Strategic Opportunities for U.S. Manufacturers

Oct. 11, 2007
Will American ingenuity and entrepreneurship rise to the challenge?

Manufacturers in the U.S. are facing many challenges such as low-cost foreign suppliers, rising energy and material costs, rapidly changing technologies, and shifting market needs. But strong global demand for almost all types of products presents many opportunities for U.S. manufacturers that have the right attitude and capabilities. Will American ingenuity and entrepreneurship rise to the challenge?

This article describes the trends, challenges and opportunities facing U.S. manufacturers. Large companies should develop global operations and pursue global markets. Small- and mid-sized businesses (SMBs) should focus on specific products and markets, either local or foreign. Specific plans and strategies for U.S. manufacturers include developing more sophisticated products and pursuing export sales to Europe and Asia. To compete successfully in the "flat world," manufacturers must conduct a strategic review to clarify the competitive issues and formulate a strategy that supports growth.

Major Trends

Many countries are rapidly industrializing and supplying products to the growing numbers of consumers on all continents. The major trends in global manufacturing are:

Competition from low-cost Asian suppliers -- is grabbing market share in every industry around the world. Some produce quality goods, but many sell only inferior products to emerging markets. But many have the desire and resources to move up into new markets -- maybe your market -- probably sooner than later.

Increasing costs of energy and materials -- Rising global demand has many supplies tight. Increased costs cannot be passed on to customers because they have other choices. And increased volatility of prices and supplies makes running operations more difficult.

Diverse and changing market needs -- Large existing markets are spawning viable new sub-segments. The growing middle class in emerging markets has unique needs. The new generation of consumers has different preferences than those of previous ones. A plethora of new product offerings is reducing customer loyalty. Manufacturers need to be rapid innovators and flexible producers just to keep up.

New technologies -- embedded in products and used in production are making many new products possible and forcing manufacturers to upgrade their skills and processes. Some will adapt and innovate, while others will fall behind.

Falling trade barriers -- The trade policies and tariffs of many countries are complex and sometimes neither open nor fair. But the barriers are falling, often slowly, in most parts of the world. The results are clear: closed or protected trade leads to domestic inefficiency, complacency and decline. Open markets lead to more competition, innovation and prosperity. For example, it was the bold and persistent competition from foreigners Honda and Toyota during the past thirty-five years that forced General Motors and Ford to improve their products and processes.

Challenges Facing U.S. Manufacturers

In addition to the global trends, U.S. manufacturers also face the following challenges:

Low U.S. dollar -- versus other major currencies increases the cost of buying foreign supplies. But it also reduces the prices for goods sold to foreign buyers. It's a huge export opportunity. It makes where to deploy production resources more important. Hedging foreign exchange cannot change prices, but it will lock in a known rate and reduce the risk for payments or receipts.

Shortage of skilled workers -- due to the increasing retirement of many experienced workers, the aging population and the lack of interest by young Americans in careers in trades or manufacturing. To stay competitive, manufacturers will have to either automate production to reduce labor content or move production to where worker skills are available. The opportunity for increasing employment is to increase the value-add in manufacturing processes and use higher skill levels. Off-shoring is an option, but be sure to account for all costs and risks such as quality, shipping and politics.

Domestic market mindset -- What worked for many U.S. manufacturers in the past (uncontested supplier to domestic post-war baby boomers) will not work in the future as the U.S. share of global consumption and production falls. Many of the biggest opportunities are in the emerging markets of Asia and Latin America. But many American managers are ignorant or hesitant about foreign countries and markets. Americans, however, have more in common with people in foreign countries than they think. If they would overcome barriers such as stereotypes and false beliefs, they could understand more and see more opportunities for working with foreign partners and selling more to foreign buyers.

U.S. Trade Fact - About 19% of U.S. manufacturers exported products in 2005. Four percent of these firms (0.8% of all manufacturers) accounted for 84% of the total value of all U.S. manufacturing exports (source: U.S. Census Bureau, Department of Commerce). In other words, a small group of manufacturers (mostly large companies) accounted for a large portion of exports. Many manufacturers, especially SMBs, do not export much, but they could if they tried.

Strategic Opportunities for U.S. Manufacturers

Around the world, every industry is doing well: oil, gas, mining, agriculture, manufacturing, automotive, aerospace, pharmaceutical, electronics, infrastructure, etc. The leading U.S. manufacturing export categories are computers/electronics, aircraft/parts, motor vehicle/parts, machinery/parts, and medical equipment.

