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Manufacturing,
exporting and outsourcing may be more intimately
linked than we realize. In various local
publications and talks on the US manufacturing
base and small business we have read or heard
some of the following statistics:
·
Sm
all
and mid-sized manufacturers make up 98% of the
entire manufacturing base in the US.
·
Illinois is the 7th largest exporter in
the country and 88% of exporters have fewer than 500
employees.
·
Among
the companies that export, 90% are less likely to
fail than companies that don’t.
·
According to a Price-Waterhouse Cooper study, 387
CEOs of $5M-$150M manufacturers that are exporting
say they are benefiting from international trade.
·
95%
of the world population and two-thirds of the world
purchasing power is outside the US.
Clearly there are
huge markets overseas that small and mid-sized US
manufacturers need to take advantage of, that
experts say not enough firms are tapping.
Unfortunately, unlike other sectors, manufacturers
face a cost-price squeeze, and intense global
competition prevents them from raising prices
despite rising costs. According to a National
Association of Manufacturing (NAM) study, external,
non-production (such as healthcare, litigation,
pension benefits) costs have caused unit costs to
rise by 22% (which translates to $5/hour worked).
Let’s examine how
the small and mid-sized firms are coping.
·
While
some manufacturers are waiting for legislative
changes to reduce the structural costs burden before
they consider exporting, others have moved abroad to
remain globally competitive.
·
Still
others are doing something completely different.
This group is
taking advantage of the global economy and turning
cost burden lemons into lemonade. What is their
strategy?
·
Some businesses understand the relationship between
wages and productivity.
Economists tell us
wages should be viewed in the context of
productivity. For example, a US firm’s wages may be
5 times higher than a low wage country (say $20/hr
vs. $4/hr). However, if this apparently discouraging
statistic is coupled with US worker’s high
productivity, it implies that US firms are in fact
globally competitive. This is how the
wage-productivity relationship works. If the US
labor is at least 5 times as productive as labor in
the low wage country, the US firm will have a lower
labor cost per unit of output produced and can still
compete successfully in an overseas market.
·
Some businesses understand the relevance of
specialization. According to a Department of Commerce study
(December 2003) some US companies are responding
well to foreign competition. The strategies adopted
by these US firms take a variety of different forms,
such as producing a product or service that requires
high reliability, high product tolerance, or product
customization; use of patents or intensive R&D; or
simply taking advantage of proximity to customer
base or even customer need for low volume
production. To different degrees each of these
factors used judiciously for each firm are important
reasons to continue manufacturing locally despite
higher US wages.
·
Some businesses combine the above two strategies
with adaptability. The agile small and mid-sized manufacturer is
maintaining its competitive edge by sourcing certain
components or standardized tasks from low wage
destinations such as India and other sources.
By understanding
the cost basis of each expense line and combining
multiple strategies, the forward thinking US firm is
able to lower its total expenses and compete in the
international marketplace.
The US’s major
trading partners (accounting for 55% of US trade)
are Canada, Mexico, China, Japan, Germany, UK and
South Korea (in 2003 trade was in excess of $1,000
billion). Compared to these trading giants, India is
a small (in 2003 India was ranked 25th) partner.
However in recent years the liberalization of Indian
trade policies has increased US trade with India. In
2003 US exports to India were just under $5 billion,
while total Indian exports [including IT and back
office processes (BPO)] to the US were $13 billion.
Interestingly, India is not immediately associated
with manufacturing, yet in 2003 alone Indian exports
in engineering products were almost $1.3 billion.
US manufacturers are now increasingly taking
advantage of India as an alternate source for labor
intensive but standardized engineering products such
as casting and forging, machine tools, electrical
machinery, industrial machinery, primary iron and
steel products, IC engines, pumps, automotive
products and textile machinery and even engineering
CAD work. 2,500 Indian manufacturing related
companies are ISO 9000 accredited. Many Indian
manufacturing companies don’t even sell in the
Indian domestic market, but target exclusively the
US and EU countries. Did you know the Indian trade
mission (a Government of India Ministry of Commerce
undertaking) has operated in the US since 1955?
What does the US
export to India? US trade statistics identify more
than 140 categories of goods. The largest among
these are petroleum products, cotton, various forms
of chemicals, electric apparatus, industrial
engines, computers, computer accessories,
telecommunications equipment, records, tapes and
disks. Not surprisingly, the last several items
contribute directly to building the IT
infrastructure need by Indian firms to serve US
outsourcing in IT and BPO! The US Department of
Commerce identifies, among other items, cosmetic
sales as an ideal category for exporting to the
middle class, which has increased rapidly since
Indian IT and BPO outsourcing to the US started in
the late 1990s. Funny how international trade is a
two way process!
Most important
take-away for small and mid-sized US manufacturers
and businesses:
·
Exports and imports are complementary sides of the
same coin.
·
A
well thought out outsourcing strategy can maintain a
US firm’s competitive edge.
·
Outsourcing is a business survival issue, because
profit maximization necessarily implies cost
minimization.
·
Cost
minimization is not just about government subsidies
and legislative changes; it also includes global
sourcing.
·
Overseas outsourcing (i.e. imports) is an essential
part of international trade.
This is why
manufacturing, exporting and outsourcing are indeed
three peas in a pod!
Everything we read
suggests that without entering the international
marketplace a US manufacturer or mid-sized business
cannot grow or indeed survive. Business as usual now
has newer dimensions as the global economy is
evolving beyond the G7 countries. The key to
business growth is to be nimble, flexible, adaptable
and pragmatic.
If doing business
with India is of interest, consider working with an
expert because it will save you time and money. Free
yourself from the travel, time and energy involved
with vendor search and vendor management of sourcing
and give us a call. We look forward to working with
you.
Sources:
·
National Association of Manufacturers website
·
www.export.gov/exportamerica
·
Foreign Trade Statistics, US Census Bureau website
·
(Government of India) Ministry of Commerce,
publications
·
International Trade – a key for small business
071204, The Business Ledger
·
Commentary, 090604 The Business Ledger
Use Global Resources To Reach Greater Profits
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