Panasonic Looks to China for Lithium-Ion Battery Manufacturing

Several years ago I was in Japan meeting with various Japanese auto makers and some of their suppliers. In the years prior to that trip the Japanese auto makers where very loyal to their supply chain. They would provide funds or training or whatever their vendors needed to thrive and constantly improve. But during the time of my trip there was a new message coming from the Japanese auto makers that they were going to drift away from this policy and start ordering more parts from Chinese vendors. The Japanese component manufacturers were pretty much in a state of shock about this and didn't really know what to do about it. They couldn't really meet the Chinese prices without help from the auto makers because most of these Japanese vendors were really family run small businesses who had never been given enough profit from the automakers to automate anything that the automakers didn't fund them to do.

And, of course, this whole situation reminded me of a similiar process that had already begun in the US at that point where so many US "manufacturers" were going abroad to get low labor rates.

The reason that companies go to the low labor rate countries is, of course, to get a better price and stay competitive with other companies worldwide who have made that same move. But in most cases I think there is a choice. Companies faced with competitors who have falling production costs can either go to a low rate country or they can invest in automation at home.

I think the reason why most companies choose the low rate country option is because it is just a lot easier of a choice to make in the short run. It is pretty expensive and takes a lot of effort to automate a home based factory. So you typically chose a vendor in such a country and they worry about the manufacturing details. They often worry about getting material, designing and building tooling, sourcing equipment, the whole bit. You just sit back and wait for your product to arrive at the docks. A lot fewer things to worry about and less cash flow tied up. Pretty soon your vendor gets better at engineering and you can hand off more and more of the product design to them. Because sooner or later the people building the product know more about it then the people ordering it. More and more technical advancements start coming from over there as well. Your own staff pretty much just worries about cosmetics and features driven by marketing studies.

Naturally there is a very bad side effect in this popular strategy in that jobs disappear from the home country and money and economic activity leaves the home country, leading to suppressed future sales demand (among other things). People talk about this more and more now, which is good. We need to decide what, if anything, we want to do about this as a country. Every country does.

But there is something else that happens in this scenerio that I don't think companies consider enough. If you have to cut costs through either further automation or outsourcing in order to compete, automating still retains the jobs that do exist moving forward within the company's control. The corporate memory actually knows everything about its product and so is in the position to come up with the new advancements and stay ahead. The company continues to have something unique to offer and thus can stay in the game. If a company outsources everything it is only a matter of time until the manufacturers in the low labor rate countries get their own distribution chain and market consultants and the former leader in a certain area becomes itself a reduntant middle man, obselete.