China, China, China...and the Economy Too
In manufacturing today, you do not have to talk to a business owner very long before the subject of China comes up. It has not replaced the US economy or health insurance as the number one and two seemingly uncontrollable business concern…but it is close!
Decades ago, US companies started importing raw materials from China as a way to reduce total manufactured product costs. Now part or all of the manufacturing for some products has moved to China (or a similar non-domestic location). The position that most manufacturers now find is that they can still compete in selected market segments, but they keep asking…What is next? Will they lose the remaining markets they now rely solely upon
One thing for sure…the Chinese competitors will not stop. They will continue to climb up from raw materials to finished goods to…related design and development services requiring technical expertise. The Chinese economy has been growing almost 10% a year. The growth has slowed ...but with a rebound,it will eventually again produce demand for raw materials beyond anything we have seen before for both internal consumption and renewed exports. This incredible demand will create new shortages and price jumps that will make it even more difficult for US suppliers to cope with the changes. (Don't get fooled by today's headlines!)
Chinese manufacturers have a number of advantages. The Chinese can pay high and higher prices for raw materials since they can off-set the increase with dramatically low labor and overhead costs. They are now closer to certain customers who now manufacture in China and distribute goods here. They are producing engineers at an incredible rate compared to the US…and these newly minted engineers will work for low wages compared to US compensation.
Chinese manufacturers are producing increasingly sophisticated products. They are not shy about “reverse engineering” a product! Even though they do not yet have the equivalent of US level quality systems, management systems, and innovation ability…they are improving all the time. The simple knowledge of these facts…scares the average US manufacturing business owner…and it should! But, a renewed "buy American" trend may provide a boost in the short term and a new foundation in the longer term.
What is a business owner to do?
There is no easy answer or set of answers. There is a clear answer to…What not to do! Whining and doing nothing is clearly NOT the answer. Every situation is a little different, but there are some steps that every business owner can take to protect and increase their wealth through the power of their business.
First, do not underestimate your own strengths. Use them to buy time to reposition your company if that is what is dictated. Don't fall into the mindset that says: Their wages are to low for us to compete. Their government is subsidizing operations and capital purchases. They have no environmental regulations to contend with. They do not honor our patents. All of these thoughts are part of the pattern that leads to inaction. Honestly assess how your quality, reliability, technical support, and other company attributes compare to the Chinese competitors.
As the great Steelers' football coach Chuck Noll once said:
“When things are bad…they are not as bad as you think they are!
When things are good…they are not as good as you think they are!”
When things were very good…it was hard for the average business owner to see these problems coming. With domestic economic outlooks varying and issue with growth in different sectors, it hard to see a path for future success…but to get there may not take as much effort or change as might be imagined.
Second, step back and think like your customers. Competitive pricing is only one of the benefits you provide them when you deliver them your products. The overall value still counts. Low costs are only a part of the value equation in any situation. If and when a market segment places too much emphasis on the price element, it is time to move on. But, today…a large part of the customer base still values Functional designs; design support; quick, consistent delivery cycles; consistent quality and high-level reporting; supplier reliability; and technical support. Somewhere in this list are your current competitive advantages…find the things that the overseas supplier cannot easily replicate and use them to your advantage today.
Third, recognize that whatever gap you find today, it will shrink over time! But by moving ahead now and working consciously at keeping a technical and management advantage you will secure the required time and amass the required capital to make critical changes ahead of the curve. To adapt to the new market realities, investment in automation or new technology may be required.
This step will necessitate some risk-taking…
but it is clearly better than doing nothing…
which is the greatest risk of all.
Mexico and others may surprise you. They will back and are great markets. China is still here today and will get better. India and other Asian customers will get stronger. As they develop, they will open new markets for all competitors. Hard as it may seem today, the new entrants into “your market place” will broaden the market for manufactured goods. If you have or can create a competitive technical or other advantages for your customers, you can compete today and position your business to more easily make whatever future transition that will be required.
You cannot "brake" the importation of manufactured products
into the United States,
but you can push the change and the "improvement accelerator"
in your own business,
to maintain a competitive gap in your key markets.