Buying business?

Point: Why do these upstart, highly aggressive companies have to come in to our markets with low-ball prices and ruin it for everyone? It's suicide.

Counterpoint: Competition is getting tougher for everyone, even in what are still largely unsophisticated and non-price sensitive market niches. Deal with it.

For nearly two decades, foundries that have competed for the highest volume business, especially in the automotive market, have had to deal with extremely demanding customers and competitors. Close working relationships, intense price competition, near-zero defects and service excellence has long been expected. No option is overlooked in the drive to keep existing business, no prisoners are taken in the battle for new business and no mercy is shown by those who would offer, or take, a lower price. This situation has been so extreme, and so infamous, that many excellent foundries have, by stated or unstated company policy, avoided the auto business altogether.

By now, this extreme competitive intensity has migrated across many customer industries, to the point where doing business in most segments of the markets for compressors, construction equipment, electric motors, valves and countless other end products is no easier than competing in the automotive sector. To really understand this phenomenon, we need to look beyond end-use industries and follow the money. It is essential to view the evolution of customer sophistication and competitive intensity in terms of casting volumes.

A Shift in Competition

In the past, competition was most intense in the industry's highest volume segments - iron and aluminum automotive castings, steel railroad castings, brass plumbing fittings and so on. More recently, it has become just as tough to do business in the high and mid-volume non-auto sector, where organizations like General Electric, Ingersoll-Rand and ITT have built their approach to purchasing on an idealized version of the automotive model. It is here where commodity teams prevail, where global sourcing is growing rapidly, where supplier consolidation has reached a new level, and where price has reached the level it was at before the boom times of the 1970s.

For the future, the prognosis is clear for a continuation of this trend to virtually every facet of the industry - even the ultra low volume segment. One key catalyst for this next phase in the industry's evolution is the acquisitions recently made by large, sophisticated foundry organizations that position them to compete in the high margin market for large, lower volume castings. These organizations will indeed shake up this sedate and minimally price-sensitive market by bringing investment capital, technology, new performance standards and rock-bottom pricing into the mix. This will create customer expectations and force traditional competitors to play a new ball game.

Back to the Beginning

This brings us back to where we started. Is the expansion of this intense level of price competition suicide or the natural order of things? More than likely, it is both.

On one hand, companies with a good handle on their costs that are efficiently manufacturing goods are driving this trend. Because they have met or exceeded the market's expected performance levels on quality and service, they can now develop their low-cost operations as a true competitive advantage. Thus, prices are driven lower to build market share while still maintaining an acceptable limit of profitability.

Some market and product niches will survive in this intensely competitive world because customers are less demanding price-wise. These very small niches exist in markets where production volumes are lowest, where castings are largest and where alloys are most exotic. In these niches, competing on any number of attributes other than price and rapid turnaround can still provide a marketable competitive advantage.

On the other hand, some people in the industry are unprepared to compete effectively in the current price-dominated competitive environment. These businesses do not have the cost structure needed to support ongoing profitable operations at the low prices they will be asked to offer and are likely to be abandoned as suppliers as they try to buck these trends. Attempting to keep pace with accelerating customer demands for decreasing prices is indeed suicide for these organizations, and they will comprise the industry's next shakeout.

With quality and delivery all but standardized across all segments of the industry and more customers focusing more on price, CEOs are faced with the age-old question of whether to play the price game or adopt a "this too shall pass" attitude. Considering globalization, changing customer demographics and the strengthening of the purchasing function within many corporations, price will remain the central competitive factor for the near future. Whether foundries decide to play the game, hold out, focus on a unique market niche or seek a true breakthrough in quality or service - a hard look at cost structure, competitive strategy, customer mix and marketing approach is in order ... and now.