By Steve Rutan

How are manufacturing firms in the United States supposed to compete with the low-priced goods coming into this country from China? Is there any way to beat out overseas suppliers that can deliver products to our coastal ports for prices that are only slightly higher than it costs us to buy the materials? Worse yet, what can smaller firms in the U.S. do when their domestic customers are moving production and assembly operations out of this country to take advantage of these irresistible cost advantages? With quality from these manufacturers improving with every passing year, is manufacturing in the U.S. finally at death's door?

These and many other depressing questions are assailing today's managers. But all is not lost. We face a huge challenge that requires American managers to re-think their business and strive to fully understand the ways in which they can still offer value and competitive advantage over these manufacturing upstarts.

Let's focus on that statement for a minute. It is brutally simple: U.S. manufacturers must continue to offer value and develop competitive advantage. These imperatives have not changed at all. The juggernaut of Chinese manufacturing is just another onslaught by low cost competitors - albeit an enormous one.

It is naïve to expect that we can simply continue to do what worked well for us for the last several decades and then bemoan the unfairness of the seemingly sudden appearance of new competition. Many of us have been abruptly shaken to attention - shame on US! Most of us should admit that we could see the changes coming for years, but, as our customers slowly adjusted to the benefits of finding new, inexpensive suppliers in China, we dragged our feet or, worse yet, hid our heads in the sand and hoped that the beach would not be washed away anytime soon. Now that the slow trickle of our customers' gradual adjustment to doing business in China has become a tidal wave, many U.S. manufacturers find themselves frighteningly behind in their ability to adapt and compete.

Not only have these new waves of competition hit our shores and done their damage. Now, the tide is out and we need to find a new beachhead. How can this be done? We can begin by honestly assessing the true advantages that manufacturers in China offer. We can use every tool at our disposal to identify their disadvantages and find creative ways to capitalize on them. Finally, we can strive to identify customers that value the ways in which we can offer advantages against these formidable foes.

China has cheap labor, low cost of capital and improving capabilities in the areas of quality and technology as well as a government-sponsored hunger to compete in all manner of world industrial markets. The result of these advantages is that, when it comes to large volume production of standard design goods, Chinese manufacturers are very tough to beat.

China also has an overheated economy, a loose lending environment, an inability to protect intellectual property and a manufacturing base that is located thousands of ocean miles away from the nearest U.S. port. Can we find some opportunities for advantage in the eyes of our customers when these factors are brought to the forefront? Let us examine some of the disadvantages of sourcing in China to understand how we can compete.

It takes a lot of time to get product from China. For goods in inventory, one global shipping expert suggests that it takes eleven to sixteen days for a ship to get from a port in China to the port of Los Angeles, three to four days to unload and clear Customs, and, finally two to twelve days (or more) to ship the product to your door.

This amounts to a reasonable expectation for delivery of at least one month to get product to your customer's door - if everything goes according to plan. But problems can, and do, occur.

In 2002, shipments arriving in this country via the West Coast came close to being paralyzed, as the West Coast Longshoremen's Union negotiations appeared headed for trouble. Robert Barro of BusinessWeek Online observed in December of 2002 that the ILWU is "a group of about 10,000 semiskilled workers who have used their monopoly position to push up their annual salaries to more than $100,000 and have the muscle to damage the entire U.S. economy. The union has excelled at limiting the introduction of productivity-enhancing technology that would likely compromise its monopoly power… the ILWU's only restraints seem to be the ongoing injunction against their strike that President George W. Bush imposed under the Taft-Hartley Act and the possibility that the Bush Administration would eventually send in troops to run the West Coast ports on the grounds of national security. Perhaps these pressures account for the recent apparent settlement between ILWU and the shipping companies."

As of December 2002, it appeared that the union agreement should guarantee that the ports will remain open for the next six years, but this does not prevent delays. On November 10, 2004, the Associated Press reported: "With the start of holiday shopping just weeks away, toy companies and other purveyors of seasonal merchandise are living through a nightmare - merchandise that's stranded aboard cargo ships amid the gridlock at two West Coast ports." Cargo volume to the West Coast had increased more than ten percent in one year from levels that already had been taxing the ports' capacity. Creative ways to bypass the ports in order to make sure that desired products were on the retail shelves in time included using airfreight for delivery. This expedited delivery is much more costly and was responsible for trimming profit margins by ten or twenty percent for some items. As a result many companies found that their profits from the holiday shopping season were significantly impaired.

Those are the standard delivery lead times and possible logistics letdowns. How quickly can Chinese suppliers respond if your customers require frequent design changes and short order lead times? Assuming that a company has already been through the process of setting up all of the relationships they need to begin making a product, and if all goes smoothly, a specialist in global trade estimates that it takes two to four weeks to get a product quote, sixty to ninety days (2 months average) to procure tooling and sixty to ninety days to make the production run (45 days average). Add to this the time required for the previously mentioned shipping logistics. From the time of product design, quoting, release of order, production scheduling, through shipping, Customs, unloading and delivery, this process is likely to take 6 months or more. This may not be a problem for some markets, but is this an acceptable lead-time for all of your customers?

What about the financial stability of suppliers? We all want reliable sources of materials, components, assemblies and finished products. How should our customers and we assess the financial soundness of a competitor in China?

China's recent history as a developing nation with a relatively low standard of living, tens of millions of low-wage workers and an insatiable appetite for rising among the world industrial powers has provided them with the raw resources to compete on the world stage. The planners for the government-directed economy have been working to quickly become a world industrial power. But this blind ambition to recklessly grow their industrial base could be the cause of a future meltdown.

