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Crossroads: Crisis or Opportunity: China’s attraction

February 1, 2003

13 Min Read
Crossroads: Crisis or Opportunity: China’s attraction

It’s no secret—globalization has become a fact of business life. Unfortunately, at this stage, globalization appears to be a zero-sum game for molders, with China in the lead. Ask any U.S. molder or shop owner about globalization and you’re likely to get an earful about China’s unfair trade advantages—about how molds, and now molding, are going to China. The threat to U.S.

Guang Dong, China
The Tech Group
Number of facilities: 13
Locations: China, Ireland, Mexico, the Philippines, Puerto Rico, Singapore, U.K., U.S.
Number of presses: 300
Number of employees: 2000
2002 revenue: $130 million

China's Attraction

China is fast becoming the manufacturing powerhouse of the world. Thanks to an abundance of workers willing to labor for a small fraction of the wages earned by others in developed nations such as the U.S. and the European Union, China is capturing billions in foreign direct investment.

But China’s not the only one benefiting. A Dec. 9, 2002 Business Week article noted that it has been wrongly assumed that “U.S. companies in China earn little money there,” and that the short-term benefits fall primarily to China itself. Joseph Quinlan of Morgan Stanley says that greater China (mainland plus Hong Kong) “represents the largest source of income from U.S. affiliates in developing nations.”

Quinlan reports that from 1990 to 1998, “the number of U.S. majority- or minority-owned subsidiaries in China jumped from 45 to 335, and the number of Chinese workers on their payrolls rose to 180,000. At the same time, surging U.S. direct investment helped lift the total assets of such companies from $2 billion in 1990 to nearly $25 billion by the end of the decade.”

According to figures from the U.S. Dept. of Commerce, “greater China accounted for almost 40 percent of total U.S. foreign affiliate earnings from non-Japan Asia last year.” The $7.1 billion in income it provided to U.S. multinationals topped the earnings they received from Mexico and Brazil combined.

The exodus of investment monies and jobs continues as OEMs abandon manufacturing plants in the U.S. and even Mexico, seeking lower costs to manufacture. Yes, it’s about the money. Consumers, say manufacturers, want cheaper and cheaper products. It’s true that less expensive products are in greater demand and help OEMs build market share. To provide those products, manufacturers will continue to chase low-cost labor around the globe. Right now, it’s China, and manufacturers are finding compelling reasons to go.

Evolution Becomes Revolution
By the end of this year, National Presto Corp. (Eau Clair, WI) will have closed all of its U.S. and Mexican manufacturing operations and moved them to China. There, contract manufacturers will produce the company’s line of small, portable kitchen appliances to Presto’s specifications, and package and ship these products to Presto’s markets globally.

Presto’s VP of manufacturing, Neil Brown, says that to his knowledge, “most of the U.S.-based small appliance manufacturing industry that had plants in Mexico will have abandoned North America and headed to the Far East.” The reason, says Brown, is simple: “We left because we couldn’t compete.” Brown adds that he believes Presto is one of the last of the small, portable kitchen appliance makers to leave North America.

“The industry we’re in is very discouraging,” says Brown. “What I’ve seen—what we’ve done to our vendors, even closing down our own plastics plant and moving the work—has been gut-wrenching. But it’s cutthroat out there. The retailers offer a good buy to the public, and they demand a good price from the manufacturer. If Presto is to survive as a corporation, we must do this,” he states emphatically.

Like Brown, Matthew Urias is among those who have seen the old business model dissolve in the face of foreign competition. Urias is the owner of Mattco Molds in Altadena, CA. He has been involved in moldmaking all his life. Now, his business consists almost entirely of performing repairs and engineering changes for a company that makes molds in Shanghai. In August 2001 he spent nine days in Shanghai at the mold shop his customer uses. His first day there he was handed a few parts to inspect.

“After looking the parts over, I made several suggestions to make the parts to print,” says Urias. “In my mind I thought it would take two or three days to make the corrections. The next morning I was handed the same parts, thinking they were the same parts as yesterday. I was informed that in fact, these were the new parts produced that morning. They had made the changes overnight. I knew, as a moldmaker in the U.S., that we were in serious trouble.”

Shanghai, China
Tessy Plastics Corp.
Number of facilities: 4
Locations: China, U.S.
Number of presses: 171
Number of employees: 900
2002 revenue: $72 million

Thy Customer’s Bidding
Although some moldmakers have partnered with Chinese shops, as a group they are reluctant to make that move. Talk of partnerships or joint ventures with offshore shops is, in their way of thinking, almost traitorous.

