April 24, 2003
"Globalization isn't news," said Lawrence J. Kendzior, a partner at Gleeson Sklar Sawyers & Cumpata LLP (GSSC), a privately held accounting firm that focuses on what it calls "middle-market manufacturers." "The news is that it's suddenly impacting companies that have never before been affected."
Soon after that comment, toward the end of a globalization workshop titled China and the Middle Market Manufacturer, organized by GSSC and Harris Bank/Bank of Montreal, one frustrated attendee, likely representing a company that had never before been affected, lamented what many believe is a fundamental transformation of the U.S. manufacturing base. "What I'm hearing," he said, "is that I might as well pack up all my machines and ship them over to China."
China's impact on U.S. manufacturing has taken center stage in recent months, as jobs in the U.S. continue to hemorrhage in spite of steady yet anemic growth in industrial output. The Internet is teeming with accounts of lost business by small manufacturers.
Moldmakers supplying the plastic injection molding market (just one example) fear extinction, as company after company closes its doors following lost business to low-priced Chinese competitors.
China moved from No. 4 to No. 1 in machine tool consumption in 2002, according to the World Machine Tool Output & Consumption Survey, released by Gardner Publications Inc. According to the report, Chinese durable-goods factories acquired $5.7 billion worth of production equipment last year, outinvesting their competitors in Germany, Japan, and the U.S. for the first time. In all, Chinese machine tool consumption spurted 20 percent during a year when most nations reduced their spending.
In February the National Association of Manufacturers' (NAM) Council of Manufacturing Associations put out a call for volunteers to participate in a task force on China. Its charge, according to Stephen Gold, executive director, is to "- explore the challenges facing U.S. manufacturers and develop short-term and long-term goals and strategies, offering guidance - in managing the growing problems that Chinese competition presents."
According to NAM, these problems include China's manipulation of its currency and vast trade surplus; product dumping and a lack of accurate import data; WTO compliance issues, such as intellectual property theft; loss of market share to Chinese companies (and U.S.-based companies operating in China); and the transfer of a growing part of the U.S. industrial network to China.
These are real and urgent issues. Finding solutions to them will help level a playing field that is widely perceived to be unfair.
But solving these issues won't roll back the industrialization that has been under way in China for over a decade. It is now the fourth largest industrial base in the world, behind the U.S., Japan, and Germany. It is creating 18 million largely unskilled, low-wage jobs each year. It's the world's second most popular destination for foreign direct investment (FDI). In 1990 FDI flowing into China was $4 billion. By 2001 it had turned into a flood in excess of $53 billion. Last year capital inflows were up 25 percent over 2001.
"China is on the verge of becoming a manufacturing superpower," said Susan Cheng, senior manager, GSSC. "It is developing into the world's factory for the 21st century."Small manufacturers in the U.S. are confronting changes that could well mean the end of their businesses, depending on the choices they make in the very near future. According to a survey of middle-market manufacturers conducted by GSSC, there are three kinds of middle-market companies tackling the challenges of globalization: Those who look at China as a source of product; those who see China as a market; and those who view China as neither a source nor a market.
That third category breaks into additional types, primarily companies that see China as a threat and those choosing to ignore globalization, or globalphobics, a term first coined in a 1998 article, 'Globalphobia': Confronting Fears About Global Trade, by Gary Burtless, of The Brookings Institute.
Companies that fit a certain profile are at risk of being unable to compete against the forces of globalization. They include firms that are incurring 25 percent or more of their costs in direct labor. Many are competing solely on price. They are making products the quality of which would not change much if their customers sourced them from China. They are making products that can be stockpiled and are easily transported.
If these companies stick with the status quo, they risk losing their markets to globalization. But there are companies in the industries currently being affected that are successfully differentiating and effectively competing. Their answer, in most cases, has been to re-engineer their strategies fundamentally by focusing on the competitive advantages available to U.S. manufacturers.
Least at risk are companies with proprietary products and well-established distribution channels; companies that must maintain close geographic proximity to their customers; manufacturers with direct labor content less than 15 percent of total cost; and companies that deliver a unique service along with a product.
But the single most important insulator from the threat of globalization may well be your own value proposition. If it's not unique, you need a new one. If you're not clearly articulating it in every available communications channel, start now.
The globalization workshop posed questions that many companies need to answer as soon as possible.
Are you building the case that superior knowledge of the customer and his needs makes your company the supplier of choice? Are you leveraging your relationships with your customers?
Are you helping your customer figure the "all-in" cost of his relationship with you? How much are long lead-times from China actually costing your customer? What is the cost risk of low-quality parts working their way into your customer's processes? These factors are quantifiable and can be compelling.
Are you driving your direct labor costs as low as they can go by implementing technology and automation? "Technology is an amplifier," Kendzior points out. "Five widgets per week can easily become 1,500 widgets per week using the same amount of direct labor. Cheap labor is not the issue. The issue is best labor and highest productivity."
Are you exploring acquisitions to acquire more defensible business models? Are you realigning your business with your core competencies? Looking for difficult-to-manufacture products?
In January the Spring Manufacturers Institute (SMI) conducted an informal survey of its members to measure the impact China was having in its industry. A majority of responses indicated lost business, reduced work forces, and delayed capital expenditures tied to Chinese competition.
"I am 95 percent automotive, and every one of my customers is doing something in China," said one member. "We won't know the true impact for several years."
"Approximately 30 percent of our customers are entirely sourcing from China," reported another member. "About 25 percent now get some of their parts there."
But there were a number of exceptions to the rule, companies bucking the trend.
"Labor-intensive jobs will, and maybe even should, find the lowest cost center," said one. "In the U.S., we need to focus on high-tech (automation and lean techniques). Do we really want to be making low-end, throwaway items?"
"About one-third of our total work has been looked at as a 'commodity' in our customer's view," said another. "We have actually lost less than 5 percent, with some jobs returning within three to six months. The current trend ... is a call to lower prices, a threat to move the work offshore, an engineering change, and an apology for the threat. Once the job goes east, the customer's engineering group loses control. America is still the most flexible."
"We have actually increased our work force," added another. "I needed to do two things: innovate faster and get more people in front of customers to ensure that they understand the value-added of my product and are not just looking at pricing."
"Yes, we have delayed an expansion, but primarily due to the influence of many factors, China being among the top three," wrote an SMI member. "We continue to purchase the most capable machinery possible, and stuff it into 30,000 square feet! Last year saw $504,000 in new equipment purchases. This is about $200,000 over what we would like to spend, but there were some great buys."
When I first visited China in the early 1990s, I was overwhelmed by the magnitude of the industrialization that was sweeping through that nation. I traveled the coastal areas and inland regions, following the development of the Chinese appliance industry. I returned a number of times during the decade, each time finding locations previously visited entirely unrecognizable because of the rapidity and scope of development. There is no denying, I reported at the time, China will be an industrial force to be reckoned with. Just a few years later, there is no denying it has become that force.
But there's also no denying that U.S. manufacturers can reckon with it.