Pick a product or market with long-term potential and become an expert at it. Develop plans and strategies to exploit the following opportunities:

Export to Europe and Asia -- Many products are in demand. Many manufacturers need supplies. Help rebuild their old infrastructure or build a new one.

Sensors and instrumentation -- such as lasers, optics, monitoring and motion control, are used in many industries that are automated or work with physical goods.

Assembly, packaging, shipping -- to aid global supply operations. Help manufacturers and distributors to have lean operations and be more vertically integrated.

Heavy or fragile products -- not suitable for global shipping. Example: precast concrete, nickel steel, thin-walled products, high-precision parts. Or products where unit volume is not high enough to achieve economies of scale in production or shipping (but watch out if variable costs fall).

Do not compete with China on cost -- Do what they cannot. Differentiate your products based on features, quality, service, value-add, etc. For example, advanced design, advanced materials, or micro-finish/coating. Understand the customer better than they do.

Advanced integration -- More than simple assembly of parts. All parts and components (some can be imported) are integrated into a sophisticated whole product. Close contact among all the departments in the production process, such as research and development, design, production technology, purchasing, and sales, ensures maximum performance of the final product. The objective is to make the integration process itself a unique differentiator.

Develop proprietary products or services -- Produce or sell the products in markets where the return is worth the risks to intellectual property.

Provide more services -- such as one-stop-shop, rapid prototyping, fast turnaround or small quantities. Offer a complete solution that the customer values.

Expand marketing -- Budget for a marketing program to get new business in select foreign markets. Work with foreign partners to start. Persevere and be patient for results.

Opportunities For Large Manufacturers: Go Global

Most large U.S. manufacturers have global operations. But they must continually consolidate and integrate disparate resources to capture opportunities when and where they appear and maximize returns. They must deepen their relationships with players of all types and sizes around the world that can add value in ways that they cannot. Large manufacturers should approach global business in the following ways:

Global business strategy -- based on being a low-cost supplier or providing differentiated products. The right strategy depends on the industry competition, the markets in each region, and the ability to deploy resources. Simply having a "China strategy" is too narrow, as issues with doing business in China, such as quality and intellectual property, become more important. A high-level "global strategy" is needed to manage diverse operations and markets.

Global supply chain -- that integrates and optimizes resources from anywhere for producing and delivering products to anywhere. There are many players and factors that must be managed. If you are not adding the right value in the right way to the right product, somebody else somewhere will and will beat you. Find your place (or places) in the global supply chain.

Global intelligence network -- Opportunities and threats can pop up anywhere, anytime. Companies must detect the situation as early as possible to plan activities and mobilize resources. Staying connected through formal and informal networks will help gather and distribute the right information to the right people in a timely way.

Opportunities For Small Manufacturers: Focus, Focus, Focus

Small- and mid-sized manufacturers cannot compete on scale (low cost strategy) with large suppliers. But they can compete on scope and innovation in specific areas, such as specialty products or processes, and in global markets. The key is to focus and differentiate:

Focus on strategy -- Differentiate your company and products. Do what others can't. Pick your market niche and be an expert in it. Be sure to deploy your limited resources in ways that support your business strategy.

Focus on customers and products -- Understand deep customer needs. Develop niche products, such as sophisticated high-technology tools or processes, that have a narrow application but a worldwide market.

Focus on adding value -- Learn new skills and technologies, such as computer control (for products or production), advanced materials (polymers, nanotechnology), advanced processes (laser machining, steel/aluminum/titanium bonding, over-molding, powder sintering) or precision engineering (design, machining). Design or make unique products that provide superior value.

If an SMB's product has appeal in a foreign market, such as Europe and Asia, they should carefully pursue business there. Although there is a learning curve to exporting, the potential for long-term rewards is high. More strict focus is needed for success in a foreign market than the focus needed in a domestic market.

Or Be the Expert in a Local Market Niche

Many American manufacturers are small operations (less than 50 employees) that will likely never export because they lack the desire or resources. They mostly supply end products to local businesses or input products to nearby large manufacturers. To grow, they need a local market strategy, which involves not expanding the market area, but penetrating deeper into the existing area.