Molders, however, are more open to the idea of going overseas, continuing the decade-long trend of following OEM customers—albeit somewhat tentatively. For some the decision was an either/or proposition: Either follow the OEM or lose the business. Larger molding firms with the financial wherewithal to cross the border tended to find these moves much easier.

The Tech Group (Scottsdale, AZ) has been an international operator for a number of years. Today, with 300 molding presses and 2000 employees worldwide (more than half of those in Asia), The Tech Group operates facilities in eight countries.

Mike Treadaway, VP of operations for Tech Group Americas, confirms the motivation for implementing such a multinational strategy. “We’re being driven by the OEMs we’re supporting,” he says. “They want a partner overseas for manufacturing and distribution, and being in the custom business requires us to go where our customer needs us. A lot of our customers have gone to a model where they’ve developed products in North America, and then manufacture globally for better efficiencies and economics.”

For this reason, OEMs tend to go with one supplier that can support the OEM’s needs globally, rather than select two or three suppliers in as many regions. Treadaway predicts that this trend will continue, and is seeing increasing emphasis on Asia—specifically, China.

For large corporations, siting an international facility can be relatively easy. Some are even buying existing plants, as Nypro (Clinton, MA) did recently when it expanded its holdings in China with the purchase of two injection molding facilities from Jabil Circuit Inc. (St. Petersburg, FL).

Guangzhou, China
Nypro Inc.
Number of facilities: 30
Locations: China (4), Dominican Republic, France, Hong Kong, Hungary, India, Ireland, Mexico (3), Moscow, Puerto Rico, Singapore, U.K., U.S.
Number of presses: 1000
Number of employees: 10,000
2002 revenue: $730 million

The plants, located in Danshui and Panyu, will add to Nypro’s presence in China. The company is building a new plant in Suzhou and runs molding and assembly operations in Shenzhen and Tianjin, as well as a moldmaking plant in Hong Kong. Nypro has been in mainland China for 10 years, and longer in Hong Kong.

A smaller molder, Tessy Plastics Corp. (Elbridge, NY), opened a molding plant in Shanghai in a rented building. Henry Beck, president of Tessy, has found the experience to be a relatively good one and the Chinese people he dealt with to be “progressive and accommodating” of Tessy’s plans.

Tessy’s decision came in response to a major business equipment OEM’s need to be competitive by doing assembly in Asia. “We elected to assemble in China,” says Beck. “This worked well for about a year, and then they said, ‘we really have to mold there as well.’ So we looked for a new building to accommodate molding presses, found one, rented it, and sent five machines over there. Then, the OEM canceled the program.” Although Tessy has since found other customers for whom to run the presses, clearly there are hazards and risks involved when following a customer.

Molders keep going, however. United Plastics Group Inc. (Westmont, IL) announced in October the opening of a new injection molding plant in Suzhou, China. Significantly, this plant “is one of the few manufacturing facilities in the world to encompass lean manufacturing principles from the ground up,” notes a press release.

The facility is located “only minutes away from major customers” and will manufacture for clients in the consumer, electronics, telecommunications, medical, and automotive industries. The plant also boasts the latest technology and design capabilities “while encompassing lean manufacturing principles.” Equipment includes 20 presses with full servo robotics, a Class 10,000 cleanroom, a full-service paint facility, and a toolroom in 24,000 sq ft.

Strategic Initiatives
One molding company that is seriously exploring its options to manufacture in China is Classic Industries (Latrobe, PA). Spencer Siegel, VP of market development at Classic, attended IMM’s first Crossroads Roundtable discussion in Cleveland in November 2002. For him a successful and competitive business strategy has to include manufacturing in China.

Classic’s primary business is serving the medical industry, but it still looks closely at manufacturing costs. “If a company is vertically integrated and technically savvy, it looks at component costs,” says Siegel. “If it’s looking at components, then it goes overseas many times. What manager wouldn’t when [he or she] sees all these articles about cost savings?”

Suzhou, China
United Plastics Group
Number of facilities: 11
Locations: China, Mexico (2), U.K., U.S.
Number of presses: 480
Number of employees: 2500
2002 revenue: $300 million

Classic has partnered with a company called Supply Windows in Dublin, CA, a bridge company that helps companies get tooling made overseas. “I’ve done a lot of business overseas personally, so when I joined Classic, I believed our customers could benefit from cost reductions through overseas tooling,” explains Siegel.

However, he also believes that molders can provide good value here as well. “You need to partner with customers from the beginning, in the developmental cycle, to show your engineering value,” Siegel states. “An engineering program is not as likely to go overseas until it’s up and running in production.”

As a contract manufacturer, Classic offers engineering services, molding, decorating, finishing, and fill and seal services—capabilities that go beyond that of a standard injection molder. “When manual steps are necessary in the assembly operation, that’s when we cannot remain competitive,” Siegel emphasizes.

