Labor Keeps Getting More Expensive. How Does a Small Manufacturer Survive? | Maybe Europe Has an Answer, Part 3

How do you save money? How do you innovate? Why do small companies stand a better chance of surviving than big ones? The story of one stroller maker may hold the answers.

Maastricht, a two-and-a-half-hour drive from Amsterdam, is one of the oldest cities in the Netherlands. In 1991 the Maastricht Treaty was signed in this southernmost Dutch city, marking the founding of the European Union. A new era for Europe had begun.

Much as the EU asks its member states for stability rather than headlong growth, this old city is not a place where startups cluster. A few local ones — the recruitment platform Shift-it, the file-sharing marketplace Knoowy — have made their home here, but even inside the Netherlands they are barely known.

Greentom may be the best known of them. In March this year the eco-friendly stroller brand won the Best of the Best award for product design at the 2016 Red Dot Awards. Drive twenty minutes from Maastricht's central station, through the suburban housing estates and past the ring road, and you reach a small industrial park. This is the place.

The brand is not yet three years old, and it already faces a new problem. Its founder, Bart Bolt, spent more than two decades designing and making strollers for brands such as Inglesina, Silver Cross and Mutsy, flying from the Netherlands to China almost every month. All of those brands had rushed to put their factories there.

Now things stand as Dale Weathington of the stroller maker Kolcraft told The Economist: "Labor is not as cheap as it used to be." Production costs in China have risen 20% over the past four years. In a recent survey of member companies by the American Chamber of Commerce in Shanghai, 91% put "rising costs" at the top of their list of challenges. Labor costs for blue-collar workers in Guangdong are climbing 12% a year, and more and more workers who go home for Spring Festival never come back to the factory.

The change has travelled to the other side of the world: small manufacturers in Europe have to find new ways to cut costs.

Europe's Manufacturing Is in Trouble

"Twenty-five years ago, fifteen years ago, even ten years ago, European companies all went to China to find workers, and good ones were easy to find." Bolt has watched the same shift. "Whether you make strollers or anything else, you can no longer find workers who will do that kind of work for that kind of pay," he said.

China, and Southeast Asia with it, has served as the world's factory for decades, and rising labor costs there have hit the whole industry directly. That has made Europe's manufacturing recovery harder still. Things have picked up a little in the past two years, but EU figures show that manufacturing's contribution to European economic growth, measured in value added, has fallen from 18.5% in 2000 to 15.1% today. Of Europe's 230,000 manufacturing companies, the great majority are small and mid-sized firms like Greentom.

On labor costs, Greentom's problem is both specific and typical. It used to have long, stable relationships with factories in China. Now Bolt finds that workers no longer want the simple, repetitive, labor-intensive assembly jobs. They want better work, better prospects, jobs that ask more of their skills; they want a better life instead of working from morning to late at night, seven days a week, in a factory — and even a skilled worker could finish only one stroller a day on average.

In a 50-to-60-square-meter assembly shop on the edge of Maastricht, you see something entirely different: two local Dutch workers can put together 50 to 100 strollers a day.

Looked at this way, the problem was probably there all along; it took a weak economy to make Bolt treat it seriously and go looking for a fix. He laid out the arithmetic: "In the factories in China, a line used to take two or three workers and turn out four or five units a day. Now each of our workers takes five minutes on average, so at 50 units a day the labor cost is one-fiftieth of what it was."

A New Kind of Manufacturer

Before he founded Greentom in 2013, Bolt was a stroller designer. He left design school in 1991 and designed the first stroller of his career. "That product was a success," so he set up his own design firm. "After that I just kept designing for different brands. I never designed anything else again." His team had 20 people, and he went to China almost every month — all the contract factories were there.

2008 and 2009 were the hardest stretch for the firm. "The financial crisis came, the world started to change, and a lot of the big global brands we worked with told us straight out: you're an outside design firm, we don't have the budget — and so for a year you have no work at all." Looking back, Bolt calls it an opening: big companies turned cautious, and the small ones that lived off big clients had to rethink how to survive for the long run. "I had to make my own choices, because my income had shrunk."

