................131
 Preface
Authors use words to describe ideas. Wouldn’t it be wonderful if simply
by putting words on a page knowledge could be transferred? In reality,
learning seldom works like this. To truly grasp ideas readers need to be
engaged.
Facts and figures are engaging, but there’s only so much they can
convey. To understand what’s happening in China, readers need a more
visceral connection. Throughout this book the author uses stories and
photographs to make this connection.
It may be the case that how operations are described in the follow-
ing pages isn’t how they should be managed. It’s up to readers to think
critically about the material and form their own conclusions. This level of
engagement promotes learning. But it can also be exhausting. That’s why
the author uses a very conversational tone in this book. That said, let’s
have a conversation about operations management in China.
 Disclaimer
The author uses stories to help illustrate situations or concepts to readers.
Stories are a combination of statements presented by third parties to the
author and the author’s experiences.
Stories were re-created from the author’s memory, and thus no at-
tempt was made to verify the accuracy of any third party statement. When
presenting stories, the author has changed the names of persons, entities,
and locations. Changes were made for creative purposes, inadvertently
because of an inability to recall the circumstances with complete accuracy
or simply to preserve the confidentiality of those involved.
No story necessarily relates to any current or former employers or
represents policies adopted by them. In some instances the stated con-
versations are modified or embellished or may have been wholly created
and are thus fictitious. Likewise, no story is intended as a factual state-
ment, description of an actual event, or a confirmation of any particular
government, personal, or company policy. Although certain experiences
underlying the stories may be factual, the stories themselves are fictional-
ized and intentionally changed to generically illustrate concepts and, as
such, are merely a means to present concepts to readers in a different and
interesting manner.
The author has also relied extensively on third party publications.
Although cited works are consistent with the author’s experiences, the
author has not attempted to independently verify that any such publica-
tions or their contents are accurate or complete.
Furthermore, the author makes no claim that this work includes a
complete treatment of any particular subject matter, including operations
management or manufacturing in China. Similarly, the contents of this
work are not intended as advice (legal or otherwise). The reader should
not rely on this work as the sole source of information related to under-
taking or preparing for work in China or otherwise.
 Abbreviation
ACFTU = All-China Federation of Trade Union
AIC = Administration of Industry and Commerce
AQSIQ = General Administration of Quality Supervision, Inspection and
Quarantine
ASTM = American Society for Testing and Materials
B2B= Business to Business
BIS = U.S. Bureau of Industry and Security
CAS = Chinese Academy of Sciences
CCC = China Compulsory Certificate
CCIC = China Certification and Inspection Group (CCIC)
CCP = Chinese Communist Party
CIB = China Commodity Inspection Bureau
CJV = Cooperative Joint Venture
CNAS = China National Accreditation Service
COGS = Cost of Goods Sold
CPA = Certified Public Accountant
CR = China Railway Corporation
DB = Provincial Standards
EAR = Export Regulations
EDB = Economic Development Bureau
EIA = Environmental Impact Assessment
EJV = Economic Joint Venture
EP = Environmental Protection
EPB = Environmental Protection Bureau
ETDZ = Economic and Technological Development Zone
FCL = Full Container Load
FDA= Food and Drug Administration
FDI = Foreign Direct Investment
FE = Fundamentals of Engineering
FIE = Foreign Invested Enterprise
FTL = Full Truckload Shipment
FTZ = Free Trade Zone
xii ABBREVIATION

G20 = The Group of Twenty countries accounting for approximately 80% of

world trade
G7 = Group of 7 countries accounting for approximately 60% of global wealth
GB = Guobia
GDP = Gross Domestic Product
GM= General Manager
GW = Gigawatt
HIDZ = High-Tech Industrial Development Zone
HR = Human Resources
IP= Intellectual Property
ISO = International Standards Organization
IT = Information Technology
JV = Joint Venture
L/C = Letter of Credit
LCL = Less than Container Load
LLC = Limited Liability Corporation
MEP = Ministry of Environmental Protection
MFN = Most Favored Nation
MIC 2025 = Made in China 2025
MNC = Multinational Corporation
MOF = Ministry of Finance
MOFCOM = Ministry of Commerce
MOLSS = Ministry of Labor and Social Security
MOR = Ministry of Rail
MOST = Ministry of Science and Technology
NDRC = National Development & Reform Commission
NEA = National Energy Administration
NEC = National Energy Commission
NEPA = National Environmental Protection Agency
NPC = National People’s Congress
OECD = Organization for Economic Cooperation and Development
PO = Purchase Order
PPAP = Production Part Approval
PPI = Producer Price Index
PPP = Public Private Partnership
PRC = People’s Republic of China
PSB = Public Security Bureau
PTE = Processing Trade Enterprise
Q = Enterprise Standards
 ABBREVIATION xiii

