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August 1, 2003

25 Min Read
Crossroads: Crisis or Opportunity: Going global? Know why, then select how (web exclusive: expanded content)

Once you have assessed your risks and opportunities, and made the decision to move beyond your present borders, the method of expansion becomes the critical issue.

Going global isn’t an option for many companies—it’s a necessity. Some companies see global operations as a must for serving their global OEM customers or even retaining the business. Others, feeling the pressure from overseas competitors, see global operations as a way to compete with other companies on their own turf, thus leveling the playing field.

Whatever the scenario, as pressure mounts to be a global supplier in response to demands from OEMs, more and more molding and moldmaking firms struggle with how to achieve a global presence with minimum risk and cost and maximum effectiveness.

The midsized accounting and management consulting firm Gleeson, Sklar, Sawyers & Cumpata LLP (Chicago, IL) found more and more of its clientele faced with this increasing pressure. Yet few resources existed on the effects of globalization, specifically in China, to help middle-market companies make sound decisions.

“Many of the business advisors and owners we queried were simply lumping flat sales and pricing pressures in with the general economic slowdown,” notes Larry Kendzior, a partner in the firm. “When we began discussing globalization and China, however, many of these people were able to discern and discuss the effects of these forces on their business. And for the most part, these effects were significant.”

GSS&C notes that it is now easier than ever to take your company to the global platform. “Current trends in outsourced manufacturing, customer involvement in the supply chain, and improved logistics processes are making it easier to source from overseas,” the firm noted in a recent globalization seminar. “The best targets for globalization tend to lie in goods that are small, have high value, and can be cheaply transported.”

This description fits some injection molded components quite well. For example, large, bulky molded parts tend to remain in the U.S. close to the customers’ facilities, while small-component assemblies that require significant direct labor and are easily transported move offshore. A middle-market manufacturer should evaluate which components it makes sense to produce domestically and which parts can be made more cost-effectively offshore, because ultimately, there are risks and costs associated with going offshore.

EVALUATION CRITERIA FOR GOING GLOBAL

Plante & Moran’s Lou Longo provides the following eight criteria to evaluate whether or not you should expand your operations internationally.

  • Threat of the risk—How real is the global threat to my business?

  • Investment required—How much money will I need?

  • Degree of control required—How much control and management will I need?

  • Desire to access the local market—Is this area a big opportunity?

  • Implementation speed—How fast do I need to do this? Am I first or a me-too?

  • Need for flexibility—How flexible do I need to be to accommodate customers?

  • Risk tolerance—How much risk can I actually afford based on anticipated returns?

  • Scalability—How fast can I ramp up or ramp down to meet changes in demand?

Foreign Direct InvestmentTrends Down
Molding companies might take a wait-and-see attitude before jumping into globalization. A study released May 12, 2003 by Deloitte Research substantiated a downward trend in foreign direct investment (FDI) by U.S. manufacturers, which fell in 2002 to an estimated $23 billion, down 37 percent from $36 billion in 2001. And 2001 was a major decline from 2000, which culminated a decade-long upward trend with a record $58 billion in FDI from U.S. manufacturers flowing into offshore operations.

“Yet even as they cut FDI, U.S. manufacturers are concentrating ever more on what they do spend in other high-wage countries, despite the widely held notion that they go global mainly to snare cheaper labor,” says the report.

Todd Lavieri, partner and leader of Deloitte Consulting’s Global Manufacturing Practice, commenting on the report, says, “No doubt, the prolonged recession in the global manufacturing sector and the continued uncertainty around the threat of terrorism and war around the world have contributed significantly to the decrease. In addition, we see an increasing focus by manufacturers on maximizing their existing investments around the world—whether in developed or developing countries—and often the effect is more limited overseas investments.”

The Options
There are several options for global manufacturing, ranging from simple outsourcing through joint ventures to a wholly owned greenfield plant. First and foremost, however, evaluating your opportunities and how much risk your company can tolerate is essential before making any type of commitment. The type of operation you select should be explicitly tailored to your risk profile.

