The PRL Goes to China

“Mattel Recalls 19 Million Toys Sent From China”, “Chinese Tires Are Ordered Recalled”, “China Moves to Refurbish a Damaged Global Image”…

It’s difficult to pick up the New York Times without noticing that Chinese manufacturing is in the limelight. From fatal pet food and toothpaste to defective children’s toys and faulty tires, Chinese manufacturing products of every kind are being flagged for their inadequate safety standards. As discontent leads to action and countries begin placing bans on Chinese imports, many are questioning the future of Chinese manufacturing. Though it is touted as the world’s most promising young manufacturing giant, China is beginning to feel growing pains.

What better time to go to China and check it out for ourselves? After two years of planning and several hiccups along the way, the PRL is finally in China.

The team consists of Professor Dave Beach, recent PhD graduate Lawrence Neeley, and undergraduate Andi Kleissner.

We arrived in Hong Kong on the evening of August 22nd and were soon joined by Bob Margevicius, the vice president of Specialized bikes and our key insight into the world of bike manufacturing in China for the next four days.

From the Hong Kong airport, we took a van with Bob and his colleague Bill Huang. Driving a mere thirty minutes brought us to the border, where we stepped out of the car, walked through customs, only to jump back in the car and head into mainland China. Our destination was the Dragon Spring Hotel in Shenzhen, a manufacturing town that sits just inside the border of the PRC.

The van ride was full of juicy stories. Ironically, our digital sound recorders and video equipment were buried deep inside our luggage as Bob poured out endless tales about Specialized. His story began back in the eighties when the cheapest aluminum frame in China was $150 (as compared to today’s price of $17 and the US-manufactured price of $70). With prices so low in China today, many see Chinese manufacturing as a panacea and forget to consider China’s complex regulatory environment. Specialized must deal both with a local government that increases the value added tax without warning, and with importer countries that can be equally unforgiving. The European Union’s anti-dumping laws strictly regulate Chinese manufacturing plants to prevent “dumping” of cheap Chinese goods in Europe. To ensure good relations with the EU, Specialized only deals with Taiwanese-owned ventures, though Chinese companies are often more cost-effective.

Before long, Bob’s story had reached the year 2000, when Cannondale went bankrupt and Specialized was able to jump into the niche of innovative bike design. It was around this time that Specialized began using experiential design and, much like The North Face, began using story boards and boundless creativity to build not just a product, but a particular experience, whether it be a sprint through the Alps or a weekend workout on your mountain bike.

We arrived at the Dragon Spring Hotel with enough stories to fill a short novel and realized that a) Bob Margevicius is a story-teller, b) never turn off the audio recorder, and c) we might just learn more outside of the manufacturing plants than inside.

* * * * * *

Our trip can be partitioned into two halves and two mentors. The first three quarters was guided by Bob Margevicius, and focused on bike manufacturing. We saw everything from fiber glass and prepreg manufacturing to hydro-forming and saddle manufacturing. The last quarter was led by Scott Bowie, Stanford Mechanical Engineering graduate and president of Zao Technology, Inc. We met Scott in Zhuhai and visited Greenwood Metal Stamping, where we stayed for two days. Our goal was to capture metal stamping, tool-making, and anodizing, but we also witnessed laser grounding, nanoforming, and sand blasting.

* * * * *

23.August.2007

Specialized Sales Channels

As Palo Alto residents, when we think Specialized bikes, we think Mike’s Bikes or Bike Connection, maybe even REI, but usually not Costco or Target. Why not? Specialized isn’t opposed to selling through the mass market. Rather, it’s the task of juggling all three sales channels—mass merchants, mid-merchants, and retailers—that has proven difficult.

Traditionally, Specialized does well at the retail level because it can make deals with the retailer: you cut down on other brands and we will supply you with free window advertisements, sales stands, and merchandise. At the mid-merchant level—mostly sporting goods outlets—Specialized fits right in by selling the explorer experience.

What happened when Specialized stepped into Costco? Local Specialized retailers revolted. Within days after Specialized started selling Full Force bikes at Costco, Bicycle Retailer magazine published an inflamed response: all retailers should stop selling Specialized bikes! In their view, Specialized was trying to do the impossible—how could Specialized expect to sell high-end racing bikes and simultaneously sell dirt cheap bikes to Jane Doe? The main problem was that Costco was only selling the bike at eight percent markup—how could the retailers compete?

Bob Margevicius immediately went back to Costco and wanted to know why it was selling the Full Force bikes so cheaply. With 35 million members, raking in $40 per member means that they only need to mark products up just enough to cover their overhead. Costco’s CEO told Bob:

We’re a merchant. A merchants obligation is, prior to sale, before it comes into this door, you own it. It comes into this door and we just display it nicely. And then someone takes it and puts it in the shopping cart and once they get to the register and they pay for it, as a brand, you own the customer. So you own any of the problems that go on.

As soon as 60,000 Full Force bikes landed in Costco, they put up a huge Specialized sign with Full Force in small letters below. Costco’s role as a merchant is the value proposition they bring to the customer, which in this case was worth eight percent. Needless to say, it was Specialized’s last merchant deal and Bob informed Costco’s CEO that this would be the last shipment of Full Force bicycles to Costco’s warehouse.


