By Kenneth J. McGuire, Director of Business Development, Manufacturing Advancement Center,
A troubling manufacturing statistic about US manufacturing companies appeared in a recent Wall Street Journal. As an advanced economy, the US is now at a new low of 336,000 manufacturing enterprises. That is down from the 1997 peak of 370,000. It is unlikely these firms are being replaced by an economic dynamo.
For those of us who believe that manufacturing companies are the vehicles that create original wealth by adding value to other extracted or cultivated commodities, the drop signals that a decline of our standard of living is underway. The growth of service firms, which trade claims or rearrange already existing wealth, do not expand the standard of living like manufacturing firms do. The Manufacturers Alliance – MAPI whose report is quoted, unfortunately sees no near term sign of reversing the decade long trend based on its data. Chinese competition is, of course, cited as one of the reasons for some of the companies going away. But the China Challenge will not be going away soon, so we need to discover how to prosper with it.
The MAPI data is quite revealing in that regard. It seems that the number of manufacturing companies that are disappearing is about the same as it has always been, so the attrition of existing firms through closure and consolidation could be ‘just normal.’ The major decline in manufacturing companies stems from the ‘Birthrate’ for new factories in the USA. Since 1998, the number of new manufacturing firms being formed is steadily declining. That fact is a particular disappointment because it is newly formed firms that are most likely to be the ones innovating the value proposition in the marketplace. New firms are much more likely to start up with fresh ideas and adopt best practices from the ‘get-go.’ And new firms are more likely to have less resistance to structural changes or susceptibility to preserving wasteful legacy habits of the past.
What was not disclosed in the MAPI report was whether this void of disappearing new startup manufacturing firms is being replaced with something different? Maybe being filled by some new form of new wealth generating business model outside the manufacturing category — one which better fits the newly globalized world. Possibly there is a very different kind of firm arising — enterprises with a product-making structure that is replacing the remnants of the industrial age. Maybe a new form of Company that creates wealth using a globalized blend of the new-good-fast-cheap value proposition, but doing it just as good or better?
Future Business Success
While new business models are fashionable talk in business circles, nothing like this immediately comes to mind, but it is worth researching. This led to another study cited in the article pointing to the difficulties company management is facing. In this NAM/ Deloitte study; CEO’s and COO’s were asked:
"Given changes in the economy and business environment, which of the following will be most important to your company’s future business success over the next three years?"
Answers:
High Performance Workforce
74%
New Product Innovation
49%
Low Cost Producer Status
45%
Increased Customer Service Orientation
20%
From these answers it appears that the competitive variables – new-good-fast-cheap – largely remain intact but with some modern-age differences — differences with which a small and agile manufacturing company (new or otherwise) could quickly succeed.
A start-up manufacturing company establishing a high performance team with a customer driven orientation, organized to innovate on the product mix and deliver a low cost product and service solution, could dominate the marketplace by mastering this new set of competitive differentiators. Management only needs to find a new blend of resources to exploit America’s people, technology, and business strengths and overcome the weaknesses obvious in the current economic scene.
Exploring Globalization This is a huge opportunity for any small and medium sized manufacturing company (SME) that can see beyond the conventional wisdom of "business as usual." SME’s that are willing to make a bold move away from the past to find another way to achieve success must be willing to take some risk by exploring the details of globalization. China is where it is happening at the moment, and SME’s may be able to discover a new business model that suits their situation. Companies belligerently determined to succeed by redoubling efforts to ‘do more of the same better’ need not apply. Change is what one does to others in their business; undertaking this kind of remake is more like reform of the top management and owners.
“Over the next few years, you will see a dramatic gap opening between companies. It will be between those who get it and are fully mobilized in China and India, and those that are still pondering.”
— Jim Hemerling Boston Consulting Group – Shanghai
This opportunity comes at a time when Chinese economic leaders are seeking to attract SME’s to become partnered with the growing number of small and medium sized Chinese companies that are being formed. To be sure, there is a government motive in seeking to find more things to manufacture in China. The government needs to absorb the huge migrating workforce, especially away from the coastal regions. But that is not the only motive.
SME’s as a Source for Innovation & Growth Chinese leaders understand that the SME’s are a vital source of innovation and growth. Attracting western SME’s to bring some of their innovation and prospects promises to be the source of faster and more balanced growth in the future. The large multinationals that are already in China in a big way, don’t spurn this same dynamic of growth and prosperity over such a wide base. And these same gigantic multinationals cannot function well without a support base of smaller firms feeding them the tertiary products and services.
Have you ever considered trying to repair a test instrument or postage meter or a french fryer? Think about finding a qualified repairman in rural parts of an emerging economy. How about finding repair parts to support the repairman? For every large multinational located in China’s ‘white hot’ manufacturing growth pockets, there are hundreds of these needs, largely unserved except with long waits or multiple support failures.
Redeploying Resources to New Markets The most difficult task will be to redeploy existing resources to completely different roles and efforts. In the new-good-fast-cheap environment it is just as important to know what not to do as it is to know what and how to proceed.
Being an American low cost leader is not a likely prospect. Most factory work of the past is easily reproducible anywhere in the world, including in China, where things are manufactured on modern, mistake-proof equipment. China is where the dynamic duo of education and hustle are present. Those who actually believes that the average skilled worker working in the US is 25-30 times better than their counterparts in China is deluding themselves.
Routine technical and engineering skills are also abundant in China and at about an 8:1 cost differential. For most routine definable tasks, like product redesign using derivative technologies, that kind of abundant talent cannot be matched. Especially if it can be co-located with the manufacturing to confirm that it works right. What is missing is the application technologies on products. China does not need nor want the same products that are assumed appropriate in advanced western markets. So, the product that was in vogue two or three generations ago in the west might just now be right in China. And the knowledge of how these can be used to make life better, is the ‘knowledge’ our company can bring to the Chinese market. Who better, than the people displaced, to bring such expertise to a new market?
Re-igniting Business Models
Money is fickle and always seeks the best returns. A high performance workforce sounds difficult to develop, if not extremely expensive. New, under served markets also offer a value enhancer, especially if the product can be brought up to speed with a product redesign.
Another option might be to find one of the manufacturing companies in decline, buy it, and leverage existing people, products, and assets, and align them with a new and different twist on the old value proposition. In most small and medium sized manufacturing companies that have been around for a decade, the old value proposition has likely gotten stale. Insert new management thinking and it can re-ignite the old model with new advantages that change the game and blend the future with a partnership that has staying power. But you have to see it for yourself to figure out how to apply it. There are opportunities in this newsletter to do just that. They are only a click away.
One of your best first steps is to attend the next MeetChinaBiz roundtable on June 14, 2006, at Worcester State College. Members gather monthly to discuss all issues related to doing business with or in China.