“All costs—such as currency risk, tariffs, logistical issues, and intermediary costs—must be evaluated,” Kendzior says. “Companies must be able to handle a new set of processes necessary for doing business in other countries,” he notes, adding that sourcing from across the street is vastly different from sourcing from China. Other considerations include managing delivery, lead times, and payment, all of which become more complex in a global environment.

Lou Longo, partner in the International Services Group for Plante & Moran LLC (Southfield, MI), has developed eight points of consideration for middle-market companies who are looking at going global (see “Evaluation Criteria”). The goal is to get equilibrium across all eight points, which includes defining existing sourcing patterns of your key customers, evaluating overseas risks and opportunities, engaging the customer in dialogue about long-term sourcing plans, and evaluating competitors’ positioning and response to global issues.

Once the self-evaluation is complete, middle-market suppliers need to apply this evaluation in terms of the feasibility and competitive advantages and disadvantages of the market entry options, Longo states. For example, a greenfield plant requires the most investment but offers the greatest amount of control. Majority joint ventures provide a lesser level of risk and a lesser level of control. A 50/50 joint venture, a minority-position joint venture, and strategic outsourcing all require trade-offs (see Figure 1).

“It’s quite a scale in terms of investment required and control wanted,” Longo notes. “They’re going to be all over the map with these eight criteria, but as you evaluate all the key criteria, what you gain in one area you may lose in others. Finding the right mix is key to successfully going global.”

  • Outsourcing. However tempting it may be to maintain control by establishing a manufacturing facility abroad and handling the logistics with your own staff, a molding company considering China, in particular, might do well to opt for a low-risk scenario first. In fact, Steve Uhlmann, president and CEO of The Tech Group, which has four plants in Asia, says that the best piece of advice he can offer a middle-market molding company looking to source components in a lower-cost region is, “Subcontract the work through a company already there.”

    The use of strategic outsourcing is the absolutely lowest-risk way to go, say most globalization consultants, and it may be the least obvious choice when talking about how to leverage low-wage opportunities in places like China or other Asian countries. According to Kendzior, outsourcing the manufacturing of components is most likely to appeal to companies that wish to avail themselves of cheap labor while avoiding the risk of an incursion by the Chinese supplier. The components are then shipped to the U.S. facility (or another facility either foreign or domestic) for assembly into the finished product.

    Outsourcing the entire product is also an option attractive to newer startup businesses that have proprietary products, notes Kendzior. Protection of intellectual property is critical, particularly for a new product, and can be a huge concern for manufacturers. There are ways to mitigate this threat, Kendzior says, including carefully monitoring the product, strengthening brand recognition, choosing distribution channels judiciously, and putting up other barriers to incursion by the foreign supplier.

    “An example of a successful tactic used by at least one new company that launched a new product in the U.S. was to negotiate a separate, worldwide distribution agreement with the Chinese supplier,” says Kendzior. “The agreement granted the U.S. company exclusive U.S. distribution rights, but made the Chinese supplier a 50 percent partner in distribution through the rest of the world.”

  • Joint venture partnerships can also be successful, and the advantage is that you are joining with a company already established in that foreign country. But what type of joint venture? 50/50? Majority ownership? Minority ownership? The Tech Group’s Uhlmann has found majority ownership joint ventures to be successful for that company. Typically, the foreign company’s ownership retains 20 to 30 percent of the business, “to keep them interested,” says Uhlmann. The benefits of this method are getting a company already established in the same business that you are in, and whose management knows and understands the language and the business culture.

    “We’re the outsiders over there,” explains Uhlmann. “It’s very critical to know the culture in the country where you are doing business, but we can’t presume to go into a different culture with a different language and be immediately successful on our own.”

    Uhlmann says The Tech Group has been “exceptionally lucky” with its joint venture partnerships in Asia. “Our partners are honest, honorable, knowledgeable, hard-working people whom we can trust,” he says.

    Longo believes that flexibility is the key to going global, and the big thing joint ventures have going for them is flexibility. “With a greenfield plant, once you build it you’re committed,” Longo explains. “Joint ventures offer greater flexibility, and this is a key consideration. But, also consider the scale. I’ve upped my flexibility but I’ve also lost control by not having my own plant.”