R&D = Research and Development

RFQ = Request for Quote
RMB = Renminbi
RO= Representative Office
SAFE= State Administration of Foreign Exchange
SASAC = Assets Supervision and Administration Commission
SAT = State Administration of Taxation
SEZ = Special Economic Zone
SOE = State Owned Enterprise
TSB= Technical Supervision Bureau
VAT = Value Added Tax
WOFE = Wholly Owned Foreign Enterprise
WSB = Workers Safety Bureau
WTO = World Trade Organization
 CHAPTER 1

Introduction

From 2000 through 2010, China’s gross domestic product (GDP) aver-
aged 10 percent growth year on year. This level of growth was eight times
what the U.S. economy experienced over the same period.1 Few sectors
have felt the impact of China’s emergence more than U.S. manufacturing.

“Can you believe the prices on these parts from China?”

“I guess we’ll just have to step up our Lean Manufacturing efforts.”
“Are you kidding? These prices are lower than our material costs. There’s no
way to close this kind of gap with efficiency improvements.”
“What are you suggesting? We can’t just exit the business.”
“I know. But we can’t compete with these prices.”
“Our quality is better.”
“Sure. But, only if people are willing to pay for it.”

The U.S. imports more goods from China than from any other country.
In 2018, U.S. imports from China reached approximately $600 billion,
or almost a quarter of all imports.2 In spite of these statistics, Sara Bongiorni
and her family embarked on the seemingly impossible. They attempted
to live a year without buying anything made in China. Recounting their
experiences in A Year Without “Made in China”: One Family’s True Life
Adventure in the Global Economy, she noted, “There’s just really no way to

1
US Bureau of Economic Analysis. 2019. “US GDP Growth Rate by Year,” www
.multpl.com/us-gdp-growth-rate/table/by-year, (accessed December 9, 2019).
2
D. Kopf. 2019. “The US Will Have a Hard Time Not Getting These Products from
China,” Quartz. https://qz.com/1654798/these-are-the-products-the-us-is-most-reliant-
on-china-for/, (accessed July 3, 2019).
2 OPERATIONS MANAGEMENT IN CHINA

live what would be considered an ordinary consumer life without a heavy

reliance on merchandise from China.”3 
The difficulties Sara and her family faced over a decade ago would be
much greater today. As Figure 1.1 shows, China has been the worldwide
leader in manufacturing since 2010.4

Figure 1.1 China has surpassed the U.S. in manufacturing output

Courtesy: Mark Perry

To be fair, there are better measures of manufacturing strength than

goods produced. Value added levels the playing field by discounting
sales for imports and cost of materials and inventory. That said, China’s
$3-trillion value added is still the world’s largest. And the U.S. is still a
distant second, with a 40 percent lower value add than China.5

3
Foreign Policy. 2007. “Seven Questions: Can You Live Without China?” http://
foreignpolicy.com/2007/07/11/seven-questions-can-you-live-without-china/, (accessed
November 17, 2018).
4
W. Hunter. 2012. “China Beating BRA in Manufacturing,” Occidental Dissent. www
.occidentaldissent.com/2012/12/15/china-beating-bra-in-manufacturing/, (accessed
September 9, 2016).
5
M. Levinson. 2018. “US Manufacturing in International Perspective,” Congressional
Research Service. https://fas.org/sgp/crs/misc/R42135.pdf, (accessed December 15, 2019).
 INTRODUCTION 3

