From Western Michigan to China: The Kurdziel International story.

To better serve its customer base and offset international competition, Kurdziel Industries established strategic alliances with Chinese foundries as a means to compete in the global casting market.

"Our customers told us that if we didn't go to China for casting production, they would."

This statement by Donald Huizenga, Kurdziel Industries, Inc.'s president and CEO, is the reason his firm is now in a strategic alliance with two Chinese foundries (with two more in negotiations) for the production of gray iron counterweights and other commercial cast components.

He continued, "Counterweights are some of the most expensive components for any material handling end-product. End-users are forcing the issue of price reduction. As a counterweight foundry group, we can't sell our product at a loss--we had to find an alternative."

Muskegon, Michigan-based Kurdziel's struggle is not unique to today's foundry. Yearly price reduction demands from customers are the norm, not the exception. However, Kurdziel's solution to the problem is unique.

The Options

In 1995, one of Kurdziel's customers, the lift-truck supplier North American Coal Company (NACCO, parent of Hyster and Yale), prompted the casting firm to look at the possibility of setting up a counterweight casting foundry in China to supply its new Chinese assembly facility.

In addition, Huizenga said, "Many of our customers are Japanese companies (Komatsu, Mitsubishi-Caterpillar, Toyota) that have led the way in global expansion," Huizenga said. "It is in their basic business philosophy to surround their plants with suppliers, so it is a necessity to be near their locations."

Since NACCO is Kurdziel's number one customer in terms of sales, the firm also knew this could be a strategic move to help one of its customers through a transition.

"We were already intrigued by the possibility of an off-shore foundry," said Roger Plont, Kurdziel's vice president of international operations, referring to the steps Kurdziel needed to follow to prosper in the global marketplace. The foundry estimated that by 1995, 10% of the U.S. counterweight business was supplied by Chinese and Mexican foundries.

But the task was daunting. For a foundry firm of its size (125,000 tons shipped in 1995, 115,000 tons projected for 2002), expansion traditionally means a new molding line. Global expansion was uncharted territory--especially to a country in the midst of a transition from a communistic, planned economy to a free-market society.

The importance of global competition was driven home once again that same year by one of Kurdziel's new counterweight customers. Kurdziel took a Chinese-designed, multi-counterweight application and redesigned it into a single casting. The consolidation saved the customer more than 35% in cost and improved internal preparation time and overall product pricing. The unfortunate result: the customer took the new Kurdziel design and shipped it back to its Chinese casting supplier. The Chinese foundry provided free patterns, free sample castings and lower prices. Needless to say, the Chinese foundry won the job back.

"The main goal of Chinese foundries is to capture market share with significantly cheaper castings," Huizenga said. "They do not have the same worries about environmental regulations, worker welfare or short-term pressure to continually improve ROE, ROI or whatever profit yardstick that may be used. They want market share."

Continued Huizenga, "As U.S. foundries, we can have all the pity parties we want, but the rules of global supply have changed and castings will migrate where it is cheaper to produce them. Our future success depends on our ability to understand this trend and satisfy it."

For Kurdziel, success means business in China.

Exploring a Chinese Greenfield Foundry

Kurdziel explored a possible relationship with NACCO in China to learn the feasibility of doing business there and understand how Chinese foundries compete at such low costs. In particular, Kurdziel wanted to determine the cost of foundry business, such as:

* labor rates;

* raw material costs;

* transportation costs;

* environmental costs;

* health and safety issues;

* broker arrangements.

Kurdziel determined that the raw material costs for Chinese foundries were no different than in the U.S. On labor, typical monthly wages averaged only $150/month per foundry worker.

When Kurdziel compared its costs at its Rothbury, Michigan foundry (the firm also has a foundry in Sparta, Michigan, and painting facilities in Pennsylvania and Washington) with those of the Chinese competition, it determined that the Chinese were most competitive on castings below 2500 lb in weight. Above that level, Kurdziel's Rothbury plant is a more efficient operation because of the economics achieved in the processing of these larger castings.