  • Greenfield plants. The most obvious solution to going global is establishing a greenfield manufacturing plant in the foreign country where your customer is located. As the highest on the risk factor scale, this option has a lot of pitfalls for a supplier. If the OEM customer has located in a specific country it is generally because it is seeking to service a consumer base in that country. It’s just more cost effective to make the products in the country in which they are distributed and sold than to ship products globally.

    THE ACCIDENTAL CONSULTANT

    When IMM last spoke with CMI Engineering (see “Orient Express: Setting up Offshore Operations,” August 2001 IMM, pp. 14-15), the company was finalizing a joint venture with Zheng Plastics to open a sprawling toolmaking complex in Dong Guan, China. Covering 800,000 sq ft, employing 1500, and running more than 200 milling machines, the CMI Asia operation was notable in scale and as a precursor of shifting business trends.

    In the two years since, CMI Asia has exploded, now producing roughly 4000 tools/year. CMI began full-scale contract manufacturing, and within the last year, a spin-off company called Performance Assoc. Consulting (PAC) used CMI’s market expertise to branch into the consulting business, helping midsize American manufacturers compete with China or evaluate products to shift to offshore production.

    Although the company compiles meticulous business plans for its consulting clients, Steve Hershberger, managing director for PAC, admits that CMI basically fell into its new operation after a customer asked it to use its knowledge of China and network of vendors to help him shift two product lines to offshore production.

    “The consulting purely came into play by happenstance,” Hershberger says. After performing the legwork and logistical planning to assist that first client, Hershberger says CMI had an epiphany. “There’s a consulting game that’s literally staring [us] in the face,” Hershberger says, “so we started going back and talking to other customers.”

    Based on those conversations, PAC was formed, and it has helped more than a dozen companies assess their businesses in the face of Asian competition. In many instances, these customers now outsource products to Chinese shops.

    “Our clients fall into two mindsets,” Hershberger explains. “Either ‘I don’t believe [the costs, quality in China], so prove it to me,’ or ‘My hair’s on fire. Take this product; here’s a drawing; save my company.’”

    Hershberger says things are inevitably more complicated, and only after an intense audit of the business’s products, costs, margins, and a myriad of other variables does PAC formulate a strategy. “In most cases, there is a place for Asia in a company’s plan,” he says, but he also believes in the cyclical nature of business, calling the current shift to China “a pendulum swing” that American manufacturers can withstand.

    “Is it an inexorable march towards Asia?” Hershberger asks. “No, it’s not, because this is a country that has consistently solved problems, and we are a very obstinate people, and frankly, pretty damn good businessmen. Ultimately for American business, failure is not an option—it never has been, it never will be. So we’ll figure out how to innovate and make our companies better so that we can be competitive. In many cases, that will require them to make some moves offshore, and it may be that that’s a temporary issue. It may be that it’s a permanent issue, but the second you quit looking at your business, and you quit questioning how you do things and why you do things, you’ve quit coming up with answers. When you do that, you may as well retire.” —Tony Deligio

    Contact Information
    Performance Assoc. Consulting LLC
    Indianapolis, IN
    Steve Hershberger; (317) 202-7040
    www.performanceindustrial.com

    Tessy Plastics Corp. (Elbridge, NY) was asked by its customer Xerox Corp. to set up a molding plant in Shanghai, China to service the business equipment OEM’s printer manufacturing operations in that region. Joseph Raffa, vice president for Tessy, says they looked at both options—joint venture and greenfield—when considering how to go to China in November 1999.

    To help the company make the right decision, Tessy hired a consultant. “We needed an objective look at which option was right, joint venture or greenfield,” says Raffa. “He very quickly said, ‘Today, there’s no reason not to do it on your own.’ Five years ago it was almost impossible to do a wholly owned foreign enterprise [WOFE]. But today, it’s much easier.”

    Tessy management considered the advantages and disadvantages of each. “With a joint venture partner, you’re always asking them their opinion about business decisions,” explains Raffa. “Our problem with that is that we’ve always considered ourselves flexible in obtaining whatever we needed to get the job done for a customer. We felt we’d compromise that flexibility if we got into a joint venture situation.”

