The business climate for U.S. companies that make molds, dies and other tools has been nothing short of brutal over the last several years. Low-cost mold and tool imports along with relocations of OEMs to low-cost countries have deeply eroded U.S. markets, and the markets that do exist today no longer resemble those of recent decades.
Along the way there’s been considerable media attention devoted to plant closings and layoffs, as there should be, but unfortunately this also has been one-sided based on negative news and has led to a lack of balance of perceptions about the true nature of market changes and the prospects for the future. The media also have many people thinking that China is the cause of all our problems and will put us out of business (they won’t), while in the 1980s it was supposed to be Japan causing all our problems and putting us out of business (they didn’t). So where does one begin to look for assistance in formulating effective competitive strategies for tooling and/or manufacturing companies?
Let’s begin by reviewing some of the global conditions placed in context, particularly China. U.S. manufacturing, contrary to popular belief and frequent media hype, is far from dead. Although manufacturing sector growth is slower than we’d like and declining as a percentage of GDP, and manufacturing employment is declining as a percentage of the workforce (mainly due to productivity, not outsourcing), U.S. manufacturing output in real dollars is at an all-time high.
U.S. GDP in 2003 was US$11T while China’s 2003 GDP was US$1.4T, about one-eighth our size. In 2003 China exported US$403B in manufactured goods, while in the same year the U.S. exported US$713B in manufactured goods. This doesn’t sound like the U.S. that’s not manufacturing anything anymore or the China that you keep hearing about taking over the world? Read on.
In 2004 the U.S. ran a current account deficit (“trade deficit” in most media) of US$653B. This is certainly high and must be corrected over time, but what’s the cause? China? Of that trade imbalance, China was responsible for only 24.8% of the total.
We’re told by some that in 10 years China will overtake the U.S. economy. Will it? Simple math, assuming that China continues to grow at 9% per year and the U.S. continues to grow at 3.5%, results in a 10-year result of China’s GDP still being four times smaller than the U.S. GDP. And with China having so far to catch up to the modern industrial world over the last decade it’s been relatively easy for them to grow very rapidly, but this will slow significantly over the years as resources and capacities saturate and companies worldwide redistribute their country risk—rather than betting everything on China. Both are observable conditions today, both in current events and in reading history, and even the Chinese government projects that their GDP growth rate will slow to 7% or below over the next few years. Meanwhile, the mature U.S. economy moves along at a steady pace with some ups and downs and the occasional recession, and structurally can continue to average a growth rate of 3.5% over the coming years.
Specifically for moldmakers, in the year 2000 Canada accounted for a 9.6% share of the U.S. mold market, the #1 foreign source, followed by Japan (3.5%), Germany (1.0%), Taiwan (0.61%), Portugal (0.58%), France (0.52%), Italy (0.52%), and finally China (0.34%), while 81.3% of the molds were produced in the U.S. And let’s note that Canada—at 18% of all U.S. imports in 2004—is the source of far more total imports into the U.S. than China is at 12% for the same period.
So basically, if China fell off the planet tomorrow it would affect 24.8% of our current account deficit and 0.34% of mold imports. None of that work would come back to the U.S.; instead it would be deflected to other low-cost countries who, like the Chinese, are working to produce their way out of poverty.
If Not China, Then Who?
There’s a major problem here; we have a cultural bias toward finding “a” scapegoat, particularly people who look different and live far away. It used to be Japan, and now it’s China. It’s interesting that media largely ignores Canada considering their lower cost wages, 2004 U.S. current account deficit with them of 10.4% of our total (in third place after second place Japan at 11.5% and in front of fourth place Germany at 7%), very high share of the U.S. mold market compared to the next six sources of imports combined, health insurance paid for by taxes on individuals rather than on businesses as it is in the U.S., and arguably an artificially low currency exchange rate with the U.S. dollar.
In fact, some publications and trade associations treat U.S. and Canadian manufacturers and toolmakers as a single “North American” group, more like neighboring states than countries competing for trade, and certainly not as the international competitors that we really are. This distortion is not a sound basis for U.S. companies to use in evaluating the global competition, since Canada is a very strong and competent global competitor.
Please understand that no bias for or against trade with Canada or China is intended here. These are simply the facts from trade data, and this article is about placing the facts into context for the creation of valid enterprise strategies in the U.S.
The problem for U.S. companies is not about the “who,” it’s actually about a complex matrix of markets and trade relationships that include all of the countries mentioned above plus many others. The list that comprises the trading partners responsible for our total current account deficit contains 15 countries, and all must be considered in context before drawing conclusions about global trade flows, threats and opportunities.
The Four Fundamental Changes
The following four characteristics have been found to be universal among successful companies, and represent some fundamental changes in thinking from the common distorted, popular conceptions about global trade.
The most fundamental element of all successful companies is a clear understanding of the current reality of global conditions such as the data presented above, based on sound research and not the hype, myth, fear, anger and other forms of misinformation that are perceived when only a superficial and often biased review of global conditions (e.g. watching TV news and pundits) is applied to the problem.
No successful company executives are angry about global business. It’s not personal, and all of them recognize that countries such as China are simply exercising their comparative advantage in the same way that we did in the late 1800s and early 1900s when we were the developing industrial economy pulling the manufacturing jobs out of Europe. In the case of global industrialization, one simply needs to read history to see the future—notably that Europe never went out of business as a result of our industrial ascendancy.
