Outsourcing Trickles Down --- Small U.S. Firms Join the Trend of Tapping Offshore Producers
7 January 2004 The Asian Wall Street Journal MOVING U.S. manufacturing offshore, long a strategy of large multinationals, also is being adopted by smaller companies, who typically use a different approach to outsourcing. Rather than setting up production facilities, as larger multinationals often do, smaller companies are forging close supplier relationships and partnerships with overseas producers, who have excess capacity and are making huge strides in boosting quality and indigenous management skills. Such an approach allows them to move faster and avoid the hassle and cost of new construction or start-up. Another appeal: Overseas producers often have newer plants stuffed with the latest machines. A major thrust is occurring among auto-parts suppliers, although makers of various goods from fishing reels to dental tools are likewise outsourcing overseas, says Craig Thornton of Plante & Moran PLLC, a U.S. accounting and consulting firm with many small manufacturing clients. Big customers have given many of them an ultimatum: If they don't have an offshore operation within the six to 12 months, they will lose business to competing producers who do. But formidable hurdles remain. Operating with only a thin layer of top managers, smaller companies in the U.S. often find that going overseas can be a distraction resulting in missed opportunities or mistakes at home. Many owners are wary of outside advisers and consultants, whom they view as more expensive and less reliable than inside managers or family members. Wayne Youngers had little choice. About 18 months ago, his customer said that Mr. Youngers's small $6 shaft used in hydraulic machines could be bought in China, at comparable quality, for $2 or less. Mr. Youngers, chief executive of Youngers & Sons Manufacturing Co. in Viola, Kansas, now is reviewing his entire product line to see which items can be made in China, and figures eventually 50% of them can be outsourced overseas. "We suddenly realized our only alternative was going out of business or being significantly smaller [in the U.S.] than we were," he says. Mr. Youngers works with a Chinese engineering firm that has established relationships with various factories in China. Indeed, facilitating the move overseas, for him and others, is the growth of intermediaries who pack U.S. manufacturing trade shows hawking their services as overseas production partners. Moreover, new communications technology that tracks production and shipments from distant plants helps to allay concerns of closely held companies, which are accustomed to hands-on management and can't afford to have a single shipment delayed or rerouted. These factors make it easier for "small firms to get into outsourcing, not just in China, but in South America and Mexico," says William Dunkelberg, chief economist at the National Federation of Independent Business. Until recently, Mr. Dunkelberg sat on the board of a small U.S. fishing-reel manufacturer that has outsourced production of some lower-end reels to China. "Monitoring processes has gotten a lot easier," he says. "The Chinese have developed skillful managers and they have the latest equipment, often better than we have." It is impossible to quantify how many small companies are outsourcing. But trade groups and others working with small producers say the activity is growing fast. In October, the Precision Machined Products Association, which represents mostly small metal-parts makers, took 52 members to visit seven factories in Shanghai and Beijing. "Many more of our members are interested in [outsourcing] and are looking for pretty quick solutions for what they can do to remain competitive," says Michael Duffin, executive director of the trade group. Working with existing producers also makes it easier for companies thin on management to oversee offshore production. Such leanness explains why 72-year-old Edward Miller bought a condo in Shanghai. The company he founded, Prince Industries Inc. in Carol Stream, Illinois, now run by his son, Mark, is one of the relatively few small manufacturers to start a new factory in China. The senior Mr. Miller came out of retirement earlier this year as the Chinese unit, operating in a rented building, began churning out handles for dental tools. The elder Mr. Miller feels like he is starting over again in a place where opportunities are vast and untapped, much as he did when he founded Prince after World War II. Having a family member on the ground in China enabled his son to comfortably focus on the U.S. operations. In addition, Prince hired a president for the China division, an American citizen born in Shanghai who divides his time between the U.S. and China, to oversee the day-to-day operations of the new plant. Another obstacle to smaller companies is voluminous paperwork and not knowing how to speed the process along. Mr. Miller's company must provide pictures and valuation reports on all China-bound machines. One shipment sat in Chinese customs for three weeks, before the company thought to inquire whether an "expediting" fee was needed. The machines were released two days after Prince made a modest payment. Most small producers don't advertise their activities overseas, in part because it is unpopular with other small producers eager for U.S. policy makers to erect trade barriers. Ehlert Tool Co., a toolmaker in New Berlin, Wisconsin, has become notorious for deciding to form a joint venture in Ningbo, China. "Most of our competitors have taken the stance that they are going to somehow reverse the trend of the global economy," says Michael King, Ehlert's chief executive. Mr. King is convinced his 80-employee U.S. work force will grow, not shrink, but with an emphasis on designers and engineers. Meanwhile, some who look offshore find it doesn't always pay. Jeffrey Glaze, president of Decorated Products Inc. in Westfield, Massachusetts, which makes nameplates for other manufacturers, toured China last summer for three weeks looking to outsource part of his production. "It isn't worth it," he says, noting that added costs, such as air-shipping products back to the U.S., erased his narrow profit. He couldn't rely on less expensive and slower sea freight, he says, because his customers demand just-in-time shipments and make frequent order changes. _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://fes.uwaterloo.ca/mailman/listinfo/futurework