    Once in China, Tessy found that what the company thought was going to be true was true. “There were no issues in accomplishing anything we wanted to do there,” says Raffa. “We started to network with people and found who does what in the industrial park. Everyone was helpful.”

    The company expanded into its own 65,000-sq-ft facility in 2001. This year, the company plans to double the number of presses to 11 machines total. A mold shop looking for a presence in northern China has now leased space from Tessy, and in return the moldmaker, Bai Jing, will perform repairs and do new mold builds for Tessy on premises. Raffa says that several U.S. companies have approached Tessy about leasing space from them as a way of entering that market.If you can be the first molded parts supplier in an area where there are a number of OEMs, your opportunities are better than if you are a me-too molder going into a region where there is already overcapacity. Think carefully, though, about setting up a foreign operation for just one customer. That dependence can lead to disaster if that one customer falters or pulls out. The alternative is to find several customers to serve in a particular region and spread the risk among multiple OEMs.

    Brian Noll, GM for Tessy’s Shanghai plant, says that from his experience, joint ventures are for companies who have some strategic advantage to contribute to the JV. “A company that makes medical products, for example, can tie in with a foreign company specializing in medical sales in that region, looking to sell new products,” explains Noll. “Those work well. But if you’re making molds, and find a joint venture moldmaker, it ends up being one-sided. They’ll learn a lot from you but you won’t learn a lot from them.”

    Raffa adds that going global doesn’t just benefit the operation in the foreign country, but often results in new business for the U.S. plants as well. Having a global presence, even a small one, has given Tessy the opportunity to quote work it wouldn’t have without a Chinese facility.

    “Even though they don’t use our foreign services today, we’ve grown our business here in New York just because they know we have an Asian connection,” says Raffa. “Their goal is to align themselves with a supplier who has that capability to manufacture in Asia even though they don’t have a need for that now.”

    So, What’s the Rush?
    What’s been driving the rush by molders to go global? Longo says that it’s basically entrepreneurs seizing a market opportunity for growing the top line without considering the threat of risk impacting the bottom line. “It’s the build-it-and-they-will-come syndrome,” says Longo. “Now we’ve invested all these dollars, opportunity costs, and management time, and the market doesn’t come knocking on our door, so we risk the entire venture.”

    Tessy’s Noll offers some direction for molders and moldmakers considering an Asian operation. “I think you need good, strong advice, and there are a number of consultants who specialize in that,” Noll says. “Also, finding the right people quickly to help you hit the ground running is critical to success, particularly with regard to business law, customs, import and export law, and VAT laws, because those are the issues you struggle with the most.”

    Still, even all this doesn’t guarantee success in a country such as China. Kendzior is quick to point out that it’s much more difficult to make money in China, and reminds those considering this option that “very few companies to date have made money in China, and the numbers of companies failing with this option have been high.”

    Editor’s note: Next month the Crossroads series takes a look at strategies for staying put and staying competitive using cutting-edge technology.

    Longo blames some of the rush to go global on perception of the threat rather than reality. “How serious is this globalization issue to your company?” asks Longo. “Understand the threat—it has to be more than what you hear. What are my customers doing? Where do I need to be and why do they pay me?

    “The perceived risk sometimes clouds the objectivity of what makes sense for the business overall,” Longo adds. “Middle-market businesses need to become more international in the scope of understanding these things, but not feel pressured to have to put a plant offshore to do this.”

    Larry Kendzior notes that the biggest problem middle-market companies have is lack of education about China. Most middle-market companies initially see China as a threat and fear prevents them from making educated evaluations. However, educated evaluations result in informed decisions when it comes to why and how to go global.

    “Talk to your people, your management, your customers. Do you view China as a source of labor, as a market for your products, or as neither?” Kendzior asks. “Based on each of those views, there will be an appropriate strategy. There’s no one right answer for every company.”

    Longo agrees, stressing that an understanding of your real cost structure in the new market is essential. “I’ve not been a big proponent of metal stampers or molders going into a low-cost market just for sake of trying to save on costs,” he says. “There needs to be a local demand for their products or services in the domestic markets. Portable, one-time suppliers like moldmakers are in an even greater risk situation.”