On top of that, "Europe isn't in the best shape." Bolt put it mildly. "The market isn't stable, there are refugees, and what I see is the whole world adjusting — China is adjusting in a good direction. The whole world moves faster than Europe, but a lot of people haven't noticed yet."

He believes he noticed early. He and his team decided to build a brand and sell it inside and outside Europe, so they would not have to care so much about the local economy slowing down. Alongside the products he developed for clients, the stroller designer set himself what he calls a crazy development goal.

In Bolt's experience, the finer and more expensive a stroller was, the more raw material it used and the more complicated its parts — two or three hundred of them. This time, "I wanted a completely different product: the assembly time as short as possible, the material as little as possible, and all of it recyclable." Compress the assembly of one product from four or five hours to five minutes, and the savings are remarkable.

The largest thing in Bolt's office is an enormous wooden desk he built by hand twenty years ago. After he started his own brand, he hauled it out of storage at home. "It's old, but it fits the company's green idea — and of course it also saves a bit of money," he said.

Saving money, and finding more inventive ways to save it, became a priority for this designer of more than twenty years. "After all those years of development and testing, we succeeded. If you only look at the product you'll say, fine, it's a stroller — but I know we hit the target." In the end Bolt cut the parts count from three or four hundred to about 30. "Assembling 400 parts is obviously a lot of work. But what if there are only 30? That's the biggest difference."

Is Local Manufacturing Uneconomical?

Greentom's Maastricht plant is about 2,000 square meters.

It is not really a factory in the full sense; most of the space holds offices for the design and operations teams. In an assembly shop and warehouse of roughly 100 square meters, two workers, both from Maastricht, put together the goods sold in Europe. Bolt intends to try local manufacturing, which for more than twenty years has been widely considered uneconomical. Greentoms sold in Asia are still assembled in factories in China, but the company plans to enter the United States in two months, and for that it will need a local American factory. "Then Brazil, India — the markets we want to enter. We'll invest in a factory for each," Bolt said.

The small number of parts he developed is what gives this seemingly dumb approach its logic.

"Workers here earn a high hourly wage, 15 to 20 euros an hour," Bolt explained, "but if you can make one in five minutes, that works out to about 1.5 euros of labor per stroller. In China the hourly wage is lower, but the labor cost of a five-minute assembly — in the Netherlands, in China, in the United States, in India, anywhere in the world — barely moves the total cost." At their fastest, the thirty-odd parts snap together in under three minutes.

The other benefits of making things locally, long overshadowed by the larger matter of cost control, are showing up too. In Bolt's experience, a traditional manufacturer needed two months from placing the order to shipping the finished goods by sea to the market where they sell. All that shipping time, and the sizeable losses in transit, can now be saved.

The outdoor brand LOWA also keeps a factory at its headquarters in Munich, where each year's new prototypes are made. After the spring/summer 2017 order fair, regional distributors all tried to get through to the regional manager and to the CEO himself, asking to be first in line for a batch of new samples. Even the distributors with enough clout to win a promise of priority faced a wait of at least three months. Founded in 1923, the company insists that every product be made in a European factory, which keeps its prices high and holds its output within a fixed range.

Local production also gives customers a sense of trust in the product, which counts for a lot in mature markets. Bolt knows this well: among goods sold in Europe and North America, those that advertise themselves as European-made have fetched higher prices for years. Sticking to European production limits LOWA's competitiveness on volume and price, yet the company has no plans to move its factories to Asia. Costs still matter, so LOWA puts most of its production in its cheaper Slovakian plant, while its most expensive plant, in Italy, makes only a few lines.