Who’s buying all these made-in-China products? Most are consumed

in China. Of the remainder, the single largest amount (e.g., 18 percent in
2018) ends up in the U.S.6
Against the flood of low-cost Chinese imports, how have U.S. manu-
factures fared? Not very well. From 2001 through 2015, U.S. companies
closed 40,000 factories and sent one out of every 10 manufacturing jobs
to China.7
Can the remaining U.S. manufacturers compete? It wouldn’t appear
so. By 2017 the U.S. trade deficit with China hit a record $375 billion.
China now accounts for roughly 70 percent of the total U.S. trade deficit.8
In response to the trade imbalance, the U.S. government imposed a
25 percent tariff on $34 billion worth of Chinese imports in July 2018.
The Chinese government responded with an identical tariff on the same
amount of U.S. imports.9 A month later both sides extended their tariffs
to include an additional $50 billion worth of imports. A year and a half
later, tariffs were still in place, and plans were underway to put a 10 per-
cent tariff on an additional $110 billion worth of Chinese imports.
Has the trade war reduced U.S. supply chain dependency on Chinese
products? It wouldn’t appear so. In 2019, $0.60 of every dollar U.S. con-
sumers spent on goods made in China still went to U.S. workers and
companies.10 And, according to a noted economist, “tariffs make supply

6
K. Amadeo. 2020. “China’s Economy and Its Effect on the U.S. Economy,” World
Economy: Asia. https://www.thebalance.com/china-economy-facts-effect-on-us-econ-
omy-3306345, (accessed June 2, 2020).
7
R. Scott. 2012. “The China Toll,” Economic Policy Institute. www.epi.org/publica-
tion/bp345-china-growing-trade-deficit-cost/, (accessed June 17, 2016).
8
J. Schlesinger and H. Torry. 2018. “U.S. Trade Deficit Grew to $566 Billion in 2017,
Its Widest Mark in Nine Years,” The Wall Street Journal. www.wsj.com/articles/u-s-
trade-gap-highest-in-nine-years-in-december-1517923918, (accessed July 16, 2019).
9
M. Bomey. 2018. “How President Trump’s Chinese Tariffs Affect American Con-
sumers,” USA Today. www.usatoday.com/story/money/2018/07/06/president-trumps-
china-tariffs-consumer-impact/762982002/, (accessed September 15, 2019).
10
A. Van Dam. 2019. “Made in China: Most of What You Pay Goes to U.S. Workers
and Businesses, Despite What the Label Says,” The Washington Post. www.washington-
post.com/business/2019/01/11/reminder-most-what-you-pay-made-china-product-
goes-us-workers-businesses/, (accessed January 5, 2020).
4 OPERATIONS MANAGEMENT IN CHINA

chains more costly, forcing companies to operate at a loss [until] the con-
flict is resolved.”11
Given the long-term importance of Chinese-made products, U.S.
companies need managers who can work with their Chinese operations
and supply chains. In the following pages readers will see how:

• Foreign investments are made in China

• Facilities are built
• Labor is managed
• Procurement is handled
• Quality is maintained
• And goods are transported

With a firm grasp of how things should work in China, readers will
also see how they don’t work. Namely,

• Most business activities are regulated

• A lot of employees are quitting
• Conflicts of interest abound
• Quality’s low
• Productivity’s lower
• And, getting anything from point A to point B can be riddled with
inefficiencies.

11
M. Sheetz. 2018. “Here’s Where We Are in the Trade War—And What It Means,”
CNBC—Markets. www.cnbc.com/2018/07/06/when-and-where-trade-wars-are-
fought.html, (accessed October 12, 2018).
 Index
ACFTU. See All-China Federation of
Trade Unions (ACFTU)
Administration of Quality
Supervision, Inspection and
Quarantine (AQSIQ), 92, 93
Alibaba, 88, 103
All-cement building construction, 45
All-China Federation of Trade Unions
(ACFTU), 57, 58
AQSIQ. See Administration of
Quality Supervision,
Inspection and Quarantine
(AQSIQ)
Belt and Road, 108
BIC. See Bureau of Industry and
Commerce (BIC)
Bureau of Industry and Commerce
(BIC), 87
Buyers and sellers, 86
Canal system, 113
CAS. See Chinese Academy of
Sciences (CAS)
CCC. See China Compulsory
Certificate (CCC)
CCIC. See China Certification and
Inspection Group (CCIC)
CCTV cameras, 104
China
Alibaba, 88, 103
barge traffic in Wuxi, 113
Consumer Perceptions of Product
Quality, 89
to Europe, 109
factory construction, 23–45
factory investment, 5–22
FIEs, 9
15-digit registration numbers, 87
firm grasp, 4
free trade zones, 26
GDP, 1, 6, 25, 55, 109, 110, 117,
119–121, 126
income tax, 28
introduction to, 1–4
JB manuals, 93
labor, 47–68
logistics, 95–116
management, 69–81
manufacturing, 27, 52, 54,
122, 127
National Trunk Highway System, 105
One Child Policy, 54
operations and supply chains, 4
opportunities and threats, 117–127
organizations, 74, 79
pension system, 60–61
People’s Bank of, 120
port clusters, 115
PPI, 122
products, percentages of, 7
rail network, 106
to Russia, 117
shipping ports, 110, 111
sourcing, 83–94
special economic zones, 24
toll gate, 98
2014 manufacturers, 90
U.S.-invested manufacturing
plants, 9
voluntary retirements, 61
water transport, 111–112
workers, 50
China Certification and Inspection
Group (CCIC), 15–16
China Compulsory Certificate
(CCC), 89
China National Accreditation Service
(CNAS), 90
China Railway Corporation
(CR), 106
rail export routes, 108
132 INDEX