    These are the types of issues that middle-market, entrepreneurial business people don’t stop to think about, Longo adds. “There are some great opportunities out there, but you have to kiss a lot of frogs to find a prince.”

    An offshore business-partnering model that works

    As molding firms struggle with how to deal with offshore competitive issues, some have determined that putting manufacturing plants in places such as China is the only answer. Others have gone the partnership route, choosing to develop relationships with Chinese sources as a more cost-effective way to gain access to lower manufacturing costs without the risky capital investment of siting a plant.

    Four years ago, IMM wrote about International Smart Sourcing Inc., a company that helps small manufacturers outsource their products to China. ISSI is a subsidiary of Electronic Hardware, a custom molder with a line of proprietary products. Acting as the middleman, ISSI oversees projects and keeps close tabs on its own Chinese vendors to ensure that the work is done right and that intellectual property is kept proprietary. Still, there are companies that accuse the Farmingdale, NY molding firm of being disloyal to U.S. manufacturing.

    "It's understandable," says Frank Pellegrino, ISSI's vice president of engineering. "Whenever there is a change some people feel threatened," he says. "I can remember when plastics began coming into its own, we got a lot of backlash from the diecasting industry. Metal to plastics-those of us in plastics got a real bad rap."

    OUTSOURCING FOR SURVIVAL
    On the contrary, developing a relationship with Chinese resources offers a real advantage when coupled with the right approach. "Outsourcing manufacturing to China should not be viewed as a threat, but as a method to remain competitive and expand business," Pellegrino adds. Now, he says, a new attitude is taking shape.

    "Customers and new prospects are looking at this with a more open mind," he notes. "They realize they have to go to China, because if they don't they'll be out of business. We have experienced this with Electronic Hardware Corp.," Pellegrino explains. "Outsourcing 75 percent of manufacturing resulted in the reduction of costs, improved profits, increased market share and an increase in employment of engineers, materials management and marketing personnel."

    Expanding markets and reaching new consumer bases by making products in China that can be marketed in the United States is a viable and real opportunity for many companies Some of ISSI's best accounts have been the OEMs. Custom molders and moldmakers have been more hesitant to work with ISSI, although the company is slowly gaining some attention.

    It hasn't been easy. "We've had to learn a lot along the way," explains Pellegrino, not hesitating to add that not every job was a success. "Not everything is suited for outsourcing to China and we've learned to distinguish what works and what doesn't."

    DEVELOPMENT AND COMMUNICATION
    Pellegrino cited an example of large mold package of about 80 molds where ISSI was pushed by the customer to accelerate the program. The project consisted of all interacting parts from large, multicavity molds. "But the project wasn't fully developed and we didn't know going in that it was a design-as-you-go program," he says.

    At one point, there were a total of 64 molds in production, all multicavity and all being revised. Meanwhile, the customer had already advertised the product as available. Time to market was essential. "We were led down this path by the customer; they drove both themselves and us crazy," says Pellegrino, stressing that product design and development require close contact with the customer, which ISSI handles from its facility in New York.

    "It signaled us that we needed to improve our communications network with our vendors in Shanghai," Pellegrino. "Also, it showed us we needed to improve management and personnel both here and in China."

    As a result, ISSI installed custom communications software, hired bilingual project mangers that have an understanding of U.S. customers' expectations and brought the Shanghai offices up to ISO 9000 standards. The quality team put a program in place that brings manufacturing engineers from China to the New York facility for training. On the U.S. side, ISSI added a Director of Contract Manufacturing to oversee customers' offshore projects.

    ISSI certifies the factories it uses in China, making certain that the facility can produce the work to the standards ISSI customers set. In one instance, Pellegrino says, they were approached by a man wanting to do business for ISSI. "We asked to see his factory, so he took us to a huge facility," he relates. "We then discovered that it wasn't this guy's factory, but he explained that this factory was just like his factory." Further investigation revealed that he had no factory, but, he assured ISSI, as soon as he got an order, he would build one.

