The Threat From China

China Expert Outlines Chinese Threat

Traditional thinking is that the threat from China in precision machined products will come from the juggernaut that is the state-owned and run precision machining shops, but that thinking may be flawed, according to an expert on the country and its economy.

Instead, said sinologist Dr. Eamon McKinney, CEO of the China Business Network, the competitive threat that the North American precision machining industry faces is more likely to come from the privately held companies in China. These companies typically enjoy the long-established advantages of the state-run companies as well as their own western-style management abilities.

Sheer numbers alone also dictate that the threat is more likely to come from private companies in China than the state-owned firms. Indeed, there are more than 7 million private companies in China, 10 times the 700,000 state-owned companies currently doing business.

Dr. McKinney, who made his comments during the Precision Machined Products Association's 69th Annual Meeting in Rancho Mirage, California, in mid-October, said that for the North American precision machining industry to remain competitive, companies have to determine in which markets and with what products they are viable and where they are not, and then make adjustments in their business plans and philosophies.

Niche Marketing And Total Value Solutions

"Companies need to look at their niches and their commodity items, and then they have to make a decision as to whether or not they want to provide total value solutions for their clients," Dr. McKinney said. "Companies can no longer regard themselves as simply manufacturers. They cannot sell their products simply as a commodity. There's little or no margin in that.

"If they do not change, they will be facing a threat that likely will make them extinct. That danger will primarily come from the privately held Chinese firms for a variety of reasons," he said. Although the state-owned companies enjoy advantages, such as cheap labor, indigenous natural resources and low operating costs, the social costs of cradle-to-grave employment, local sourcing mandates and their physical locations are barriers enough to make them—in general—not as great of a threat as many would believe.

Chinese firms that have foreign investment, either through joint ventures or some other means, also are unlikely to be as much of a threat for many of those same reasons. As happened in Japan in the 1980s, many companies are using their investments in Chinese plants as "plantation manufacturing"—making parts and sub-assemblies there for export back into the home market to be placed into larger components. Moreover, while they may enjoy some of the cost advantages of the state-owned companies, they are not passing those along to the consumer, "so they're not that competitive," he said.

A Mobile, Highly Competitive Enemy

"I don't think what you'll be seeing emanating from China will be mass production (from the state-run companies). It's a different kind of enemy here . . . it's a mobile, highly competitive enemy whose speed will be the differentiator," Dr. McKinney said in reference to the privately run shops.

Dr. McKinney noted, for example, that during a recent visit with precision machined products manufacturers from North America to privately held Chinese factories, western executives were amazed at the quality assurance standards of the Chinese (whose basic tenet was a zero-tolerance for defects). "The executives said the quality assurance methods the Chinese employ would be difficult to do in many U.S. plants," Dr. McKinney said, noting that an initial defect in production will cost both the shopfloor operator and an inspector in a plant in China a 3-day suspension in pay, and a second defect will result in the loss of their jobs.

"This is the key in making the privately held companies so successful," Dr. McKinney added.

Having said that, however, he was quick to point out that there are some state-owned precision machining companies, as well as joint venture companies, producing parts that are just as adept and competitive as the privately held companies in China.

Consequently, he said that while the competitive pressures will likely come from the privately held companies, state-run operations will likely have a significant presence in North America as well. It's just like it is here in America. Not all of those private companies are well managed. And there are some public companies that are very well run."

Whether it's China's privately-held or state-owned shops, the threat to the North American precision machined parts industry is very real. To remain competitive the industry has to change its thinking and business strategies. And it needs to move quickly.