Early last year, BusinessWeek Online evaluated the prospects for an economic correction: "China is on a wild [capital expenditure] spree," says Dong Tao, [Credit Suisse First Boston's] chief economist for non-Japan Asia. "Two or three years down the road, this will bring a major supply shock to global industry." The rapid expansion of many industries is quickly outstripping demand. Steel making capacity will more than double by 2007, new manufacturing businesses come into being every day, real estate development is out of control. Recent reports indicate that factories located in the larger cities are having difficulty in finding workers to staff their plants. The "unlimited supply of cheap labor" seems to be reaching its limits. This can have a serious impact on the commitments made by your customers' China suppliers.

Most of this new industrial capacity has been funded with easy money from the country's banks. Official bad loan ratios for some of China's most troubled banks range as high as 32%. Some financial estimates indicate that the actual rate could be much higher. It's enough to worry about the impact on the banks if so many loans under perform - what about the businesses that have been funded with these loans. Inability to service their debt will at least cause instability of their business operations. Some of your customers' China suppliers could go out of business without warning. This will not be a quiet disruption of business when it occurs.

How safe are your customers' core products when they source production in China? Once the production partner is up to speed, what forces exist to keep them loyal to their customer in the U.S. and what temptations exist for them to eventually bypass their customer and go direct to the marketplace?

Even large, sophisticated businesses are not immune to the threat of product piracy. In December 2003, The Detroit News reported that major automakers were experiencing compromises of their international brands and piracy of proprietary components for their cars. One Chinese automaker's new minicar "was a dead ringer for the slightly more expensive Chevrolet Spark" and "locally made VW components, such as brake discs for the Jetta" were found in the competitor's cars. Toyota "suffered a stunning setback... when a Beijing court threw out its lawsuit charging that... China's largest private carmaker - violated its copyright when it used a logo similar to Toyota's... More worrisome were accounts that the Beijing Second Intermediate Court suggested Toyota's internationally known insignia was not a distinctive enough brand in China's fledgling vehicle market - the world's third-largest after the United States and Japan... History shows that Chinese joint venture partners are prone to knock off your products,' says [C. Peter ] Theut, a longtime counselor for foreign companies operating in China." With the ruling on Toyota's logo, these "partners" appear to have the support of the courts in their liberal rip-off of brand insignias and component parts.

All of these potential flaws in the system of manufacturing products in China offer the prospect of significant delays, disruptions and possible loss of intellectual property. How can a U.S. manufacturer use this information to develop sustainable relationships with customers here and abroad? We will briefly consider each of the topics that we have discussed and shift our challenge to finding and focusing on those customers that value the ways in which we can offer value beyond low price.

Delivery Time

Study your existing and prospective customers. Which among them can afford lead times of two months or more after they order the product? The customers that constantly challenge you for quick delivery will have difficulty making the switch to Chinese sourcing. The trend over the last several years has been for companies to manage their inventories very tightly to keep costs down. If there is any unpredictability in a customer's demand over the course of the year, it is difficult for them to rely on order streams that will take months to respond to their needs. In dealing with this uncertainty, if they expect a supplier to keep buffer stock available to meet their changing demand, can they afford the inventory liability of fixed stock if the market dictates that their products must change? Your ability to provide fast delivery presents an opportunity for you to offer value beyond the superficial price of the product you make.

Product Modifications

result of minor ongoing improvements or in response to the demands of your customer's marketplace. These customers will be more loyal to you if you demonstrate the ability to turn on a dime. Develop the ability to modify production quickly. Make sure that your personnel recognize that this is one of your strengths and that every customer change request should be welcomed as a compliment to your ability to accommodate them. Search for customers that have this need.

Do your customers involve you in product design or do they simply give you a print and ask for the finished product? If they see you as merely a means for manufacture - worse yet, if you see yourself that way - then it is not a mystery why they are trying to take their business to the lowest bidder. Look to the customers that view you as a valuable partner in their product development and design process. In the interest of cost cutting, many of your customers may have cut back in some areas crucial for product development. Seek out process capabilities and areas of technological expertise that fill these gaps. Once you feel you have the potential to take over these activities on behalf of your customers, change your sales pitch to convince your customer that you have additional ways to contribute to their long-term health.

Potential for Economic Disruptions

Granted, featuring the prospects for a possible meltdown of the Chinese economy in your customer negotiations is a lot like the late campaigning in the recent presidential election. "Give me your business because something could go wrong with your other supplier!" Remember that unexpected economic crises and downturns occur with frightening regularity. Which of your customers were burned by the last downturn? How did they fare during the Asian Flu of 1997? The poor performing loans of the Chinese banks could indicate a major problem with the viability of individual companies - one of them could be your customer's outsource partner.

Loss of intellectual property and long-term competitiveness

This threat is real. The official position is that the system for protection of intellectual property is now up to international standards. The word on the street is that any manufacturing joint venture is likely to compromise your proprietary product content in two years or less. Consider which of your customers and prospects have the most to lose if they source important elements of their production in China. Be armed with recent examples of companies that have lost their grip on intellectual property and illustrate the risks that your customers are taking when they move production there. Furthermore, develop your own capabilities for providing key manufacturing content within the environment of secure U.S. business practices compete when our customers are sourcing overseas. In the end, some companies will decide that their decision really boils down to price - we need to persist in our efforts to sell to these companies, but we also need to know when to let them go. Our emphasis moving forward is to develop a portfolio of the right customers over the long haul. The process takes a clear strategy, and plenty of time, effort and creative resources. Set aside your frustration in trying to beat the Chinese competitors at their own game. Understand the value you offer as a U.S. based manufacturer and seek out those customers that have solid reasons for giving you their business.

Steve Rutan is a Consultant with Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at

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