by Gail Dutton
June 3, 2008
“Made in America.” The imprint means innovation, high quality, safety and reliability. So why should companies even consider exchanging that stamp for “Assembled in USA” and components manufactured in other nations? Not so long ago, the main reason was to gain lower prices for labor-intensive goods. That’s still a good reason, but there are several other circumstances in which “Made in America” isn’t the best choice. Here are ten, culled from the experience of Mark Thompson, global commodity leader at Pioneer Hi-Bred International, an international leader in plant genetics.
Material is available only from global sources
Swiss pharmaceutical giant Roche experienced this a few years ago to produce the flu medication Tamiflu, which at that time, was the only medication effective against the deadly H5N1 strain of avian flu. A key ingredient of Tamiflu, shikimic acid, is extracted from wild star anise, which is only available from four provinces in China. Star anise from other countries provides lower yields and inferior purity, according to Roche spokesman Darien Wilson.
For a historical example, consider diamonds. Once found only in India, nearly 50 percent of the diamonds mined today come from Africa, although significant deposits are being mined in Brazil, Canada, Australia and Russia. The U.S. has no reliable source of industrial or consumer-grade diamonds. (Colorado’s Lake Kelsey diamond mine opened in the 1990s with sporadic operations, and Arkansas boasts a public diamond field—Crater of Diamonds State Park near Murfreesboro, Arkansas—that has yielded some multi-caret stones.)
Sometimes the issue isn’t materials, but expertise and geography that can’t be found in the right combination in the U.S. Ireland, for example, has become a primary location for call centers, especially for European operations. The country is attracting a young, multi-lingual population of native speakers that can serve all of Europe and much of America during normal business hours before handing off calls to their North American counterparts.
Call centers are tapping into linguistic expertise, while technology companies are accessing high level scientific knowledge. With the economic collapse of the Soviet Union and the Warsaw Pact nations in the early 1990s, many Eastern European scientists who had been assigned to government-funded, generally defense-related projects, found themselves out of work or woefully under paid. Western companies were able to thus hire some of the brightest scientific minds for their commercial applications at lower salaries than comparable U.S. scientists would command, if they were willing to work commercially, and to use the time difference to their advantage.
This “follow-the-sun” working strategy lets teams in different time zones provide round-the-clock service. Some firms, including Xerox, split some project teams among time zones, ensuring that a particular technical challenge is resolved faster because someone is always working on it.
Technology is available only from global sources
It’s hard to believe, but there actually are some things the U.S. doesn’t make. “Except for a firm’s core, strategic technologies, access to materials and process technology is gained through the supply chain,” according to Richard Weissman, assistant professor at Endicott College in Beverly, Massachusetts. It’s also true, though, that bright ideas originating offshore may be adapted to improve products, services and efficiency, developing broader appeal or additional applications.
Maglev trains are a good example. The U.S. abandoned maglev transportation research in the 1960s. Germany and Japan carried on. So when the U.S. Transportation Administration began considering high-speed maglev trains, the technology had to come from Germany, Japan or Korea, which began research somewhat later.
German firm Transrapid pioneered the technology, opening an exhibition line in Hamburg in 1971 and repeatedly winning world maglev speed records. It designed and built the only currently operating commercial maglev transportation system in existence, in Shanghai, China. So, when Lockheed Martin became involved in maglev transportation in 2000, it teamed with Transrapid International, the U.S. subsidiary of the German firm. Under their agreement, Transrapid provides the technology and Lockheed Martin oversees the projects, ensuring they meet U.S. specifications and codes. Marketing is being conducted jointly.
Likewise, in the 1970s, Gummi Bears candy was only made by Haribo in Bonn. It became a global hit. Later, Trolli and a few other German manufacturers acquired the gummi technology and began making other shapes including, in the U.S., gummi worms. Notably, Thompson says, “it was the last new candy product category.” Since those early days, the technology has been exported to the U.S. and Mexico, he says.
For Oregon-based Leupold & Stevens, need for high quality combined with cost pressures was behind the decision to find Asian sources for the optical glass it uses in his rifle scopes and binoculars. The glass is mainly found in Asia, with a few very high end manufacturers in the U.S. and Germany. Sourcing in Asia allowed the company to have the desired level of quality at a price its customers can afford.
Lower total cost of goods
Even with the price of the goods, transportation, taxes and import duties, some goods can be acquired cheaper abroad, as Leupold & Stevens found with optical glass. This is one of the major reasons companies first consider offshore sourcing. Generally, any labor intensive item can be produced abroad and delivered to the U.S. for less than the cost of making it here and delivering it domestically.
Early in his career, Thompson found this was true with toys and birthday cake novelty items. It’s still true today with a wide range of goods, including stone tiles from India and garments from southeast Asia and Central America and computer components from Korea.