Once the firm had performed its initial exploration in China, it went so far as to mock up a greenfield foundry to determine feasibility. Despite the labor savings and the chance for autonomy and control over production, the study indicated that the castings produced would be slightly more expensive than the price offered by other Chinese operations. In addition, there were other political and cultural factors to consider.

According to Plont, "Many of these represent un-quantifiable risk. The rule of law is still developing in China. The structure of Government levies a high degree of local autonomy and things are changing daily. This results in the absence of a reliable business model."

Although standards regarding environmental, employment, health and safety regulations do exist, there are uncertainties in China as to whether a foreign firm building a new plant would have disparate enforcement to stricter standards (including a list of controlled substances longer than in the U.S.). In addition and even more importantly, building a greenfield meant that Kurdziel would have to operate a management structure in a foreign culture and political climate that has posed problems for many U.S. firms.

"We surveyed top management consulting firms in the U.S. and each had horror stories about joint venturing in China," said Plont. "U.S. Government agencies like the Dept. of Commerce also had their tales to tell. However, we did recognize a strategic opportunity to expand our market share and product offerings to include a whole line of counterweights from 50-70,000 lb."

Building a Partnership

Beyond building a new plant, what are the opportunities for a foreign company looking to establish itself in China?

The simplest option is to broker castings produced by Chinese foundries. A U.S foundry can serve as a manufacturer's sales representative for a Chinese foundry. "The problem with this approach is that the Chinese culture doesn't recognize intellectual property and copyrights," said Plont. "If you take an OEM's product design that you have 100% sales requirements for and establish it in China and show them how to make it right, the probability is that the Chinese foundry is going to go directly to the OEM and try to negotiate a deal directly to produce that design. We had to protect ourselves against that."

A second option is a strategic alliance or contractual agreement. In this situation (which can encompass a variety of things), a legal agreement or contract can provide the U.S. foundry exclusive rights to sell the castings the Chinese foundry produces in its U.S. markets and the Chinese foundry exclusive rights to be the only one serving a particular market segment. "This situation guards against the stealing of customers because there is legal recourse to block the castings from being sold in the U.S.," said Plont.

A third option is a joint venture with a Chinese foundry in which the U.S. foundry takes an equity stake in the partner or some form of contractual joint venture relationship. According to Plont, the difficulty in running a harmonious organization between two such divergent cultures as the U.S. and China is difficult at best, and the road is laden with potential pit falls.

A fourth option is to establish a WOFE (Wholly Owned Foreign Enterprise). This entails either purchasing an existing operation in its entirety or developing a green/brown field site. Serious consideration was given to this by Kurdziel as stated earlier, but a strong business model could not be developed.

Kurdziel decided to pursue a strategic alliance, but needed expertise to help guide it. Dake, a local Michigan manufacturing firm with previous experience in China, was selected to help Kurdziel with various business issues.

Huizenga said, "We needed to put our faith and future in China in the hands of someone that could teach us the ropes of production, coordinate shipping and plan for the future."

"The plan was to become educated about business in China so we could internalize all the functions and run it ourselves," said Plont. "No other outside firm can know all the intricacies of your business like you do."

Kurdziel began the work of finding a Chinese foundry partner. The search netted a state owned iron foundry in Beijing. Kurdziel signed a strategic alliance contract with the firm in late 1995.

Building a Partner

Initially, production began with a few castings--components with strategic advantages. Each job required monthly face-to-face meetings to work through engineering and manufacturing issues. Castings were shipped to the U.S. and inspected. For the first few years, almost all of the castings required rework for metallurgical, dimensional and surface defects.

"We would open up a container not knowing the quality we were going to receive," said Plont. As a result, Kurdziel made monthly trips to China to train on production and management practices to improve quality and efficiency.

Beyond production, one of the difficult issues Kurdziel faced during startup (and still faces) was shipping. Initially, Kurdziel relied on Dake to handle all the logistics issues.

"Freight rates can be very volatile," said Plont. "The market is primarily based upon supply and demand."

At Kurdziel's initial shipment levels (up to three containers at one time, each container holding 38,000 lb), freight was up to 40% of the cost of castings shipped from China to the U.S. Even at today's higher volumes of 1000 containers per year, freight is 25-30% of the casting cost. As a comparison, the textile industry calculates freight at 3% of its China product cost.

