Can Western Manufacturers Still Compete

What we found out was that Glenn was not only a consultant, but he had also managed manufacturing organizations so he understood the issues faced by manufactures today. He reinforced the training by hands on activities.... we as a management team was learning to think out of the conventional box - move away from existing paradigms, and we began to look a new and better ways of conducting our business. In summary, our management team is better equipped to deal with the increasing cost of doing business. We are learning to move away from conventional thinking to now examining new and different ways to do our business. The training was awesome - an eye opener and I recommend it to anyone who is serious about surviving in the US economy as it is today.

-- Lee Ferris

Western manufacturing’s share of the world economy is shrinking.

Faced with intense price pressure and structurally high labor costs, there might seem to be no path to profitable growth for most Western manufacturers.

Off-shoring is not a new phenomenon; it has been going on for years. China’s exports, which had been very low and stable until about 1990, rose dramatically starting around 1991. They accelerated between 1990 and 2005 and spiked shortly after China joined the World Trade Organization in 2001. Western manufacturers quickly noticed the opportunity related to low-cost Chinese production. Pioneering entrepreneurs sourced from China and set up entire business models based on foreign sourcing to serve their American and European distribution channels. This happened in a variety of industries, from retail toys to industrial parts distribution—whatever could benefit from the low-cost competitive advantage.

China became the prominent source for low-cost offshore manufacturing capabilities, while India became a hot spot for business process outsourcing (BPO). The value of offshore arrangements has increased steadily. While the number of new deals has decreased significantly in the last two years, the cumulative value of arrangements in place has increased.

Outsourcing and off-shoring are not fads. Many large companies continue to outsource and offshore significant components of their businesses. Western manufacturers are threatened and are surviving mostly on productivity growth and squeezed margins. In real terms, however, prices of U.S. manufactured goods are falling. Since 1995, prices for manufactured goods have declined 9 percent, while nonmanufacturing prices rose by 22 percent, according to a report by the National Association of Manufacturers (NAM). The strongest increases were in health care, education, and construction. Output is high and relatively constant, but price competition is fierce.

Western manufacturers are surviving mostly on productivity growth and squeezed margins. Simply put, productivity has kept manufacturing alive. U.S. productivity rose 4 percent between 1979 and 2006 when measured by the inflation-adjusted value of output per hour. Productivity rates in North America continue to be the highest globally.

Still, manufacturing has declined from 25 percent to 30 percent of U.S. gross domestic product (GDP) after World War II to 10 percent today. The difference can be attributed to off-shoring or domestic production absorbing price decreases over the period.

Survival plans

At the current rate of outsourcing and off-shoring, Western manufacturing is arguably in danger of being marginalized. Should Western manufacturers accept that manufacturing is past its prime and offshore entirely, or is there hope? Some Western companies are outsourcing their entire manufacturing operations to low-cost countries. This can be seen particularly in made-to-stock manufacturing, such as lighting and electronics.

The two largest lighting producers fabricate their electronic drivers and ballasts abroad. A private equity investor notes that this also is the case for Vizio. That firm, which is the largest liquid crystal display television seller in America, manufactures 100 percent of its products in Asia.

Manufacturing now comprises only about 10 percent of the U.S. economy. Despite this downturn, leaders are eager to continue off-shoring. Seventy seven percent of survey respondents expect their company to increase the number of workers off shore over the next five years. Nearly two-thirds of the remaining U.S. manufacturing base still can be offshored. Finding success Western manufacturers can thrive by filling a critical void in high-quality customized products and services. Plus, they can become profitable by pursuing a business model that stimulates differentiation and focus through technological advancements and service offerings. Combining focus on technological superiority with the implementation of service offerings is central to successful manufacturing in the West.

Another key to success is differentiation on quality. While there will be a huge market at the low end, Western manufacturers cannot afford to migrate there because their labor costs are too high to export competitively to Asia. Therefore, rather than giving up manufacturing as a whole, Western manufacturers need to learn how to effectively present products as the high-cost options. In the words of a Wall Street investment banker, “The economy will always demand manufacturers of premium, niche, [or] high-end products, which don’t compete by price but compete by quality and/or unique attributes.”

Cost always is a driver, but it’s not the main driver. Low-cost countries typically have trouble achieving the quality levels accepted as the standard in Western industrialized nations. An American Chamber of Commerce study found 80 percent of manufacturers have increased quality control on goods made off shore.

What should you do?

The off-shoring phenomenon has deep roots and long-term implications. While the trend seems to be decelerating, manufacturing infrastructure, organization, and strategies of companies in the West have been profoundly changed. In many cases, this has resulted in improved productivity and competitiveness and a stronger basis for sustaining profitability in the long term.

Manufacturers will need to make several changes, if they haven’t already, to ensure that they prosper in tomorrow’s global and competitive environment. They must build technology that can’t be copied. Also, they must layer value-added services on top of manufactured products; these “product-services” increase customer loyalty and profitability and tap the innovation capabilities of the enterprise, which cannot be commoditized. Finally, leaders would be wise to develop price and brand as high quality producers, while off-shoring and divesting low-end, repetitive, and labor-intensive work.

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