Chinese Academy of Sciences Environmental impact assessment

(CAS), 123 (EIA), 34–35, 41, 42
Chinese Environmental Protection (EP)
factory, 36, 50 Law, 34
fapiao, 88 Environmental Protection Bureau
hukou, 51–52 (EPB), 34–35, 41, 42
Spring Festival, 63, 111 EP. See Environmental Protection
tailgate, 104 (EP) Law
truck load configuration, 103 EPB. See Environmental Protection
Christmas, 111 Bureau (EPB)
CJV. See Cooperative Joint Venture ETDZ. See Economic and
(CJV) Technological Development
CNAS. See China National Zone (ETDZ)
Accreditation Service (CNAS)
Company seal, 18 Factory
Consumer Perceptions of Product construction, 23–45
Quality, 89 designs, 36
Consumer Product Safety investment, 5–22
Commission (CPSC), 90 FDA. See Food and Drug
Cooperative Joint Venture (CJV), 18 Administration (FDA)
Coronavirus. See COVID-19 FE. See Fundamentals of Engineering
COVID-19, 23 (FE)
CPSC. See Consumer Product Safety FIEs. See Foreign-invested enterprises
Commission (CPSC) (FIEs)
CR. See China Railway Corporation 15-digit registration numbers, 87
(CR) Firm grasp, 4
Food and Drug Administration
Debt book diplomacy, 118 (FDA), 90
Decision making, 75 Foreign-invested enterprises (FIEs), 9,
Dockside rail access, 107 21, 22, 23, 28, 127
Dust/carbon dioxide, 44 Foreign investment, 11, 17
Free Trade Zone (FTZ), 25, 26
Economic and Technological FTZ. See Free Trade Zone (FTZ)
Development Zone (ETDZ), Fuel cost, 100
26–27 Fundamentals of Engineering
Economic development, 39 (FE), 92
Economic Development Bureau
(EDB), 12, 30, 32, 34, GDP. See Gross domestic product
39, 42 (GDP)
Economic Joint Venture (EJV), 14, 18 Government-built factories, 40
EDB. See Economic Development Grand Canal, 112
Bureau (EDB) Green building evaluation
Education system, 55 standard, 43
EIA. See Environmental impact Gross domestic product (GDP), 1,
assessment (EIA) 6, 25, 55, 109, 110,
EJV. See Economic Joint Venture 114–116, 124
(EJV)
Electric bike courier service, 100 HIDZ. See High-Tech Industrial
Electricity, 32–33 Development Zone (HIDZ)

