Why China – cheap capital?

In 2008 Evergreen Solar opened up a solar panel factory in Devens,  Massachusetts, but they just announced that they will layoff their 800 workers and move production to China (NY Times 1/14/11). Why? Well, of course, it is too expensive to manufacturer in the U.S. And low cost production is critical – the price of solar panels has fallen from $3.39 per watt in 2008 to $1.90 per watt now. Evergreen Solar has reduced its cost to $2.00 per watt, but Chinese manufacturers are producing at $1.00 per watt.

But labor is NOT the reason for the high cost of production in the U.S. – labor is a small portion of the cost to make solar panels. Nor does it seem a lack of technical skills. Instead, the issue is the cost of capital – a solar panel plant can cost $400 million and Chinese manufacturers have access to low cost bank loans.

It it is likely that there will be more movement to China for reasons other than the cost of labor.

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WalMart pushing for green

WalMart announced today that they will seek to reduce their greenhouse gas emissions by 20 million metric tons by the end of 2015 (See NY Times, 2/25/2010 or WalMart).  This is equivalent to the carbon emmissions from 3.8 million vehicles (based on assuptions of average mileage driven and emmissions per mile). The plan has three main components:

• Selection – WalMart will focus on product categories that have the highest total “life cycle GHG emissions”. 
• Action – “Walmart must demonstrate it had direct influence on the reduction and show how that reduction would not have occurred without Walmart’s participation.”
• Assessment – Independent verification of claims by ClearCarbon and PricewaterhouseCoopers.

It is important to note that while there is an emphasis placed on the impact this initiative would have on its immediate upstream suppliers, WalMart is taking the complete supply chain perspective – from raw materials to end consumer use.

Why is WalMart taking this initiative? According to Michael Duke, WalMart’s president and chief executive, “We know we need to be ready for a world in which energy will only be more expensive.” Given the possibility of higher energy costs, it is prudent for an organization to better understand how energy costs influence their own costs and demand. For example, through an initiative like this, WalMart can better answer the followiing important question – “If carbon costs increase to $50 per ton, what does that do to my own costs and demand?”.

What is not included in the announcement is a current assessment of WalMart’s carbon footprint. So we don’t know how much of an overall reduction this represents. But it is revealed that this is half of the expected increase in their carbon footprint. Consequently, even if WalMart succeeds in this initiative, its overall carbon footprint is expected to increase. In fairness to them, this may still reduce their carbon footprint per employee, per customer and/or per $ sold because they will also be a larger company by 2015 (at least that is the plan).  

There is no also indication of which types of projects will generate the saving. For example, WalMart continously purchases and replaces trucks in its fleet. To the extent that new vehicles are more efficient, they will earn some reduction in GHG emmissions “automatically”.  And there is no indication of whether WalMart will sacrifice profit to achieve this goal. For example, will they stop selling a popular product that has high emmissions?

Thus, there are many open questions. But it is clear that this initiative, coming from such a high profile retailer, will continue to have impact on supply chain design.

China passes US in auto sales

I remember when Nixon resigned, where I was when I learned of the first Space Shuffle disaster, and my shock and disbelief when I saw the pictures of the Twin Tower burning (I turned on the TV only after the 1st one had already fallen) and now we have China passing the US in auto sales (NY Times 1/08/10).  OK, maybe this is not as important as some other events, but in the operations management world, it is a biggie…. or is it?

China sold 13.5 million vehicles (including 650,000 heavy trucks) whereas the US sold 10.4 million, the lowest level in 27 years. I suspect the US will be able to regain that title in the next year or two as our market rebounds to the old/normal levels, but that will only be a temporary “victory”. However, we probably will “own” the “number of autos per capita” stat for a long time, and I am sure that the total carbon emmission of our 10.4 vehicles swamps the carbon output of China’s 13.5 million. So there is hope for those who need to feel good via stats.

In the end, the most important part of this news item is that if you want to be a world player in the auto industry, then you better be a player in China.

Environmental Kaizen

Kaizen, or “continuous improvement”, means constantly working towards improving processes, no matter how small the improvement.  The idea of kaizen has famously been applied at Toyota to their manufacturing process but the concept has also been applied by GM to make their manufacturing plants more environmentally friendly.

GM’s Lansing Delta assembly plant in the the world’s only to have received Gold Certification from the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) system. They achieved this goal by making many small (and some large) improvements to their processes. For example, they use bright lights were tasks are needed and dim or no lighting where light is not needed (such as where robots are working).  The restrooms use rainwater collected from the roof and the roof is painted white to reduce heat absorption. (Both the light and rainwater examples emphasize that an important resource should be used only where needed.) But more important than any single idea, the implementation of Kaizen changes how employees view their environment and motivates them to generate further ideas.

Automotive News, August 11, 2008 – GM Factory a Model of Sustainable Manufacturing