Packaging is another problem. Regardless of the care taken with packaging the castings, "Two or three out of every thousand containers arrives in the States with all the castings damaged because the container was dropped or mishandled," said Plont. "In earlier years, this number was much higher. Even today, some castings are damaged. It is simply unavoidable."

Guan Xi

In 1996, Kurdziel's alliance foundry shipped 5000 tons of cast counterweights. By 1997, Kurdziel's production had grown to 18,000 tons, and by 1999, 20,000 tons. At this level, production had outgrown what the alliance foundry alone could handle. As a result, it began outsourcing castings to "friends"--11 different satellite foundries.

"The problem is that not all Chinese foundries are created equal and process control was nonexistent," said Plont. "In China there is little or no application of contemporary quality engineering or quality assurance principles. Even the concept of providing castings that have been inspected and meet the customers specifications 100% runs counter to the Chinese mindset of 'It should work.'"

Plont cited examples of foundries using up to 100-year-old molding and melting technology. Cupolas are started with corncobs and air-cooled. In some shipments, Kurdziel had to test casting metallurgy to ensure the component was even the material specified. Regardless of Kurdziel's monthly efforts to train these foundries, most shipments continued to have the same defects. Kurdziel continued to inspect every casting in the U.S. and repair or scrap those that didn't conform to customer requirements.

When Kurdziel felt it was time to step in and control this supply relationship, it encountered a cultural difference call "Guan Xi"--which means relationship-friendship. The alliance foundry was shipping Kurdziel's patterns to "schoolmates, relatives and friends" of its management. For Chinese businessmen, the friend-business relationship was strong and wasn't to be broken.

The solution, according to Plont: "After making dual tooling in the U.S. to clean up problems, we finally were able to change the supply system to include only the best foundries".

Kurdziel terminated the relationship with the alliance foundry in 1999 and entered strategic alliances with the two best foundries from the original supply chain (judged on quality, delivery and price). Kurdziel formalized this new strategic alliance with the debut of Kurdziel International Corp. in 1999.

During these initial years, Kurdziel also began to internalize the functions being performed by Dake. By the end of 2000, the contract between Kurdziel and Dake had expired and was not renewed.

Kurdziel International

Today, Kurdziel International Corp., Muskegon, Michigan, has 5 employees. In 2000, the firm formed a WOFE, Kurdziel International Trading Tianjin Co., Ltd, in Tianjin, China, to establish a continuous presence in China and to hire Chinese workers. The aim of the Chinese firm is to ease the import/export process, perform supplier surveillance on the Chinese partner foundries, and aid in casting engineering and job development. The staff in China (all China-born) consists of nine people performing the functions of logistics and customs, accounting and finance, and various engineering disciplines.

"One of the greatest benefits to the continuing presence in China is the assistance with cultural and business differences," said Huizenga.

Much of what Kurdziel struggled with throughout its ramp-up in China was cultural differences. "We learned that the most important thing is communication. We effectively handle the translation and interpretation of customer expectations to the casting producers, and manage that link," said Plant. "This is a skill we are still developing, but we are vastly superior today than we were when we started."

The paradigms and mindsets of the Chinese foundrymen are vastly different than Kurdziel's. Plont relates, "We have developed an organization that takes this into account. Today, Kurdziel has fully integrated trans-cultural interpretation into its business system."

"In our engineering drawings as well as our communication, we can't leave anything to interpretation," said Plont. The goal, in a sense, is to "Americanize their Chinese mindset" to fit better with Kurdziel and its goals.

"You need to find a way to work within their cultural environment and achieve your desired results," said Plont.

As an example, Kurdziel provided safety glasses and gloves to its Chinese partners, but they aren't yet interested in using them. Kurdziel designs and fabricates gauges, along with the methods and procedures for using them. Kurdziel's Tianjin-based engineers now provide oversight and instruction to the foundries to insure the methods and procedures in place are used consistently.

