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

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.

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.”

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.”