    ISSI also puts enough work in its partner plants to create loyalty with the owners. This helps prevent intellectual property theft. "Everyone is afraid of theft," confirms Pellegrino. "The best way to keep something a secret is to have stringent nondisclosure, noncompete agreements with vendors and clients. Additionally, we control and monitor the factories by putting one of our employees in the building of our major manufacturers. We deal with a group in China that we feel are honest and forthright," he adds. "Our integrity is critical so we're very, very careful about that."-Clare Goldsberry

    ISSI
    Farmingdale, NY
    Frank Pellegrino
    (631) 293-4796
    www.smart-sourcing.com

    Doing business in China: Who is the right person to manage your business?

    Editor's note: Simon Yang, Ph.D. is an Engineering Manager for DELPHI Asia Pacific operations (Packard Systems in Warren, Ohio). He can be reached at [email protected] or by phone at (330) 373-2619.

    Since China opened its door to the rest of the world in the 1980s, international companies have begun to set up joint ventures and wholly owned subsidiaries in China. At first companies went to China to take advantage of lower operation costs for exporting their products back to developed countries. With the household income steadily increasing at a 7 percent GNP annual growth rate over the last ten years, attention is now focused on China's 1.3 billion potential customers. For example China's motor vehicle production has been growing 13.7 percent on an annual basis. In 2000, the country turned out a total of 2,069,069 motor vehicles (Automotive Engineering International, April 2001:110). Overall the market looks promising in China while the rest of Asia is struggling. But more than 80 percent of all foreign joint ventures and wholly owned foreign companies have been in red in their China operations. Why haven't foreign companies been able to change their balance sheet even though they have brought in advanced technologies, modern management teams, and strong capital support? One of the critical reasons is international companies have not sent the right type of managers to manage their business in China.

    Language Barrier vs. Cultural Barrier for Managers

    The majority of foreign companies send in their management team with limited knowledge about China. Managers hurry to hire employees with capability to speak English. What managers don't realize is that they have only partially overcome the language barrier, and that what is really hurting company's bottom line is the cultural barrier.

    China restarted college education in 1977 after the ten-year-long "Cultural Revolution" during which college education was suspended. Since 1977 only about 7 to 10 percent of all high school graduates have opportunities to study in colleges. Most of the individuals who studied foreign languages have no background in business or engineering.

    In many foreign-owned companies the only people who can directly communicate to foreign managers are translators or secretaries who don't have any other necessary business training. Each day foreign managers think things are going the way they directed through the mouth of a translator or a secretary. But translators are not able to totally interpret managers' ideas or directions to the people because they just don't have necessary business background or knowledge. People on the floor may gradually begin to get frustrated and start to make their own decisions without following a manager's direction. That is a typical failure mode that many foreign companies still have not recognized.

    Foreign companies' strategies should include qualified people with a necessary working background-those who have working experience in Chinese companies with college degrees-rather than concentrating on foreign language capabilities. In the long run those people are more stable and know how to manage people well. Enormous companies fail in China because unqualified people are running the business.

    Another Trap: Chinese Speaking Managers from Outside Mainland China

    Some companies have begun to send Chinese speakers working in their parent companies to manage their business in China. It makes perfect sense on the surface. This type of person usually knows the company system very well because they have been working in that company for years. Also they seem to know about China because they speak some kind of Chinese. Until about five years ago, almost all people in that category originally came from Taiwan, Hong Kong, or Southeast Asian countries. Because of historical reasons, people originating from Mainland China rarely fit into this category.

    China had closed its door to the rest of world for almost forty years since the People's Republic of China was established in 1949. During those forty years Mainland China had not allowed students to study in the western countries. On the other hand, students from Taiwan, Hong Kong, and Southeast Asia have graduated from colleges in the western counties. Many of them have immigrated and worked in the countries they graduated. Companies think those people would understand Chinese culture. But those people had never stepped on mainland before. They don’t know about China either other than the language. Even the Chinese writing letters (Han Zi) had been changed in forty years. Those people have similar culture shocks just like any other foreigner. Sometimes it makes things worse when companies assume those people know about China but actually they don’t.On top of that Chinese will follow western managers’ directions better

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