Global Manufacturing: Myth, Reality and Strategic Options

Since I last wrote for this publication in April 2005, the world has kept turning and the trends in manufacturing evolving. And the global strategies of successful companies con-tinue to lead the way to future success for the manufacturing sector in the U.S.

 

“We Can’t Compete From the U.S.”

We’ve all heard this before and unfortunately many people still believe it. We’re being told this repeatedly by politicians, pundits and media, and have been told this for many years now. But let’s consider a very important question: “Who says we can’t compete?”

It’s critical for us to understand exactly who wants us to believe this:

• Our competitors, both global and local
• Our political enemies and those who despise capitalism
• Various media outlets and pundits who need to sell their papers, magazines and TV shows
• Politicians who want you to believe they’ll solve our problems if they’re elected
• People who want to sell you books and services

If it’s true that we can’t compete from the U.S. then why are so many foreign companies opening and buying manufacturing companies here? Notable examples include Haier Group, the largest appliance manufacturer in China, Toshiba, Toyota, Honda, Mitsubishi, BMW, Mercedes Benz and the many Chinese, Indian and European companies in various industry sectors buying small and midsized manufacturers (SMMs) across the U.S.

The answer is simple; it’s a myth that we can’t compete. We can and do compete very well from the U.S. and we continue to compete on a very large scale. There are also many advantages to producing in proximity to markets that are pulling some categories back into the U.S. and attracting these foreign manufacturers to buy U.S. companies.

 

Don’t Trust the Media!

Unfortunately, millions of Americans, including many business owners and executives, watch and read the various media and accept the information as facts. They then make business decisions based on these “facts” that often lead to the failure of their businesses.

These business people aren’t stupid or foolish; media imbalance, bias and outright propaganda are very well evolved, deeply entrenched and difficult to identify without comprehensive direct research. Generally the lack of context is the number one distorting factor whether intentional or not. Even with unbiased journalism there’s little space for much depth among today’s story clutter, leading to information imbalance, and no one would have time to read or view the entire context for all stories anyway.

The correction is simple. Using media stories as only a starting point, take the stories that are relevant to your industry and invest the time to research the full context in order to reveal the actual issues and conditions. Then build your strategies on the complete information, the current reality for your business.

 

Myths and Reality

Let’s have a look at the myths and reality of the U.S. manufacturing and global trade situation. Note that all of the data referenced here can be found at the following Web sites: www.census.gov, www.fedstats.gov, www.bea.gov and
www.cia.gov.

Myth: China’s economy is nearly as large as the U.S. and they will soon outgrow us. Along with this is that “China is the factory floor of the world” and manufactures more than the U.S.

Reality: China’s GDP in 2005 (latest data available) was $2.225T, compared to the U.S. at $12.49T. China’s economy is about 18 percent of the size of the U.S. economy.

China’s industrial output (including construction) for the same period was $1.05T compared to $2.51T for the U.S., while their exports of manufactured goods totaled $752.2B to $842.17B for the U.S.

The U.S. manufacturing sector alone is still larger than the entire GDP of China, and while their 9.5 percent growth rate represents $211B in GDP growth, the U.S. growth rate of 3.5 percent represents $437B in GDP growth.

Myth: For China’s economy to grow as large as the U.S., the U.S. economy must decline and U.S. citizens must suffer declining living standards.

Reality: China is “catching up” to the U.S. in GDP, but as China and other third world countries industrialize they create their own market demands presenting new market opportunities to U.S. manufacturers. Since there’s always a time lag for this to occur it appears to some that it won’t happen, but it’s already occurring and a review of the history of industrialization for European countries, the U.S. and Japan will show us the future. The global economy is not a zero sum proposition; the pie keeps getting larger.

Myth: U.S. manufacturing output is shrinking and we will become dependent on other countries since we won’t manufacture anything in the future.

Reality: U.S. manufacturing output is not shrinking; it’s at an all time high and growing. What media trumpets is that manufacturing employment is down as is the percent of GDP, without mentioning that output continues to rise.

There are many other myths that you’ll recognize once you start conducting your own research. Space limitations prevent us from even scratching the surface for the many that exist.

 

So What Are the Strategic Options?

There are many more proven options than we can fit in this single article. Here are some key macro strategies from successful U.S. SMMs.

1) Don’t take it personally.
Unfortunately, many SMMs—includ-ing toolmakers—often lack motivation for conducting their own research, choosing to stay in their comfort zone and doing “what we’ve always done” while complaining that their market “isn’t where it always was” and assum-ing it went offshore. They take the changing demands and shifting markets personally, an affront to the historical success of their companies and their leadership. As a result these companies continue to fail in greater numbers than the actual market and business condi-tions would dictate.

Let’s also remember that companies of all types have been failing since long before Japan or China came along as competitors. Virtually all poorly managed companies that fail these days blame globalization rather than taking responsibility for their failure to adapt and meet new market demands. The fact is that only a fraction of the failed U.S. companies are “victims” of conditions of
globalization that are insurmountable.

To a great degree this is why we see large companies dynamically adapting and profitably going global while so many SMMs cling to outdated business models and express frustration and vitriol at a perceived enemy (usually China these days; before China it was Japan) as their companies fail. Large company executives don’t make it as personal as the founders, second or third generation owners and/or operators of SMMs, they’re willing to change the business model quickly and they know that to do so they need to conduct their own research.

Another major contributor to SMM failure is the resistance of SMM owners to hire people with the knowledge and experience to navigate today’s world of global business. The era of globalization represents the first time that many of these business owners need to hire executives who know things that they don’t know, or even fully understand, in order to accomplish jobs that the business owners aren’t qualified to do. They have trouble adapting to a new decision process where they can no longer be the tie breaker in discussions of strategic development simply because they own the company. Large company executives don’t carry this baggage; they generally don’t own the company or see these new global specialists as threats to their authority or egos.

What do these successful companies know that unsuccessful companies don’t? They know many things—they conduct their own research with an open mind to new directions for the company and then hire the global experts they need to accomplish their goals.

2) Don’t just inform the executives.
Remember that your employees are also being bombarded with distortions from media daily, leading to anxiety about their job security and a fatalistic attitude resulting in a lack of motivation to innovate and excel in their jobs.

Make sure you regularly communicate the current reality in full context to your employees. This will restore their confidence in a future along with motivation to apply their expertise and creativity to support the strategies you initiate and to do so with enthusiasm. Many companies have weekly and even daily briefings for all employees leading to higher performance and innovation, lower turnover and much higher morale.

3) Go global, but don’t fall prey to “Strategic Overshoot”.
It’s time to go global in one way or another. This may mean simply expanding your market research to keep tabs on global developments while operating domestically or it can include outsourcing, exporting and/or creating alliances, joint ventures or launching wholly-owned operations outside the U.S. But be wary of Strategic Overshoot.

Strategic Overshoot is a term I’ve applied to the following condition: “The tendency to decide to operate in another country—often China these days—before careful analysis of the actual business and market conditions rationalizes the decision.” The answer is often much closer to home.

4) Pursue exports.
While it’s true that not all companies can export, there are many who can but don’t because they simply assume that there are no export opportunities for them. Once you get into your own research you’re likely to be surprised. Although it’s unfamiliar territory for most SMMs and outside their comfort zone, there are significant opportunities for many, if not most, tooling and manufacturing companies to profitably grow through exports.

 

Conclusion

There’s no magic bullet, but the new strategies being applied for success in today’s global business environment continue to prove themselves year after year. It’s well past the time for all U.S. SMMs to get in the game.

Reprinted with permission. © Michael L. Hetzel 2007