This strategy depends on location. It has increasing downside as the U.S. manufacturing base shrinks. But it can provide steady revenue in a viable and stable market area. Consider local opportunities such as:

  • Increase market share of existing products, by targeting competitors' business.
  • Add new or specialty processes for which customers currently go elsewhere. Example: shot peening, grinding/polishing, chrome plating, etc. See above advanced processes.
  • Make complementary products or services to expand revenue to existing customers.
  • Seek customers that are major exporters -- sales to them will give you a place in the growing global supply chain.
  • Downstream integration -- Add production of more finished products, such as bringing some of your customers' work to your facility.
  • Upstream integration -- Bring operations currently done by your suppliers to your facility.
  • Or shed operations that do not add substantial value or give you a competitive advantage.

U.S. Manufacturing Champions -- In addition to the leading global manufacturers, such as General Electric, IBM and Boeing, the following U.S. companies are examples of manufacturers that are thriving in the global economy:

Precision Castparts Corp. -- Portland, Ore.-based company manufactures complex metal components and products worldwide for industrial, aerospace and automotive applications. Its product lines are investment cast products, forged products and fastener products. It has 80 facilities in 22 states and 16 countries. Revenues are $5.4 billion and growing at 31% a year. The company was founded in 1945.

Dynamic Materials Corp. -- Boulder, Colo.-based company is a leading producer of explosion-welded clad metal plates used in petrochemicals, refining, aluminum smelting, shipbuilding and power generation. It also provides advanced welding services for aircraft and stationary turbine engine parts. It has facilities in three countries that sell products in over 15 countries. One-half of sales are from foreign countries. Revenues are $121 million and growing at 45% a year. The company was founded in 1965.

Conduct a Strategic Review

The world is flat: accept it. Your new customers are not like you: not a problem. Learn how to play the new game: or risk failure.

The first step for a U.S. manufacturer to compete in domestic or global markets is to conduct a strategic review of growth and markets and clarify the following issues:

  • Is business growth below objectives or potential?
  • What share of revenue comes from exports? Consider excluding sales to Canada and Mexico, which are really similar to domestic sales.
  • How suitable are existing company skills and resources for growing the business?
  • What resources are needed to grow? Do managers and employees have the right attitude and motivation?
  • Will growth be based on the local market or an expanded market, possibly including exports? Where are the best opportunities? Be patient for revenues, but impatient for profits.

Managers can use the initial review to decide on the scope of further work for setting objectives, formulating strategies and deploying resources to achieve growth.

Operations Strategy

Your operations strategy must support your business objectives and strategies. Are your products simple or complex? Are your production volumes high or low? Are your operations centralized, decentralized or out-sourced? The right operations strategy enables your facilities to produce products and fulfill actual orders in the best way.

For example, the practices of the Toyota Production System are suitable only for high volumes (hundred-thousand units or more). For lower volumes or complex products, a flexible manufacturing system will yield better results because workers will be more engaged and equipment will be better utilized.

The production system should operate based on the demands of customers (pull), not on the availability of parts (push). Six Sigma and lean manufacturing can help improve individual processes, but they are not good for fostering innovation or creating new products. Always have some employees (or better, all employees) working on creating new products.

Resources should be focused on engineering solutions and innovation, which enhance growth and revenue, not on production and costs. This includes advanced design, rapid prototyping and flexible production.

In addition to the above issues, to maintain competitiveness and growth in the flat world, all manufacturers must:

  • Have lean operations -- to reduce waste and delays.
  • Have continuous improvement -- to improve design, quality and output.
  • Understand the three aspects of quality -- and compete on all of them in ways that satisfy their customers:
    • User (customer) requirements.
    • Design specifications.
    • Process (delivery) conformance.

The above issues may seem daunting, even insurmountable, to many manufacturers in the U.S., many of which are struggling now. The game has changed. The bar has been raised. The new era of global business is testing the mettle (pun intended) of U.S. manufacturers. On a national level, it is testing U.S. industrial might and prowess. The future of U.S. manufacturing depends on American ingenuity and entrepreneurship, historical strengths that made the U.S. the greatest country in the world. But will these elements of success rise to the challenge now?

If U.S. manufacturers do not address the above issues, their products and revenues are at risk of being captured by smarter or more determined competitors. With global prosperity on a long upswing, there are more opportunities than threats to U.S. manufacturers. But the rewards will go only to those that understand the current trends, adapt to the changing conditions, and take a global view of business.

Blair Kingsland is a Senior Consultant with Spectrum Innovation Group. He has 25 years of experience working in business development, marketing and product design roles in the telecommunications, software and aerospace industries. Spectrum Innovation Group is a consulting firm specializing in innovation and growth. It provides insights into business trends and helps companies exploit opportunities for improving their operations and growing their business. The company is located in Toronto, Canada.

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