Further Global Expansion

Despite the problems, Kurdziel knows the development of its Chinese partners has been a success because, after the initial learning, training, and development time, the firm has made a profit on its overseas castings. In addition, quality has reached a consistent level with less than 5% rework now required on its Chinese castings. While lead times are still too long, Kurdziel has reduced some of the "waste time." The firm now expects castings to be produced in China within 30 days of production order. The castings then will be in transit to the U.S. for 30 days. Kurdziel then maintains a 30 day inventory in the U.S. for any unforeseen shipment difficulties.

"We did not know how difficult it would be," said Plont. "But our relationship today shows real promise for the future. We will never be purely price competitive with the direct procurement relationships between producers and OEM's. But for those customers that recognize the pit falls inherent in a global supply chain, we offer significant risk reduction strategies which are difficult to copy in our market."

The future is a continued drive toward a streamlined partnership between Muskegon and China. In addition, Kurdziel is exploring new opportunities in China and Mexico that would extend beyond gray iron counterweight castings to ductile iron and steel. For steel castings with higher labor rates, Chinese foundries can offer casting prices 50% below U.S. plants.

"We have established the global presence necessary to succeed in our global market," said Huizenga. "The key is to build on that and develop the global presence necessary for success in the future global market." MC

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For More Information

The American chamber of Commerce--People's Republic of China website at www.amcham-china.org.cn

The United States--China Business Council website at www.uschina.com

The China Business Review website at www.chinabusinessreview.com

RELATED ARTICLE: Kurdziel's Keys to Establishing Overseas Partnerships.

Following is a list of keys Kurdziel has cited as critical to partnerships overseas. By no means is this a blueprint for success, rather it includes important considerations that should not be overlooked.

1 Plan on at least a six-month search process to find "partners."

2 Find a representative that has done business in the overseas environment being pursued. This representative is the link between the U.S. foundry, the foreign culture's business practices and the foreign partner.

3 Take a major role in managing your consulting base.

4 Have the representative develop a short list (5-6) of possible foundry partners (and their capabilities) and make site visits to these partners to understand their business environment.

5 During these site visits, determine if this potential partner can perform as desired. Examine the technology, processes and samples of products (as compared to supplied engineering drawings) to understand what the foreign suppliers can achieve. The foreign foundry often will say whatever it takes to secure the business. Plont affirms: "I have spent well over a year of my life in China and I have yet to hear a Chinese foundryman tell me he could not do it. Yet, I have vast examples of where they obviously could not do it. It's your responsibility to assess their capability."

6 Once a partner is chosen, start slowly and develop some confidence in what can be achieved. Under-. stand that a commitment overseas is judged on yearly results and will require intense training -- from the foundry floor to the office, and throughout the supply chain.

7 From day one, focus on shipping costs and all other cost factors in the supply chain. Rely on the expertise of other U.S. firms shipping from overseas to understand the in's and out's. If a foundry isn't careful, 100% of the margin can be lost throughout shipping.

8 Inspect everything that arrives in your shop because customers will expect the same quality as what is produced in the U.S. Be sure to budget time and money for inspection and rework.

9 Recognize the global supply chain risks. "There is no question that international supply chains contain greater risks in political, environmental and commercial terms. For those customers who sincerely recognize those risks, we have put together a business structure and strategy to completely mitigate these added risks," said Plont. "My advice to procurement professionals is 'What they don't know will hurt them!' The "irrational exuberance" of offshore sourcing, will ultimately be tempered by the reality of the now only potential enigmas." MC

A Snapshot of the 2001 Chinese Foundry Industry

There are 10,000-15,000 foundries in operation in China. Of this total, more than 5000 are iron, more than 1600 steel and more than 2300 are nonferrous.

The Chinese foundry industry shipped 10.9 million tons of castings in 2000, a 13% drop from 1999 shipments but a 4.6% increase over 1996 shipments.

The 2000 shipments are distributed by metal as follows: 5.6 million tons gray iron; 2.3 million tons ductile iron; 0.4 million malleable iron; 1.5 million steel; 0.8 million aluminum and magnesium; 0.1 million copper-base; and 0.1 million zinc.

--MODERN CASTING 35th Census of World Casting Production--2000