High-tech factories, 125
High-Tech Industrial Development
Zone (HIDZ), 27–28
Income tax, 65
ISO. See Organization for
Standardization (ISO)
JB manuals, 93
Jiangsu highway scene, 98
Joint ventures (JVs), 11, 13, 20
JVs. See Joint ventures (JVs)
Labor, 47–68
Labor pool, 54–55
Legal authority, 19
Letter of credit (L/C), 83
Local labor bureau policies, 58, 59
Local methods, 12
Low-cost Chinese imports, 3
Made in China, 1, 3, 7, 88–89, 122
Made-in-USA products, 7
Mainland income tax, 21
Management, 69–81
Manufacturing output, 2
Map of China NTHS Expressway, 96
Middle income trap, 124
Ministry of Commerce (MOC), 126
Ministry of Finance (MOF), 126
Ministry of Rail (MOR), 106
Ministry of Science and Technology
(MOST), 123
Ministry of Transport (MOT), 97
MNCs. See Multinational
corporations (MNCs)
MOC. See Ministry of Commerce
(MOC)
MOF. See Ministry of Finance (MOF)
MOLSS. See National Ministry of
Labor and Social Security
(MOLSS)
MOR. See Ministry of Rail (MOR)
MOST. See Ministry of Science and
Technology (MOST)
MOT. See Ministry of Transport
(MOT)
Multinational corporations (MNCs),
8, 10, 28
INDEX 133
National Development and Reform
Commission (NDRC), 10,
32–33, 126
National Energy Commission
(NEC), 33
National Ministry of Labor and Social
Security (MOLSS), 57
National People’s Congress, 97
National Trunk Highway System, 95
National Worker Injury Insurance
Fund, 66
NDRC. See National Development
and Reform Commission
(NDRC)
NEC. See National Energy
Commission (NEC)
New Year, 58
Ningbo-Zhoushan Port, 110
One Belt, One Road, 117–119, 124
One Child Policy, 54
Opportunities and threats, 117–127
Organization for Standardization
(ISO), 90, 91
Organizations, 74, 79
Overloaded Chinese truck, 101
Pension system, 60–61
People’s Bank, 120
Performance expectations, 20
PO. See Purchase order (PO)
Port clusters, 115
PPI. See Producer price index (PPI)
PPPs. See Public private partnerships
(PPPs)
PRC Product Liability Law, 93
Processing trade enterprises
(PTEs), 86
Producer price index (PPI), 122
Promissory notes, 62
PTEs. See Processing trade enterprises
(PTEs)
Public private partnerships
(PPPs), 126
Purchase order (PO), 83, 87, 93
Renminbi (RMB), 6
Rented factory space, 84
Representative Office (RO), 12–13
134 INDEX
Request for Quote (RFQs), 87
Research and development (R&D),
27, 28, 122–123
RFQs. See Request for Quote (RFQs)
RMB. See Renminbi (RMB)
RO. See Representative Office (RO)
SAFE. See State Administration of
Foreign Exchange (SAFE)
Self-preservation, 76
SEZ. See Special Economic Zone
(SEZ)
Shanghai Free Trade Zone, 25
Shareholders, 29
Shipping ports, 110, 111
Silicon Valley, 28
Skills translates, 56
SOE. See State Owned Enterprise
(SOE)
Special Economic Zone (SEZ), 24–26
Spring Festival travel congestion,
64–65
State Administration of Foreign
Exchange (SAFE), 29
State Owned Enterprise (SOE), 30,
119, 120, 123
Technology, 14, 15, 124
gap, 123
Toll gate, 98
Traders, 85–86
Trans-Siberian Railway, 108
Trucks parking, 105
Unmanned factory, 127
Urban-based society, 52
Urbanization, 125
U.S.
banking regulations, 83
Chamber of Commerce, 11
container ports, 111
CPSC, 90
engineering graduates, 50
GDP, 1, 5
Health and Safety, 89
highway regulations, 102
highway system, 97
-invested manufacturing plants, 9
jobs, 8
logistics, 95
manufacturing, 3, 5, 6, 9
in manufacturing output, 2
rail, 106
sea trade, 109
taxes, 20, 28
toll gate, 99
trade, 5
workers, 53
Value added tax (VAT), 16, 24, 28
VAT. See Value added tax (VAT)
Village road, 96
Voluntary retirements, 61
Water transport, 111–112
Wholly Owned Foreign Enterprise
(WOFE), 20–21
construction project, 30–31
WOFE. See Wholly Owned Foreign
Enterprise (WOFE)
Work-Related Injury Insurance
Regulations Manual, 66
Worker Injury Insurance Fund, 68
Workers safety bureau (WSB), 34
Working hours, 62
World Trade Organizations
(WTO), 124
WSB. See Workers safety bureau
(WSB)
WTO.See World Trade Organizations
(WTO)
Yangtze River, 71
Economic Belt, 113–114
Zombie firms, 20
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