The same applies in the United States. "In America I can tell customers this was made in America, and they'll like that," Bolt said. "If you're a mother, you don't actually care how long a worker spent making the thing. You care whether it's safe, whether it looks good, whether it goes into the trunk easily. But if I tell you that you ordered a special color yesterday and I shipped it today, that will make you happy too."

In 2014 Greentom sold 2,000 strollers in Europe. The next year, sales outside Europe accounted for 30% of a total of 10,000 units. This year Bolt's target is to get the share outside Europe to 40%.

If things go as smoothly as he expects, Bolt seems entirely unworried about whether so small a company can keep up with the volume. Again he credits the simpler parts list: "If an old stroller company that makes 10,000 units a year suddenly has to make 500,000, its supply chain and its production process are too complicated. It can't do it." Having compressed both the process and the supply chain, Bolt thinks a tenfold jump in annual orders would not be hard.

Money, though, is always a problem for a startup. Over the past two months Bolt has begun meeting investors formally to discuss a new round. Before that he raised his angel money from friends and former partners.

"Why Startups Get Their Chance"

On a street well away from Maastricht's center is the shop of the bag brand ellen:truijen, which doubles as the designer's own studio and opens only on Thursdays and Fridays. Beyond that, ellen:truijen has a single sales counter, in a boutique in Utrecht. The brand has just finished rebuilding its website, upgrading it from the designer's personal blog into a shop you can actually buy from.

ellen:truijen makes only 200 bags a quarter, but on selling, the designer Ellen Truijen thinks much as Bolt does: neither of them relies any longer on a customer walking into a physical store.

Small manufacturers all over Europe have absorbed this lesson, and nearly all of them have easy-to-use websites. From the start Bolt never intended to sell his products in shops the way his old clients did. Greentom's sales and marketing team is now picking a site for a store in Berlin, Amsterdam or Rotterdam, but those stores will mostly serve as showrooms. In China the company has found distributors and sells through Tmall and other e-commerce platforms. Those customers are also asked to register on the official site, which gets them a "green number," something like a membership number.

The way people at these small companies work together is more flexible than you might imagine. Maastricht is far from the capital, but Bolt is not worried that this will make it hard to hire the right people, especially for web development and online retail. Greentom's marketing director, Floor, drives from Amsterdam to Maastricht and back once a week; another sales and marketing staffer lives in Brussels; and the social media specialist also works remotely with head office.

"A lot of traditional companies pay too much attention to old ways of working and old ways of managing. That's why startups like us get our chance." This three-year-old company only reached 10,000 units in annual sales last year, yet Bolt still declares: "The companies that can adapt quickly to a changing market will succeed." He plainly counts Greentom among them.

It sounds a little early to say. Still, adapting quickly has genuinely made a few small manufacturers stand out these past few years.

Alongside its work on audio, the Swedish headphone brand Urbanears releases new colors twice a year in step with fashion trends, which made it the third-best-selling headphone brand in Europe in short order. The Danish furniture brand HAY launched Mini Market a few years ago, selling stationery and small home accessories; rivals are now racing to copy it, on the view that it helped a young brand attract repeat customers quickly and manage its cash flow. Another case is a natural soda company called Zevia. Small food companies used to have to pay for shelf space; part of Zevia's revenue now comes through Amazon, no longer tied to physical stores. And when it comes to promotion on social networks, small companies' websites are often better designed than big companies'.

Deloitte's 2016 Global Manufacturing Competitiveness Index predicts that as manufacturing keeps taking up more advanced and more refined products, processes and materials, the traditional manufacturing powers of the 20th century — the United States, Germany, Japan and the United Kingdom — will return in 2016 to the ranks of the most competitive countries.

Greentom, Urbanears and Zevia may not be the most advanced face of European manufacturing, but the competitiveness of these small companies should not be underestimated. They are growing fast, in flat contradiction of Europe's overall condition. "Every year we grow at least two or three times over, and I can see us holding that rate for at least the next five years," Bolt said.

Cover and in-article photography by Tang Yunlu

Cover image source: YouTube