Talking trade: execs debate how to compete against offshore competition.
This globalization has dramatically changed the rules of engagement for U.S. foundries. As a result, today's foundry executives have been forced to strategize for the future with both eyes focused on how to combat low-cost foreign competition. But how?
In pursuit of some assistance for today's globally challenged foundries, MODERN CASTING held a roundtable discussion at last spring's AFS Trade Forum featuring five industry executives. The one question posed to the group for the roundtable was: "How do U.S. foundries compete against low-cost, offshore competition?"
The roundtable participants were: Scott Pranger, vice president sales/marketing, Kurdziel Industries, Inc.; George Boyd, president and CEO, Goldens' Foundry & Machine Co.; James Larson, executive vice president, Waupaca Foundry, Inc.; Charles Kurtti, executive vice president (retired), Neenah Foundry Co.; and Raymond Monroe, executive vice president, Steel Founders' Society of America.
Following is what these industry leaders had to say.
Setting the Stage
The problem is pricing.
According to the roundtable participants, U.S. foundries are having their casting prices undercut by up to 50% by low-cost foreign competition. In addition, some customers' purchasing departments are mandating a certain percentage of all castings must be purchased offshore. If U.S. foundries don't meet the year-after-year price reduction demands from customers, they lose the work.
"Customers used to expect 5-10% annual cost reductions from foundries," said Monroe. "Today, this number is more like 15-20%, and this is related to the offshore foundry pressure."
According to the roundtable, offshore sourcing is affecting ferrous and nonferrous foundries, regardless of the casting process they employ. But low-cost, offshore sourcing is not new to the U.S. foundry industry. Since the early 1980s, competition has come from a variety of sources including India, Japan, Brazil, Mexico and China.
"But this is not 1982," said Boyd. "It is 20 years later and everyone--large and small--is sourcing offshore. There is familiarity now and customers have become comfortable with the process. I am seeing low-volume castings coming in at acceptable quality levels and low costs. Foreign foundries are using the same machinery that we are using but with subsidies to lower their costs."
According to Monroe, the government subsidies of today are much different than the subsidies offshore firms received in the 1980s. "They don't have a check written to them from the government," said Monroe. "The low-cost foreign firms receive utilities at below market rates and low-cost loans that may never need to be paid back."
The pricing that casting customers receive from these subsidized foundries leaves them wanting more.
Said Boyd, "We could be close to a time when our customers have become comfortable with offshore sourcing and today's 15% of U.S. casting demand met by imports could zoom."
Compounding this lowest cost mindset, said Monroe, is the state of our current economy.
"Foundries understand there are vicious cyclical periods for steel and iron castings," he said. "When business is good, they put money in the bank. When business is bad, they try to break even. The problem is that in 1998-99 when business was good, the pricing pressures meant there wasn't a profit. Now that business is poor, running at breakeven means laying off good people."
With these pressures to deal with, what can a U.S. foundry do to compete?
Modernization & Automation
During the roundtable, no doubt existed as to what the most important step any foundry can take to compete in today's global market--modernization and automation. This step relates to production matters and to the way U.S. foundries operate their businesses.
Said Kurtti: "Innovation and productivity are a must and it doesn't matter what size you are. Small foundries often want to sit back and wait and see what happens. That is death. You have to control your own destiny. If capital is a problem, we must do our job and sell it properly. The banks will support the process if we properly educate them and provide good and proper business plans."
"Foundries must focus on the issues they have influence over, such as eliminating the limitations of manufacturing," said Monroe. "Get to know your banker and your equity partner so you can have access to the capital you need to compete."
This statement was echoed by all the roundtable participants, who also stated that low-cost offshore foundries aren't only targeting large production run casting jobs.
"In our experience, both small and large customers are going offshore," said Boyd. "We have a gear shop customer that orders a small lot (1000 castings/year) of ductile iron castings through a broker from a Chinese foundry. Customers may preach a three-pronged attack to judge suppliers on quality, delivery and price, but the annual price reduction demands show what drives them. It's how low can you go."
But modernization and automation of the plant isn't enough, said the roundtable.
"We can't re-energize ourselves and invest ourselves down 35% in cost in the next 3-5 years," said Boyd. "If castings come in from China 40-50% below my prices, it doesn't make any difference how good I get. I can't get to those numbers. It is not just about us losing a job, it is about us losing any ability to raise a price on the jobs we are not losing. At the end of the day, we may survive, but we won't have any money to reinvest."
