Her parents made China the factory of the world. Can the kids save the family business?

By David Kirton

RUICHANG, China (Reuters) – When Steven Du took over his parents' temperature control systems factory in Shanghai, one of his first changes was to turn on the factory's heating in winter – something his frugal ancestors were reluctant to do.

“If you don't improve their environment, workers aren't as happy and it becomes harder for them to do their best work,” said the 29-year-old. “The change is worth the extra cost.”

You, like tens of thousands of other young Chinese factory bosses, are inheriting a low-level manufacturing operation that can no longer rely on the labor-intensive model that has made China the world's largest exporter of goods.

A shrinking and aging workforce and competition from Southeast Asia, India and elsewhere are making at least a third of China's industrial base — the low-cost manufacturers — obsolete, say Chinese scientists.

This life-threatening mission of technological upgrades and practical changes falls largely to a group of people in their 20s and 30s known as “Changer Dai,” or “second generation factory,” a pejorative term for “spoiled,” rich kids, ” fu er dai”.

“When I change the tag, I'm trying to save my family business from bankruptcy,” said Zhang Zhipeng, a research associate at the Shenzhen Research Institute of High-Quality Development and New Structure, who estimates about 45,000 to 100,000 of those that this cohort is located in various stages of acquisition of up to one-third of China's private manufacturing companies.

The large-scale generational handover, coming at a time when China's growth prospects are deteriorating, is the first in the country's private sector since the Chang Er Dai's parents emerged as industrialists in the decades after Mao Zedong's death in 1976.

For this report, Reuters interviewed eight rotating daily newspapers, who described their attempts to bring family businesses into the modern age with efficiency gains while confronting challenges such as labor costs, labor shortages and, in some cases, disagreements with relatives about the best way forward.

Du spoke on condition that his company not be named, to protect the privacy of his semi-retired parents, who he said are in their 50s and would leave most of the factory running to him.

Like his peers, Du grew up with a level of comfort and opportunity his parents never dreamed of.

He attended high school and university in New Zealand, majoring in electrical engineering. He moved to the United States and worked at Apple's Foxconn plants in Wisconsin. He studied Taiwanese and Japanese production methods, focusing on reducing inefficiencies.

Those skills would come in handy at a factory the Chinese state established in 1951 and privatized in 2002.

His father's business acumen and his mother's hard work helped turn the factory into a supplier for major Chinese home appliance companies. It also sells components for temperature control systems for shopping malls, computer rooms, battery cooling and medical equipment.

But production processes remained largely unchanged until Du's takeover in 2019. He introduced specialized industry software that includes accounting, orders, procurement, deliveries and other processes previously handled by humans, Du said.

He redesigned the factory floor so that forklifts could zip around easily, and regrouped storage and production units to minimize the physical demands of a workforce whose average age is around 50 years old. To complete the more complex tasks, a worker now has to travel 300 meters instead of one kilometer, and it takes less than a third of the time.

While his mother spent many hours managing small-scale production, Du finishes most days around 4pm at a gym he has set up at the factory and lets workers use before heading home.

“Young people like to be more lazy, but laziness is actually a sign of progress,” he said.

Du has increased wages by 10-20% over the past three years to keep staff turnover below 5%, but says his factory is 50% more efficient.

“Factories need to upgrade to higher-level manufacturing or they are doomed to fail because their costs go up,” said Zhang, the researcher.

THE SON OF A “MOTHER”

Zhang Zeqing estimates that he has achieved a similar boost in efficiency by digitalizing processes since running the egg products factory in Ruichang, a city in the southeast, with his parents.

At Yixiang Agricultural Products in Ruichang City, workers in green uniforms place duck eggs in cups attached to a conveyor that feeds a vacuum packaging machine. A new screen above the machine shows the speed at which the eggs are being sealed and estimates the average output per worker and the time and labor required to pack 10,000 eggs.

Barcodes track all products from farm to factory to store, allowing supervisors to monitor orders, production and delivery on their phones and make decisions based on real-time data.

“We used to record everything by hand on paper,” says the 30-year-old. “All internal data was messed up. This led to great waste.”

Like five of the other Change-Er-Dai who spoke to Reuters, Zhang never intended to take over the factory. He wanted to study landscape design in France.

But he felt he had to step in, at least for a few years, and convince his now 55-year-old parents that investing in tech upgrades and the creation of new sales channels on e-commerce platforms was worthwhile.

Something needs to be done, he said, as “frontline workers are getting older and young people are less willing to work on the frontline”. China has record numbers of unemployed youth, but many of them have university degrees and prefer not to work in factories, even if they take a job below their educational level.

Zhang's parents initially resisted, as they were unwilling to spend money on a business they thought was doing well. But they finally gave in.

Sales have increased 35% annually since he came on board.

“I sometimes wonder why our e-commerce has been successful while others have failed. A company manager told me that because you are your mother's son, you will support you endlessly, that is, even if you fail,” Zhang said.

“Too demanding”

Certainly, China as a whole is modernizing its industrial complex in more significant ways than the changes made by young factory managers like Du and Zhang.

Some segments, such as the highly robotized electric vehicle industry, are disrupting global markets thanks to government subsidies and foreign capital and know-how.

Chang er dai is helping to lift the bottom, however, which is also important for maintaining China's share of global manufacturing, two industry experts told Reuters.

Some of the technology introduced by Zhang came from Black Lake Technologies, a company founded by Zhou Yuxiang, which counts more than 1,000 Chang er Dai among its customers.

“The model of many Chinese factories over the past few decades has been based on sales growth, so very few have paid attention to production efficiency or digitization,” said the 34-year-old, who also sees himself as Change er Dai. He doesn't run his parents' business.

“They usually manage their operations through stacks of paper. More advanced factories may use Excel, but that's all.”

Tian Weihua, an academic specializing in manufacturing upgrades at the Science and Technology Innovation Research Institute, a government think tank, says Chang Er Dai's technical knowledge and overseas experience give them a better chance than their parents, companies too to remain competitive in the future environment of higher costs, weaker external demand and emerging production centers in cheaper, less developed countries.

But “technological upgrading does not cure all diseases,” Tian said, adding that more steps are needed, including in product innovation.

Not all changers will get there.

After studying textile design at the University of Arts in London, Zhang Ying, 29, took over her family's garment factory in the eastern city of Ningbo in 2017.

But the business had problems. Wages had more than doubled in a decade, to over 7,000 yuan a month. Labor, mostly migrants from the interior provinces, was in short supply. She wouldn't dare fire them.

Last year she took time off to have a child, leaving the responsibilities to other managers. She has no intention of returning.

“It was too challenging: the pressure was too sudden and too great. I got a rash from the stress and had to take medication for a year, so I quit,” she said.

(Reporting by David Kirton; Editing by Marius Zaharia and David Crawshaw)

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