“You really have to be careful in determining total costs,” though, Thompson emphasizes. It’s more than just the cost of the goods plus transportation. Total costs include direct and indirect costs like insurance, carrying excess inventory, which Thompson says is needed because of the increased shipping time, as well as quality and communications with suppliers.
Additional factors may also come into play, though, that obviates any advantage in cost. For example, one electronics manufacturer a few years ago found that air pollution in Shanghai registered 800 ppb of hydrogen sulfide. Inside its supplier’s factory, the level nearly doubled to 1500 ppb, versus 7 ppb in the U.S. Such high levels of hydrogen sulfide corrodes electronics, substantially shortening the lifespan of computers and other electronics coming from that area.
The total costs of goods may also include direct and indirect costs throughout the items life. Germany, for examples, requires cradle-to-grave attention, with plans for recycling at the end of the item’s life. So, if components aren’t recyclable, a lower upfront cost may result in higher end of life costs. Also consider the risks to intellectual property, a concept that often isn’t fully understood even by high level execs. To guard against that, Leupold & Stevens, Coca-Cola and other firms keep their most valuable intellectual property at home.
To meet quality requirements
Sometimes quality matters, and sometimes “good enough” is just fine. It’s important to know the difference. A slipped stitch on a $6 shirt doesn’t really matter. Corroded circuit boards or inferior optics, however, make a big difference.
NASA knew when it sent astronauts into space that the quality of the still photos they took truly mattered, not only for science but to capture the imaginations of people throughout the world and thus garner support for continuing the space program. For those missions, the Polaroid camera that was fine for backyard barbeques wouldn’t do. Neither would the Nikons or Leicas used by professional photographers. NASA needed the best of the best. It needed Swedish-made Hasselblad, the Stradivarius of cameras. Perfection, of course, isn’t cheap. The digital, SLR H3DII model, released September 2007, retails for just under $34,000.
The tradition of quality that surrounds Hasselblad extends to other industries, too, and other countries. The printing industry typically sources its presses from companies like Germany’s Koenig & Bauer AG. For centuries, the finest analog watches, like those from Phillipe Patek, were handmade in Switzerland.
It’s important to note, though, that the definition of the term “quality” may vary by country and by region, as Mickey North Rizza, Boston-based analyst at AMR Research, points out. So, when discussing quality issues with suppliers, it may be better to discuss specifications and the reasons for such exacting specifications “as well as the definition of any confusing words, as it is better to error on the side of clarity,” she says. Also look at the supplier’s track record to ensure that company really does understand your product, specifications and overall business goals.
To establish additional sources of supply
From childhood, we’ve been admonished, “Don’t put all your eggs in one basket.” That’s why we make contingency plans, and that’s why working with multiple suppliers is a good thing.
When Thompson was a buyer in the food industry in the 1990s, a California drought severely hurt the garlic industry. He and other American buyers turned to China and to obtain the supplies they needed. That was a good stop-gap strategy, but since then, China has been charged with dumping garlic onto the U.S. market. The U.S. Department of Commerce is investigating.
Pistachio growers did this in reverse in the 1970s. At the time, Iran was the sole source of pistachios, Thompson says. American growers planted their own trees and have since become a dominant player in that market—a smart move in light of the Iranian Revolution and our subsequent embargo against Iran.
Shoe and athletic apparel giant Nike, is another example. It contracts with more than 700 factories in 52 nations. Having such a broad supplier base ensure that supply chain disruptions in one factory or region can be absorbed by suppliers in other regions, and thus minimize the impact to Nike.
There are indirect benefits, too. These contracts employ some 800,000 workers throughout the world, decreasing the influence of any one supplier or region while increasing the base of skilled workers and making it possible for plants suppliers to work together to develop their own best practices and therefore continue to improve product quality, factory productivity and workers’ quality of life.
Anticipation of actual material shortages
Right now, the American energy industry doesn’t have the production capacity it needs to meet the energy requirements of this country. Although America has vast resources of oil and coal, much of it remains untapped in regions that are declared off limits to extraction or that are in difficult to access formations, like oil sands. Wind energy, one alternative, too often meets a NIMBY mentality, as evidenced by last autumn’s debacle off Cape Code. The result is a perennial shortage that forces us to import oil from Canada and the OPEC nations, and to buy coal from Asia.
Although that particular shortage is imposed by politics and technological hurdles, other shortages may be sparked by labor unrest, bad weather, warfare, disease, industrialization of other countries and other issues, which may cause delays in the supply chain or put regions temporarily out of the market.
For example, when ‘mad cow disease’ (bovine spongiform encephalopathy) threatened the Canadian been industry in 2003, grocery store meat sections augmented their selections with Australian beef. And, when U.S. citrus crops are damaged by periodic freezes, buyers can augment their supplies with produce from Mexico or India and, during the shoulder seasons, from Australia and Brazil.
