Ceramic Industry

INTERNATIONAL BUSINESS: What Are You Waiting For?

April 1, 2004
It began with raw materials. Companies imported them from China and manufactured finished products in the U.S. Then the manufacturing moved to China, so that we now import not just the raw materials, but also the finished products. This is the position in which many industries find themselves today (raw materials and finished products having moved overseas), and the ceramic industry is a prime example. The question is: What's next?

One thing is for sure-the Chinese won't stop. They will continue to climb the value ladder, which includes producing all things relative to turning raw materials into finished products, and producing increasingly sophisticated finished products. They also have a number of advantages. They are close to the customer (now that so many customers have moved into their neighborhood), they are producing engineers at a prodigious rate, and they work for low rates of pay (compared to us). They also know how to reverse engineer a product, and they aren't shy about doing so. Relative to the essential elements of business success-quality, innovation, management and the like-they are not yet setting new global standards, but they are improving all the time.

What's a company to do? There are no easy answers. However, there is one obviously wrong answer-do nothing. Ignoring a problem rarely works, a lesson I learned when my hair first started falling out. It never did stop. I really did go bald, even though all of my brothers still have their hair. It isn't fair, but it happened anyway.

You don't have to lose everything. You can take steps to protect your company, and now is the time to act.

Don't Underestimate Your Advantages

To some, the battle is already lost. "We can't compete," goes the retreat cry. "Their wages are too low. Their raw material is free. Their capital investment is subsidized. They have no regulations whatsoever. They steal our technology." Some companies are so beholden to this mindset that they would rather do nothing than get in the ring and fight.

Others take a different view, believing that technology, quality and reliability still count. The fact is that cost is only one part of the value equation, and low wages are only one part of the cost equation. Style, design, distribution, brand name, speed, efficiency, quality, reliability, technical sophistication-these factors still matter, and you should be working creatively and diligently to make the most of your know-how relative to the competitive factors in your industry.

Of course, some competitive factors are easier to meet than others. If you sell primarily based on style and price, then low-cost competition will likely threaten you more quickly than if you make a more technologically sophisticated product. But if technology, quality and reliability drive your products, then you probably have a competitive advantage that others won't be able to match overnight. Don't squander the intellectual capital and industry expertise you have accumulated, and don't assume those advantages will disappear. They might be challenged over time and the gap will shrink, but your technological/management/experience advantage will disappear only if you neglect to use it.

Reevaluate Your Business Model

For many companies, making the most of your competitive advantage will mean investing in improvements at home. Some manufacturing plants have been able to use automation and vertical integration to take a huge slice out of their cost structure without sourcing one component overseas. If you can do the same, I highly recommend it.

For others, pursuing growth where the growth is-in some cases, overseas-will be the only way to compete. If you decide to export your products to China, you'll face the issues of sales and service in a market 9000 miles away. This is difficult enough if you are a huge, global operation with resources to burn and plenty of international experience on staff. The challenge is even bigger for those with a shorter reach and a shallower well of experience. However, it can be done. Use existing industry relationships to gather information and contacts, and use the Internet and other resources to find more information and contacts. There are also firms that specialize in building these bridges for you. One of the best decisions you can make is to get an early start, which will allow you to learn and adapt at a reasonable rate.

Investing in new technologies and/or markets might seem risky, but you have to take risks to survive and grow. You can't just sit there and wait for everyone to catch up, because they eventually will.

Protect Your Technology

Many companies are concerned about protecting their technology, and this is a reasonable concern. Pure intellectual property theft is far more widespread in developing countries like China than in the U.S. and other developed markets, where the rule of law and transparent business practices are more firmly established. Beyond that, there are things any company can do to try to learn from what its competitors do. Whether you call it outright theft or enlightened reverse engineering, it won't take long after you introduce a product into China before local competitors are trying to meet the new standard you will have set. For some products, the gap might take years to close; for others, the gap will narrow more quickly. Either way, if your only other option is to surrender business, what choice do you really have but to take the fight to the competition?

If you have a partner in China (which could be an agent, distributor, etc.), it is important to have a partner you can trust-someone who won't walk out the back door with your technology and who has a long-term interest in protecting your position. Such partners are out there if you know how to find them and structure and maintain your relationship. (I will address the issue of evaluating partners in my next column.)

It should also be said that the competition can't catch up if you stay out in front by continuing to innovate. China doesn't change the technology race; it just broadens the field of entrants. You have a head start already-just don't stop running.

Your main problem will be if your Chinese competition meets your technology standard and also makes it cheaper. This brings us back to the issue of cost competition, which as was said previously you are going to have to address by either improving your production process or reevaluating your market strategies. The point is that you shouldn't let a cost disadvantage ruin your technology advantage. If you take steps to mitigate the former, the latter will lead you to success.

Get Busy Adapting

Three-fourths of the world lives on less than $8 a day. All ideologies except capitalism have failed, which means more and more countries will be headed up the road of development. (China is well on its way; India is coming on strong, and others will follow.) Low-cost competition from developing markets is going to be a permanent part of the economic landscape for the next few centuries. I think America will survive and thrive. The question is, what companies will make the transition? If your industry is undergoing massive restructuring, you need to get busy adapting.

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