Some markets are shifting overseas while other markets are expanding here. Contrary to the widespread myth, there are good and growing domestic and export markets for tools and molds made in the U.S.
U.S. tooling and manufacturing companies have enjoyed a benevolent market anomaly in the form of remarkably stable markets within the U.S. since the end of WWII. What we’re entering now is actually a period of relative normalcy accelerated by the information age, where commerce shifts in shorter time segments according to the development patterns of various countries and where the people of those countries rise out of poverty and become consumers for the rest of the world’s products. We can’t hold them back any more than we would have allowed others to block the rise of our economy (they tried, too), and we need to stop thinking of this as the loss of some entitlement. We’re entitled to compete with our ingenuity, efficiency and adaptability, not by suppressing the progress of others just to freeze our past good fortune in place.
Unfortunately, due to the many years of having their customers clustered around them in a virtually local landscape, many U.S. moldmakers think that the market is gone when in actuality it has morphed into new structures and global rather than domestic distributions. The proximate market clusters of the past have created a condition where many moldmakers and manufacturers have historically had no need for marketing, and so have developed no clear understanding of it since they’ve never had to analyze the issue of shifting markets.
There are many tooling companies that hire or promote tool designers to be “the marketing guy,” then lament over his failure at marketing when he was “one of the best mold designers we’ve ever had.” When asked if they’d hire a career marketing specialist and ask him to design molds, the issue begins to become clear.
By definition, marketing is a business discipline based on research, statistics, specifications, tolerances and other metrics, very much like product, tooling and process engineering in many ways, which provides vital insights into market and competitive structures for the effective strategic guidance of a company. It’s not some guy guessing, as many have claimed, it’s a complex profession and it’s time to incorporate the discipline into all of our U.S. businesses of all sizes. (Refer to the Sales & Marketing Column in each issue of MoldMaking Technology for continuing pointers on this business topic.) For small businesses, marketing collaborations easily resolve the affordability issue.
Once again, a common thread exhibited by successful companies is that they integrate true marketing, the ability to see the who, what and where of global demand and supply chain structures into their businesses. Most of them also share a focus on export markets, where the demand for tooling and products is actually rather strong and insufficiently served except by European and Asian companies. It’s up to us to move outside of our comfort zone and learn to operate in these new markets, and the time is now.
We need to stop trying to reinvent the wheel and learn to collaborate. Americans are notorious for the lone wolf mentality that well served our pioneer ancestors, but it’s a 21st century world now and the efforts of individual companies must be strategically combined if we’re to achieve the best possible results.
The first step in collaborating is to learn from companies that are succeeding and thriving in the same U.S. as the rest of us by reviewing their strategies and tactics before crafting our own. The second step is to create a collaborative matrix specifically designed for each company and make it part of the corporate culture.
When we study European and Asian companies and their performance in global markets, we start to perceive that what many of us think are unfair trade practices are actually the results of advanced collaborative practices.
The days of vertical integration at all costs are also over. The “at all costs” part is the killer, since the primary cost is lost market share and competitiveness due to high capitalization costs, limited flexibility as product demands rapidly and repeatedly shift, and the high costs in operating expenses and time due to protracted learning curves.
This also is where strategic outsourcing comes in. Outsourcing because we no longer make or perform something ourselves, whether it’s an entire tool, components, designs or a business process, and strategic because we select the what and the where (on shore, near shore, offshore, etc.) of our outsourcing to capture the greatest returns under various market conditions.
Companies need to create market, price and cost control power through the combined effects of distributed skills, capital allocations and operating efficiencies, and shed the attitude of secrecy and isolation that’s been ingrained in our culture for decades. I’m not proposing that you should indiscriminately throw your proprietary know-how and trade secrets around. It’s actually much less exotic than that; it’s simply the creation of flexible relationships between complementary companies in the U.S. and abroad, relationships that are themselves dynamic and that shift with market conditions. This provides the sort of agility in the face of market shifts that large, static vertical infrastructure investments cannot compete with.
U.S. companies frequently only participate in the most basic form of collaboration: trade associations. Fortunately, many of these associations are beginning to develop service models that also include training and support in the areas we’re discussing here, and I highly recommend participation in the association programs.
Successful companies open their minds to collaborative structures that allow each of them to amplify their capabilities and profitably capture market share, and then they configure their operating structures to dynamically maintain that alignment with the continuously shifting markets and their various collaborative relationships.
4. Products and Processes
Companies need to shift their offerings in a synchronized fashion with shifts in demand. Some companies no longer make anything that they made 20 years ago, or even 10, but they’re in business, profitable and growing in the new segments that they now serve. This can be as basic as making a different kind of mold, or as complex as integrating or consolidating other functions such as production or product design, and in some cases not making anything that the company was founded to produce. Profitability is captured and sustained by keeping pace with change, not sitting still and lamenting that the markets changed without us.
There are many tactical options which surface once the above changes are made, but the journey must begin from within the company. Fortunately, there also are many good educational and governmental support programs to help businesses along the way. These include the international business programs at many universities and state and community colleges; import and export workshops and global trade seminars produced by associations such as the International Trade Club of Chicago (www.itcc.org); U.S. government sponsored support such as the U.S. Export Assistance Center, SBA and Ex-Im Bank; state, city and county funded programs in metro areas such as the Chicago-Cook Business Center (www.chicago-cook.org); and training and marketing support programs from trade associations such as the Tooling & Manufacturing Association (www.tmanet.com).