That is why other fields of battle exist to combat low-cost foreign competition.
To a great extent, today's U.S. foundry industry sees federal and state governments as the enemy in working through regulation issues with OSHA and EPA. On the issue of trade, however, the political arena can be a positive forum to voice concerns and gain support--if one condition is met, said the roundtable.
"We see ourselves as a group of individual businesses," said Boyd. "When you look at the steel industry and its political influence, it is 150,000 steelworkers supporting 600,000 retired. We have 220,000 workers, but no political influence whatsoever because we act as individuals instead of a unified front. If we could get one voice to come out of our industry, we could be as effective as the steel industry."
One recent act in this direction was AFS joining the National Assn. of Manufacturer's Dollar Coalition aimed at addressing the overvalued dollar. AFS also has formed a Commission on Trade that is focused on formulating a plan on how the industry might tackle a fight against unfair low-cost foreign competition (for more information, see "AFS Trade Commission Gathers Information" sidebar).
"Our industry has managed in adversity for 10 years," said Boyd. "We must become more politically active and focus on the macro issues that represent truly unfair trading conditions. Although we don't know if we can prevail, I know we can't if we don't try."
Both Kurtti and Larson understand the political importance of individual foundries stepping up to support their national, state and local metalcasting organizations.
"Fair and equitable regulations mean that you have to be active with your state groups," said Kurtti, "Work with them to develop these regulations."
"I would encourage small foundries to become more involved in local and national organizations," said Larson. "If we are going to look at the macro issues, we are going to need all of their help for political pressure. They need to become part of the solution."
Beyond associations, Larson pointed to alignments with other groups, such as your workforce, as key to playing and winning the political game.
Although your customers are the ones sourcing your casting jobs to the lowest bidders overseas, they still are your partner and, according to the roundtable, must be treated and further groomed like one.
"You have the unique advantage of being closer to your customer than those overseas," said Monroe. "You must exploit that advantage by understanding your customer's unique needs because you will not be able to compete on price. You will need some other differentiation--a unique process or capability."
"The key to looking forward is working with customers to find out what added value can be worked into products to create more valuable castings," said Pranger. "We have established finish painting at our customer's production sites for just-in-time delivery to the production line. We also have developed an international presence that has opened up other doors into Europe and Japan. This has allowed us to maintain a commodity product in this country that otherwise wouldn't have survived."
Pranger also stressed the importance of understanding the marketplace in which you compete. "You have to know who your international competitors are," he said. "You have to know the prices they are providing to the marketplace and their global capabilities. There may be more than 10,000 foundries in China but the vast majority are small mom and pop shops without the management capabilities to meet the demands of domestic customers."
In addition to under standing your marketplace, said the roundtable, foundries have to educate customers on the perils of offshore sourcing.
"While price appears to be the only important factor in some buying decisions, customers must also evaluate the risks of buying from offshore developing countries," said Pranger. "Leadtimes are dramatically affected when considering the transit times from China or India, for example. Therefore, customers must develop an accurate scheduling and production plan that takes into account work in process, ocean transit time and inland delivery. This process can take several weeks and exoose a customer to 90-120 days of inventory in the supply chain. That is a significant amount of product and cost that must be considered in the event of a product failure, engineering change or receipt of poor quality castings."
Pranger continued, "Many of our customers are unable to provide consistent forecasts for 30 days let alone 90 days. The cost of international freight can make up a significant percentage of the overall price of offshore castings. We have witnessed extreme volatility with international freight rates over the last few years. Customers must also consider an array of intangibles that they previously may not have even thought about such as the real possibility of a West Coast longshoreman's strike that could delay container delivery and leave customers without supply options."
Also, according to Monroe, educating your customers on how the marketplace will be aligning in the next decade and how casting demand in all market segments is expected to rise is critical.
"Make your customers aware of the risk or potential lack of capacity that is coming up in the next 5-10 years when they are going to need domestic suppliers," said Monroe.
"Today's customer also requires suppliers step up with engineering support and product liability responsibility," said Pranger. "I have seen very few third-world foundry groups offering either of these two supplier requirements. Without domestic backup capacity, customers can and will be exposed to line down situations due to lack of supply and/or defective castings."
