Watching China's ascent.
What is newsworthy is that recent events signal China's readiness to make the transformation - again, like Japan before it - from a maker of cheap goods to a low-cost producer of high-quality engineered products, including high-value metal castings, and especially automotive castings. Several items are key here.
Domestic Factors of Change
The recent strengthening of the U.S. dollar relative to other major world currencies has caused a slump in U.S. export trade, a dramatic swelling of our international trade deficit (now larger than at any time since 1988), and a renewed interest among U.S. OEMs in sourcing castings from overseas suppliers. This climate is doing much to soften U.S. attitudes toward imported castings and, indirectly, toward China.
Another factor is the character of the current crop of casting buyers. TDC's market research indicates that the generation of purchasing agents our industry worked so hard to educate over the past decade has moved on, and that the education process needs to begin yet again. As in the past, foundries need to communicate the benefits of castings vs. substitute products and processes, the characteristics of the various cast metals, and the importance of focusing on total or life cycle cost, as opposed to simply the casting's per unit or (heaven forbid!) per lb price.
While this new generation of buyers is just as price-conscious as its predecessor, there are at least two critical differences. First, this new group is much more comfortable using technology to conduct business over long distances. Second, the new group has a much higher comfort level with international sourcing. These facts make the current foray overseas much less likely to be a short-term adventure, as they have in the past. In this case, foreign trade has received a boost from shifting U.S. demographics, and once again, China benefits indirectly.
China's Own Transformation
China's own performance has much to do with its transformation. Chinese suppliers - including foundries - have done a good job meeting customers' expectations and allaying their fears. Recent interviews with senior buyers at Ford Motor Co. illustrate this point well. At present, Ford bids on all casting work from 13 different countries. One buyer said, "We are currently looking at five countries more seriously than the rest, and one is China. The Chinese have done a good job quality-wise, and are bending over backward to provide us with outstanding service. We feel the benefits outweigh the risks."
China's favorable economics don't hurt, either. Another Ford buyer told us this: "We know that material costs are more or less equal in casting production, and that labor and energy are the two key cost variables. I'm looking first for the countries that have inherent long-term advantages in these two areas, and then for the best foundries within those countries. In this kind of analysis, China is looking very strong."
Finally, the July 1, 1997 merger of mainland China's manufacturing strengths with Hong Kong's unequaled international marketing skills will effectively complete the "package" China needs to become a major player in the international marketplace. This fact, as much as anything else, should give pause to the North American foundry industry, which has long suffered at the hands of suppliers from different industries that have simply out-marketed metalcasting and its traditional products.
The implications of China's ascent on U.S. foundry CEOs and their companies are clear, and hinge on the fact that the North American casting supply picture is changing once again. If we factor in China's vast metalcasting and machining capacity, we eliminate whatever capacity constraints might occasionally occur among North American suppliers, and put an entirely new light on capacity decisions. This excess supply scenario also has wicked consequences for casting pricing and price competition.
Under this scenario, even some North American niche markets, such as malleable iron, could lose their luster. Chinese capacity changes malleable iron castings from a scarce commodity to one that is abundant and price-driven. The same can be said for other high-volume niche markets, including aftermarket components, nonauto engine parts and more. In short, as internationalization continues and China becomes ever more prominent, no company will continue doing business unaffected; and virtually no foundry will be safe.
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|Date:||Jun 1, 1997|
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