Sometimes, though, a shortage is global, making good relations with multiple suppliers even more important. Right now, there’s a global shortage of steel and, according to Tom Johnstone, president and CEO of Stockholm-based SKF, it will likely continue into 2008. For the world’s largest bearings manufacturer, the shortage leads to steadily increasing costs and “negative effects on production, service to the market and operating margins,” Johnstone said in the third quarter report.
Texas general contractor Brasfield & Gorrie planned for steel shortages, buying 4,200 tons of concrete reinforcing steel in advance, to help minimize delays while building a $169 million Galveston condo complex. That’s the same strategy companies used during the steel shortage of 2004 and during the 2005 shortage of tires for construction equipment. Sometimes that’s all you can do, but it’s easier if you have multiple suppliers.
Support in global markets for domestic products
The imprint “Made in America” isn’t as important as it once was, as other nations develop increasingly sophisticated, high quality products. And, the backlash against globalization encourages consumers and manufacturers to buy locally. An American-made product that incorporates components from the local country increases its local acceptance and support. Or, as Thompson says, “Buying from other nations helps you sell your own products there.” In some cases, it may be required, he adds. “It’s also a way to create awareness and to reduce costs,” Rizza adds.
The globally-sourced, Made in America business model is particularly true in the aviation industry, Thompson says, which uses it as a sales point. Boeing Corporation’s 787 Dreamliner, for example, is being constructed in Everett, Washington, but includes components from 43 of the world’s top aviation suppliers and electronically inks more than 130 supplier sites around the world. Major orders have been placed by airlines throughout the world.
NASA took the same approach in developing the International Space Station. Dominated by the U.S., it’s built from modules developed in many countries. The Canada Arm, for example, has been a source of Canadian pride for nearly three decades and appears prominently in many photos of the station. Last October (2007), NASA was preparing to launch an Italian component called “Harmony” to link the U.S-made Destiny lab with the European Space Agency’s Columbus module and Japan’s Kibo module. International cooperation, in this instance, shares the glory as well as the financial costs of exploring space.
Support in global markets for domestic products
The imprint “Made in America” isn’t as important as it once was, as other nations develop increasingly sophisticated, high quality products. And, the backlash against globalization encourages consumers and manufacturers to buy locally. An American-made product that incorporates components from the local country increases its local acceptance and support. Or, as Thompson says, “Buying from other nations helps you sell your own products there.” In some cases, it may be required, he adds. “It’s also a way to create awareness and to reduce costs,” Rizza adds.
The globally-sourced, Made in America business model is particularly true in the aviation industry, Thompson says, which uses it as a sales point. Boeing Corporation’s 787 Dreamliner, for example, is being constructed in Everett, Washington, but includes components from 43 of the world’s top aviation suppliers and electronically inks more than 130 supplier sites around the world. Major orders have been placed by airlines throughout the world.
NASA took the same approach in developing the International Space Station. Dominated by the U.S., it’s built from modules developed in many countries. The Canada Arm, for example, has been a source of Canadian pride for nearly three decades and appears prominently in many photos of the station. Last October (2007), NASA was preparing to launch an Italian component called “Harmony” to link the U.S-made Destiny lab with the European Space Agency’s Columbus module and Japan’s Kibo module. International cooperation, in this instance, shares the glory as well as the financial costs of exploring space.
Support to other organizational global operations
“Setting up factories helps you get local buy in and support, too,” Thompson says. Arranging joint ventures and research partnerships also can help swing buying decisions in your direction.
Boeing is a case in point. That company has a 60-year relationship with India and has become “the mainstay of the country’s domestic and intercontinental commercial fleets,” according to Boeing’s news releases. Air India bought its first Boeing jetliner in 1960 and within two years because the world’s first all-jet airline. It continued adding Boeing jets to its fleet, and so did other Indian airlines. The market was strong enough that by 2003, Boeing established a subsidiary in India to “strengthen its local presence” and to find “new ways to pursue growth and productivity initiatives.” Those ways include projects with India’s leading companies and research organizations.
Even before it established a subsidiary, Boeing began working closely with India’s leading software development companies on information technology projects and engineering data analysis projects. It since has partnered with the Indian Institute of Science to conduct research on aerospace materials, structures and manufacturing technologies, which are then integrated into Boeing’s aircraft. Some 2,000 Indian researchers are actively involved. Boeing’s R&D division also is collaborating with India’s national Aerospace Laboratory and has contracted with Hindustan Aeronautics Ltd. to manufacture some components and assemblies and to digitize engineering drawings.
Additionally, Boeing plans to invest up to $75 million for training facilities, mainly for Indian pilots and, working an Indian partner, another $100 million to build a maintenance, repair and overhaul facility in central India for Boeing planes.
