Onshore Manufacturing

Executives are scrambling to figure out how to respond to growing competition in manufacturing from China and other emerging economies. They should check out Louis Uchitelle’s article “If You Can Make It Here . . .” in the September 4, 2005 issue of the New York Times. The article profiles three U.S. manufacturing companies that have maintained manufacturing operations in the U.S., rather than following the broader trend towards offshoring.  One of these companies is well-known – Harley-Davidson.  The two others – Haas Automation and Hiwasse Manufacturing – are much less well-known.

The individual stories are interesting but, as always, it is the patterns of behavior that are most informative. What do we learn?  First, the CEO’s of these companies all have deep experience in manufacturing operations.

Second, Uchitelle observes:

Innovation is often compulsively pursued at the manufacturing companies that stay in America.  The engineers and designers at Harley-Davidson and Haas are constantly altering the companies’ products in ways that are not easily imitated by lower-priced foreign competitors.

Third, these companies “eschew layoffs, but in exchange for job security they require their workers to help squeeze out labor costs through automation and other efficiencies.” The companies are continually looking for opportunities to automate their operations, but at the same time they are committed to redeploying their workers in other parts of the business. In this way, they enlist the active participation of workers in the search for process improvements to generate greater operating efficiency. The high levels of productivity enable these companies to compete against low wage rate suppliers from China. For example, Haas Automation estimates that its productivity rate is 50 times greater than equivalent Chinese manufacturers, more than making up for a 10 times higher wage rate.

Fourth, these companies focus on new sources of growth.  This is a necessary corollary if the companies are to honor their commitment not to lay off workers while at the same time pursuing greater operating efficiency.  Harley Davidson and Haas are both targeting China as a promising export market for their products.

Fifth, these companies have remained relatively specialized.  In fact, Harley-Davidson almost went under about 25 years ago after being owned for more than ten years by a diversified company, AMF. A leveraged buy-out by Harley-Davidson’s management in 1981 marked the beginning of a successful turnaround. In pursuing growth, these companies have concentrated on leveraging their core product expertise rather than diversifying into unrelated businesses. (I would argue they will need to become even more specialized, but that is the subject of another blog.)

Sixth, these companies work closely with their suppliers to enhance quality and support their rapid incremental innovation. They don’t buy from suppliers just on price, but instead focus on building deeper relationships with suppliers that can help them differentiate their products.

Seventh, private equity has played a key role in the success of each of these companies.  Both Haas Automation and Hiwasse Manufacturing are privately owned and the leveraged buy-out was instrumental in the successful turnaround of Harley-Davidson.

Haas Automation also seems to be focusing on modularity and parts commonality to become more competitive.  Although it has a common design for its machine tools, this basic design can be configured “into 100 models and variants to suit specific customers’ needs.”

OK – so what does this all mean?  Bottom line, it means that U.S. companies can still compete in manufacturing with offshore locations. But this means they must adopt the management practices and strategies that companies in offshore locations are pursuing.  Many U.S. executives continue to be misled into believing that the success of offshore locations hinges on low wage rates and that there is no way to compete, especially in the manufacturing arena.  Sure, low wage rates are an important factor, but far more important are the aggressive management practices and strategies being pursued by companies in offshore locations.

What are these management practices and strategies? Well, they include deep senior management experience in manufacturing operations, rapid incremental innovation, aggressive talent development, focus on growth that is consistent with specialized capability, close relationships with suppliers to accelerate innovation, modularity in operations and access to capital that takes a long-term view of business opportunities. These are the focus of the book that JSB and I just wrote – The Only Sustainable Edge.

The New York Times story suggests that these management practices and strategies work just as well here in the U.S. as they do on the edge in emerging economies like China and India.  The problem is that a lot of Western companies have lost sight of these basic management practices.  They have become excessively focused on short-term financial performance, especially short-term cost reduction.

This is the challenge we face in competing with geographic edge companies.  Financial metrics are lagging indicators – they tell us how well we did. We need to restore our focus on the operating metrics of the business and the talent required to drive these operating metrics to higher levels of performance. This is the leading indicator that will tell us whether or not we are really on track in addressing the challenges created by competition on the edge.

By the way, the New York Times article also has an interesting chart showing that U.S. share of global manufacturing value added has declined by only about one percentage point over the period 1982-2004, while the big losers have been Germany, France and Japan.  Over the same time period, China gained global share by 7.5 percentage points.  It is a stunning growth in share. It reinforces my advice to executives to focus on trajectories and relative pace of growth, rather than static snapshots of performance.