Although Classic’s three-year business plan calls for the company to have some type of overseas operations in order to remain competitive, Siegel firmly believes the company’s U.S. facilities will remain strong manufacturing centers. “We believe we’ll be able to maintain our base in the U.S. because of services we provide here,” he says. “There are times when it makes sense to go to China, but many times it’s imperative to stay here for the development activities.”

The nature of Classic’s presence in China is not yet certain. It might be a strategic partnership, and it might do assembly operations with some support molding. But one thing is certain: “It will be under our control and adhere to our standard practices and procedures for quality so that our customers will feel comfortable with our overseas manufacturing,” Siegel says.

Actual foreign direct investment in China, $US
1999$38 billion
2000$38 billion
2001$41 billion
2002* $48 billion
*through November
Source: The Wall Street Journal

Unlike many in the U.S. molding and moldmaking industry, Siegel isn’t ready to throw in the towel on manufacturing here. “We’ll probably build in excess of 100 tools in 2003, and 80 percent of those will be built in the U.S. because they’re developmental programs,” he says. “A lot of people see it black or white, all there or all here, but it doesn’t have to be that way.”

Other Options
In addition to China, Eastern Europe is being discovered as a viable manufacturing base. With an eye on that region’s motivated, skilled workforce, major OEMs are moving into the area. Hungary, in particular, has established itself as a primary manufacturing country. OEMs such as General Electric, Audi, and Philips Electronics have established significant manufacturing plants in Hungary, which lure molding and moldmaking firms.

In December 2002, Nypro announced a second manufacturing facility in Hungary. The Nagyigmand plant houses an assembly and painting complex covering 20,000 sq ft. These two operations are the fastest-growing segment of Nypro’s value-added processing capabilities, says Brian S. Jones, president of Nypro.

This contract manufacturing facility will be integrated with the neighboring Nypro Karsai facility in Tata to accommodate increasing demand for molding and painting services. Nypro serves telecommunications and electronics peripherals customers there.

Another firm taking advantage of Eastern Europe’s skilled labor is Precision Castparts Corp.’s Advanced Forming Technology (PCC-AFT, Longmont, CO). In April 2002, PCC-AFT opened a new, world-class, metal injection molding facility in Retsag, Hungary. The 25,000-sq-ft facility is equipped with state-of-the-art, automated manufacturing equipment for high-volume production of injection molded metal components.

PCC-AFT is the largest metal injection molding company in the world. “We have also built up long-term supplier agreements with some of the well-known industrial manufacturing companies who demanded a competitive European manufacturing presence,” says Istvan F.K. Vamos, PCC-AFT’s president of global operations. “These factors are vital to our growth plans, especially since this part of Europe is becoming extremely popular with many multinational companies, all of which draw on the fast-expanding Hungarian manufacturing sector.”

Risk vs. Reward
Molders who’ve already gone global can attest that siting a plant overseas isn’t exactly a cakewalk. There are risks to these ventures. Despite its more open tendencies, China is still a communist country, which adds an element of unpredictability to any foreign investment there. Tessy’s president Henry Beck is well aware that the political tide could turn quickly in China, but considers such action unlikely. In the end, the Chinese government has as much at stake in foreign investments as multinationals like Tessy do.

Beck says that Shanghai is “expanding left and right,” noting how open the various government entities are to foreign investment. “We haven’t had any problems at all,” he adds. “At our open house, we had people from the economic development office and customs officials welcoming us to the area. They’re happy to have you there.”

Not all risks in China are political, however. For the OEMs, theft of intellectual property and resulting counterfeiting is a worrisome and costly challenge. An article in the Dec. 19, 2002 edition of The Wall Street Journal notes that for many years, “global brands have been fighting legions of counterfeiters in China that churn out cheap copies of everything from Gucci bags to car parts.” Now, that problem is spreading, with staff at many Chinese-run OEM firms colluding with outsiders to flood the market with branded products at a fraction of the price the OEM charges.

Add to that government institutions and officials that are slow to mature and adhere to trade agreements, and the risk of locating a facility in China becomes substantial. Still, the promise that conditions will improve, coupled with the attraction of cheap labor, makes doing business in a developing country a logical choice.

Only now, however, are we realizing what the effect of this transition will be on the U.S. economy. It’s hard to argue with a molder who sees China as a saving grace; the challenge is for molders and moldmakers in the U.S. to rediscover and reinvent the ingenuity and creativity that helped take us this far.

Editor’s note: Next month’s Crossroads story looks at China itself—its place in the world of trade, its manufacturing policies, tariffs, growth plans, political drivers, and what the next decade has in store.

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