Martec Visit

Martec has been in the bike industry for the past ten years. They were first introduced to carbon composite technology in 1981 when they worked with Addidas France. In the early days, Martec produced carbon tennis rackets and they purchased their carbon from Japanese suppliers. But with the introduction of bike manufacturing in 1997 and the resulting increased use of prepreg, they decided to start producing their own hot melt prepreg in 1998. Since prepreg can only be kept in refrigerated conditions and is only good for one week, manufacturing their own prepreg ensures that Martec always has a stable supply of carbon without putting any to waste. Today, they produce an average of 200,000 m^2 of prepreg per month which they use to manufacture front forks, seat posts, and monocot frames.

During our visit to Martec, our two guides were Ivy and Mr. Lynn. Though she grew up in China, Ivy went to high school and college in Canada, where she studied Commerce and MIS. She has been back in China for five years now helping her father, Mr. Lynn, with the Martec business.

When you are in the carbon industry, there are three important concepts to understand: a) carbon is very labor intensive, requiring hours of lay-up and part alignment, b) tooling costs are exorbitant (one tool can only produce x number of items per day and you may end up needing ten tools for one size not to mention six different frame sizes for one model), c) economies of scale are essential to running a profitable enterprise. In many ways carbon is still a black magic and sits somewhere in the realm between art and science. Indeed, Ivy was the first to admit that “for carbon composite, it’s more of a trial and error with the lay-ups, and there’s not a formula like a chemistry formula that we can just get and apply, so it’s very important to have the experience.”

Martec has four cnc machines and five nc machines for in-house tool-making. Between this and their independent prepreg manufacturing, Martec is an unusual gem among Chinese manufacturers. They are always looking for ways to expedite the development process. This comes in handy when Bob visits and gives Ivy and Mr. Lynn ten new ideas, pushing their manufacturing capacity to the limit. Martec’s in-house tooling allows for fifty percent faster development time for Specialized.

Even with forty-two hours of sanding and ten to thirteen days of painting per frame, Martec churns out an impressive three hundred bike frames per month.


Long Hua Visit

On our way to Long Hua, we got lost in the maze of half-finished freeways and gridlocked roads, finally emerging at Long Hua after two hours on the road. Luckily, Bob’s charisma turned our late arrival into a fashionably late arrival.

And after Martec’s video and camera phobia, we were very excited to hear that Long Hua would give us free visual recording reign. However, our excitement died a bit as the tour progressed at lightning speed past steel forging, drawing, punching, and unfulfilled mentions of a chance to see cold forging. After our whirlwind tour, we came back to the conference room, where we looked at catalogs full of every imaginable suspension fork—downhill, mtb, street, city trekking, and comfort suspension forks in every color of the rainbow. The day was quickly coming to an end and we still had one more engagement to catch, so we watched only a small segment of Long Hua’s promotional video before bidding them adieu.


AFT (Advanced Forming Technology) Visit

It was dark outside as we drove through the guarded gates of another Shenzhen industrial park. Factory workers were enjoying dinner at small restaurants that lay wedged between factories. The buildings were all buzzing, and if it weren’t already dark, I would have guessed it were midday, peak production. (the glory of having two twelve-hour shifts)

We pulled up in front of AFT and met Mr. Sigh, a bright young man on AFT’s marketing team. Foregoing a conference-room chat, we went straight to the factory. Though the factory floor itself was quite large, it was home to only two machines—a hydroforming machine and a super plastic forming machine. Both machines insert fluid into a metal shaft and pressurize the cavity to press the metal out against the mold walls. Super plastic forming uses air, while hydroforming uses liquid as the pressurizing agent. As Mr. Sigh soon explained, super plastic forming is better at creating intricate parts because air is a compressible fluid (unlike liquids which are incompressible) and slowly applies pressure to the walls of the cavity. By using 6061 aluminum, AFT is able to achieve more than twelve percent expansion, which certainly inspires one to think of interesting new products.

More exciting than the processes themselves was the ensuing conversation. Back in the conference room, Mr. Sigh had laid a nice piece of bait on the table…a hydroformed metal bike fork lay on the table. It had been welded and then hydroformed. Almost immediately, whiteboard pens were flying and hands were waving passionately through the air. How could we make the fork without welding? Thoughts of triple extrusion followed by strategic cutting gave way to talk of 3D forging.

It was a very animated conversation and the kind of ideation that would make any graduate of ME219 smile.


Deja vous
Bob was first introduced to the world of Taiwanese manufacturing management through AIT (the American Institute of Taiwan). After submitting a list of baseline criteria (such as, “must be English-speaking” or “must be capable of producing x number of products”), Bob received a list of thirty Taiwanese manufacturers that AIT believed would make a good match.

Bob narrowed the list down to eight manufacturers and went to Taiwan for two days, planning to visit four one day and four the next. On four visits out of eight, Bob found himself standing in front of the same exact manufacturing plant (called KHS). Each time, there was a new welcoming sign and a new welcoming committee. But by the third time through the manufacturing floor, Bob had to say he’d already seen it all.

Not only was the trip an introduction to Taiwanese manufacturing, it was a nice introduction to trading companies. A trading company has the contacts, English skills, and knowledge of the products to be able to act as a liaison between manufacturers and western design firms. They also have the guts to cover the manufacturer’s sign and welcome spiel and replace it with their own.

Key lesson: When taking a site visit in China, make sure you’re visiting who you think you’re visiting!