According to Monroe, short-term survival may be the key for the industry's future...at least for the next decade. "You must improve your productivity dramatically to survive for the next two years until the dollar straightens out and business improves."
According to the roundtable, the present economy will improve and the dollar will weaken. This will make U.S. casting sources more attractive in the global marketplace.
According to Stratecasts, Inc., Ft. Myers, Florida, U.S. metal casting shipments are expected to rebound over the next three years to more than 15 million tons shipped in 2005. This will be a 2 million ton increase from 2002's projected 13.2 million tons shipped. These increased shipment projections are due to stronger demand from a variety of markets with the strongest being automotive/light truck (a return to 1999 demand levels), medium-to-heavy truck (a return to 350,000-unit production demand levels) and railroad (a return to demand beyond 40,000-car levels).
But the question that then will beckon is: Who is going to produce the castings in the U.S. to meet the demand?
"A strange phenomenon is going to happen," said Larson. "The economy is going to come back and there is going to be an undercapacity of casting supply in the U.S. Foundries must be thinking longer term. When the economy does come back where am I going to be? When the industry had the last surge in the economy and an undercapcity, we pushed some of our customers to offshore options because there weren't any domestic suppliers. This can't repeat itself."
Thus, the roundtable discussion returned to the issue of modernization and automation. Foundries must fight to improve their operations to reduce costs to compete today while also looking to improve productivity and increase production capacity for the increased demand to come.
For More Information
Visit www.moderncasting.com for additional thoughts from the foundry industry on what can be done to combat foreign price pressures.
RELATED ARTICLE: AFS Trade Commission Gathers Information
Officially formed at the AFS Trade Forum in April, the AFS Commission on Trade has as its mission: "To facilitate an understanding of the full impact of global competition on the metalcasting industry and identify and create a roadmap of actions available for future consideration." Composed of 15 industry representatives, the commission's first three meetings have been dedicated to gathering information and educating itself on the options available to the foundry industry to combat low-cost offshore competition.
During these fact-finding meetings, the commission spoke with representatives from the U.S. Dept. of Commerce's International Trade Administration as well as representatives from other associations that have facilitated trade actions on behalf of their industries.
"We have, with the support of the International Trade Representatives, begun to identify what information is necessary for them to have if we are going to request help in any area of a legal challenge," said Charles Kurtti, the Commission's chairman.
The Commission will be issuing a detailed survey this fall (MODERN CASTING conducted a prepolling on the subject, p. 29) to secure more detailed information on the degree of infiltration low-cost offshore suppliers have made into U.S. casting markets and what specific markets and metals have been hit the hardest. Once the information has been gathered, the commission will determine if there is a strong enough case for legal action and then how the industry must be segmented (by markets or metals) to create the strongest case that will benefit the metalcasting industry.
"Our industry, because of its diversity and numbers, faces an unusual challenge in finding the product or segment to be studied for a possible future action," said Kurtti.
The Commission expects to determine if legal action is possible and what action, if any, can be taken within the next six months. For more information on the AFS Commission on Trade, contact Charles Kurtti (retired), Neenah Foundry Co., at 920/725-0028 or visit www.afsinc.org/AFSTradeCommission.htm.
The members of the AFS Trade Commission are: Kurtti; Hugh Aiken, Atchison Casting Corp.; Dwight Barnhard, AFS; George Boyd, Goldens' Foundry & Machine Co.; Thomas Brown, Benton Foundry; Don Carpenter, U.S. Foundry & Manufacturing Co.; Paul Cervellero, Inductotherm Corp.; Jerry Donohue, North American Precision Casting; Arthur Edge, American Cast Iron Pipe Co.; Donald Huizenga, Kurdziel Industries, Inc.; Jim Keffer, EBAA Iron Sales, Inc.; James Larson, Waupaca Foundry, Inc.; Dan Torzewski, Indianapolis Casting Corp.; Dan Twarog, North American Die Casting Assn.; and Jack Zbiegien, Gregg Industries.
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|Comment:||Talking trade: execs debate how to compete against offshore competition.|
|Author:||Spada, Alfred T.|
|Article Type:||Panel Discussion|
|Date:||Sep 1, 2002|
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