Case Studies

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Rationalization and Improvement of Manufacturing Operations for a U.S. MNC with Multiple Subsidiaries in China

Key Takeaways:
U.S. Multinational Company (MNC) successfully rationalized its multiple manufacturing subsidiaries in China, achieving better asset utilization while improving overall performance.

Company operated 2 manufacturing plants (separate legal entities) in China. One was established as a Greenfield operation, with all fundamental operating processes setup according to the U.S. Parent Company’s global standards. The factory operated quite successfully for several years. This operation was focused on final product assembly and test, with a fundamental strategy of utilizing a network of external suppliers for all product components. The factory employed approximately 700 people and its finished products were sold mainly to export markets. Despite its success, a significant portion of the facility remained underutilized. The Company’s other factory was originally a locally owned manufacturing and sales operation, acquired about the same time that its Greenfield operation was established. The factory included extensive mechanical and electrical component manufacturing capabilities in addition to final assembly and test and employed approximately 400 people. Virtually all of its output was sold into the China domestic market. Despite significant efforts to improve the operation, it lagged behind its Greenfield counterpart in essentially all operational aspects and still “looked” much like a small locally owned. Basic product reliability also lagged significantly behind international standards.

Parent Company’s objective was to find the most effective way to improve the overall performance of the acquired subsidiary and its products, and ensure its sustainability given its strategically important focus on the Chinese domestic market. A parallel objective was to rationalize its in-country assets, and more fully utilize the capacity and organizational capabilities of the Greenfield operation. A comprehensive improvement and rationalization plan was developed and implemented to bring the acquired subsidiary’s processes and products up to international standards, and more effectively leverage the company’s in-country assets and capabilities: 
  • A plan was proposed and agreed to by the U.S. Parent Company to physically move the acquired operation and legally merge it with the better-performing Greenfield operation. The management practices, processes and work culture of the better-performing Greenfield subsidiary would be fully applied. This also provided the opportunity to fully rationalize the Company’s manufacturing assets within China.
  • Factory of the previously acquired subsidiary was located in the same city as the Greenfield operation but in a different legal jurisdiction. Maintaining good relations with the local authorities in both jurisdictions was imperative. An additional plan was developed to sell the assets of the component-manufacturing portion of the subsidiary to the local industrial zone development corporation. An ongoing component supply agreement was included as part of that plan. In this way the local authorities were shown due respect and maintained a vested interest in the ongoing success of the final product assembly operation that would be relocated out of their jurisdiction.
  • All necessary steps were taken to enable and implement the merger of both subsidiaries into the legal entity of the Greenfield operation. The business scope of the Greenfield entity was expanded to include manufacture and sale of the products produced by the other subsidiary. In addition, an arrangement was developed and agreed upon with the local tax authorities to allow the newly merged entity to maintain two sets of tax books – allowing for the utilization of prior tax credits such as losses carried forward for both subsidiaries.
  • A comprehensive plan and timeline was developed and implemented to relocate the equipment, process documentation and inventories to the Greenfield site. Information systems were integrated, training was carried out and a restructuring plan was developed and implemented for any employees who elected not to move to the new location.
The project was carried out on schedule and within budget, with no disruption from employees who were disaffected by the plan. Performance across all key metrics improved significantly, including a 10X improvement in product reliability. The combined operation has remained profitable and successful for several years post-rationalization.

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