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The sport of boxing has many classes and subdivisions, but it has only one competition that is universally recognized as the best—the one that produces the heavyweight champion. It is in this class that you find boxers who are the strongest and the most able to take a punch. It is evident that the United States’ economy has been the world heavyweight champion since the Second World War; today, however, it seems that our nation is now more heavy weight than champion.

This thought has run through my mind in recent years as I worked in Mexico, Europe, and, over the last four years, China. Even when I’m home in the States, people here who have not been overseas believe the U.S. will prevail just as we always have prevailed. Their example is typically Japan, forgetting that Toyota, Honda and other Japanese automakers are growing their market share and profits here and around the world as our Big 3 continue their downward spiral.

My purpose in this letter is to offer you a better understanding of what is
really taking place in China and why U.S. manufacturers must seriously face the
challenge of competing on a global basis. I have made more than 30 trips to China since 2003 and I can assure you the scene is similar everywhere I go: incredible expansion and construction. Let me put this into perspective: 40 percent of the world’s construction is happening in China. Does that seem incredible? It ought to—it is the fastest growth in the history of the world. The gross domestic product in China is growing at 6 to 10 percent. By comparison, the United States’ GDP is growing at 1 to 3 percent. While some here believe that China will not be truly competitive, consider this: China has more English speakers and more Internet users than the United States has. In addition, the ratio of new engineers produced each year in China in comparison to the U.S. is 4:1.

The competition is formidable. So how do we compete with $150 to $200 a month labor rates in China and other low cost producers? Part of the answer is greater efficiency through automation, lean manufacturing, Six Sigma and other tools to reduce non-value labor and waste. However, would you be surprised to know that China is also beginning to employ these same principles? China wants to move from the world’s low-cost producer to the country that is inventing products.

Some pundits in our country say that the only way to compete is to move all of our labor-intensive work to China. That’s not the right long-term strategy. Manufacturing today represents less than 17 percent of jobs in the U.S. and continues to decrease. Some say we need to keep all jobs here and that we should adopt a strategy of protectionism. That fight is long over. If you do not address the low-cost competitors, you can be sure your competitors will.

The ultimate answer for manufacturers will be a combination strategy. Some industries are fortunate that either labor cost is a small component of their overall cost or they are able to automate and continue to produce solely in the U.S. For most though, foreign prices and lower cost pressure from your competitors is a real factor. In this case, the appropriate strategy may be that certain products or components carrying a high labor component need to be manufactured off-shore, and your plant here may need to be redesigned to eliminate all non-value labor.

Another key consideration is that China should also be considered as an exciting new market for your products and services. Many U.S.-based companies have found China to be a profitable market. China has a population of 1.4 billion people and that number is increasing.

In my view, the bout for heavyweight economic champion is not over. We may be bloodied and our economy staggering a bit, but manufacturing can use new tools and form new alliances to regain its pride
and profitability.

To read a recent Journal-Gazette article featuring Al Bowden go to: http://www.journalgazette.net/apps/pbcs.dll/article?AID=/20070826/BIZ/708260362&SearchID=73291653608508

Our perception of change is often influenced by whether we are the originator or recipient of the action. Even as the recipient, we frequently enjoy the benefits (as mentioned above), but at other times we feel a loss of control. Long range plans and assumptions are suddenly threatened a future that once seemed secure is very much in doubt.

American business has a long history of creative and innovative change. From the Industrial Revolutions through most of the 20th century, America led the world in the areas of technology, manufacturing, distribution and business innovation. However, as transportation and communication systems steadily improved, both businesses and markets began to evolve toward a global economy. U.S. companies expanded to take advantage of that economy by building or buying facilities in other countries. Foreign companies bought U.S. companies or built plants in the U.S. With the increased global competition, there was great downward pressure on prices and increased demand for higher quality. Many well-known organizations did not survive (think AT&T) and most that have survived have undergone tremendous internal change.

The paradigm of business has changed. For most of the 20th century, business used the following formula:

Selling Price = Cost + Profit

Selling Price was determined by adding Profit to the Cost of the good or service. Although we worked to reduce the Cost component, because the competition was less, we were still able to increase the Profit and therefore the Selling Price. That paradigm has now changed! Although is looks the same from an algebraic perspective, the new equation is dramatically different. It is:

Profit = Selling Price – Cost

Selling Price is now determined, not by us, but by the global market. Profit becomes the dependent variable something that we cannot control directly. The only item that we can control is Cost. Initially, this was accomplished by reduction of manufacturing labor costs through automation and transfer of manufacturing to locations with significantly lower labor costs. It has extended to white-collar jobs as well, including hardware design, software development, and even professional services.

Reduced labor rates, however, are no longer sufficient to maintain competitive status. Inefficiencies, or waste such as scrap, rework, poor quality, unnecessary movement, variation, excess capacity, etc. to name a few must also be reduced or eliminated. Organizational culture, from the top to the bottom, also needed to change. We needed everyone’s ideas, support and participation in order to be successful.

Research has shown that most manufacturing operations have as much as 15-25% of their total sales that is wasted through the cost of poor quality (COPQ). Service businesses and the transactional aspects of manufacturing businesses are even worse. Unfortunately, our traditional accounting systems are not designed to identify these costs, but they are very real. Survival in the global economy demands that we reduce these costs through continuous improvement process methodologies.

As organizations began to seriously apply the principles of Lean (as developed by Dr. Taiichi Ohno of Toyoda), Six Sigma (as pioneered by Dr. W. Edwards Deming), advanced manufacturing concepts and modern leadership styles, they not only found success, but many also learned that American facilities could compete effectively with foreign ones. Examples of both success and failure exist across northeast Indiana, and across the United States.

Is there a type of business that is isolated from global competition? Perhaps, but even those that seemed to be safe from such competition a few years ago, are seeing the situation change. Outside a few niche areas, the prudent businessperson will pursue a balance of two approaches:

Using proven business improvement methodologies (such as those mentioned above), he/she will continuously improve the quality of the product or service, increase customer satisfaction and reduce cost. World class has to become more than a buzz-phrase; it has to become the way of life.

While striving to preserve domestic operations, he/she will also make informed decisions about expansion, consolidation and/or relocation of facilities to China, Mexico, Slovakia, India, etc. Sometimes it is important to follow a customer. In other situations, there is a market opportunity that cannot be effectively served with domestic operations.

Change, in and of itself, is neither good nor bad! Understanding the impact that the changing global economy has on our organizations is not only prudent for many, it may be a matter of survival!