Boeing is there because the market is strong the company can benefit from Indian expertise. A case can be made that India would have purchased Boeing planes anyway, so perhaps its coincidental that in 2006, Air India ordered 68 Boeing commercial jets—the largest commercial airline order in India’s history, worth $11 billion. Between now and 2026, Boeing projects that India will need 856 new commercial jets at a price tag of about $72 billion. Boeing spokespersons won’t draw any linkages between the company’s investment in India and sales of planes. Draw your own conclusions.
Global sources can be more reliable
This isn’t a given, but “it’s always a possibility,” Thompson says. Reliability has two aspects—that of the product and that of the supplier.
“I was buying candles from a supplier in China, and the order always arrived on time and in the proper quantities,” Thompson says. “This really is about finding a good supplier with a good reputation and then working with them to develop a deep understanding of your needs and their constraints and, oftentimes, a personal relationship.
The relationship can be at least as important as the actual business deal, particularly in countries in which the rule of law is still evolving, and suppliers will take care to get to know the potential buyers and their values. Without strong courts to enforce decisions, the deal is enforced by the relationship. “You have to travel and meet with them, and lay out your expectations,” he emphasizes. With that in mind, don’t expect to confine your conversations to the phone and Internet.
Sometimes the product itself is more reliable. Take the coatings industry as an example. Right now, red lead paint is the standard for coating steel to prevent corrosion. There are some challenges, though. Lead-based paint isn’t accepted in all locations because of environmental concerns. Additionally, steel that needs to be coated while in service—bridges, for example—can’t necessarily be cleaned sufficiently to allow the paint to adhere, and the paint also can’t always penetrate the crevices, joints and overlap points inherent in construction.
To address those problems, the Swedish firm Introteknik AB developed a coating system called Isotrol that penetrates the existing paint, rust and grime to protect the steel. Independent tests indicate the coating protects for 15 to 20 years in highly corrosive environments, which is far longer than competing products, according to the just-released Frost & Sullivan report, “Advances in Corrosion Protection Technologies.”
Joint ventures
Joint ventures may help firms access local expertise and talent, advance a product or take advantage of trade agreements. They’re a mainstay in the pharmaceutical and biotech industries, which rely on joint ventures to get innovative products to market. In those industries, typically the biotech firm develops a drug into or through the clinical trials stage and then partners with a larger pharmaceutical company to bring the drug to market. In recent news, German pharmaceutical giant Boehringer Ingelheim and U.S. biotech firm Vitae Pharmaceuticals, Inc., launched a collaboration to develop and commercialize a compound to treat diabetes and other metabolic diseases.
The benefit to Vitae Pharmaceuticals is the upfront and near-term payments of $35.6 million, in the form of cash, research funding and an equity investment, plus the possibility of up to $300 million in future payments as predetermined milestones are met, with royalties also coming from future sales as Boehringer Ingelheim leads the development and commercialization of the compound. Vitae Pharmaceuticals maintains the right to develop the research for other indications. In exchange, Boehringer Ingelheim gets access to an innovative compound without the intensive, early stage development work.
Collaborations like the Boehringer Ingelheim/Vitae Pharmaceuticals agreement make business sense because they exploit the skills of both companies to do something neither could do easily alone.
When joint ventures are formed mainly to access local markets, however, they may not be such good deals. As companies become increasingly globalized and source from many nations, international joint ventures can actually muddle operations. Research from Harvard University and the University of Michigan indicates the value of working alone has a better financial outcome than collaborating when companies have global production or sourcing operations or when they want to leverage a global network of affiliates.
In those scenarios, the interests of the local partner—getting more business from the company—may conflict with those of the multinational firm. Oftentimes, the expertise companies seek through joint ventures can be accessed through other vehicles that allow the firms to retain ownership. So, before forming a join venture, look carefully at what each partner offers as well as at the potential pitfalls before proceeding. wt
Sidebar: The Sweet Life
Mark Thompson is the global commodity leader for Pioneer Hi-Bred International, the world’s leader in advanced plant genetics. His background, though, is in candy.
“Practically all candy comes from outside the U.S.,” Thompson says. “Look at the fine print on the candy bag or box. It usually says ‘distributed by’ rather than ‘made by,’” he says.
That change occurred shortly after Thompson entered the candy business in the late 1980s. “U.S. subsidies to sugar farmers drove the price up,” he says, so that it was nearly double world prices. Candy companies balked, but Congress didn’t budge. Consequently, most U.S. candy companies closed their U.S. factories and moved offshore. As purchasing manager for the aptly named Foreign Candy Company, he purchased candy mainly from Mexico, which he says is still a major supplier for the U.S. candy market.
But eventually, Thompson decided that man could not live by candy alone. He needed some spice in his life. What he found was the world of garlic, vanilla, cinnamon, which he sourced for Tone’s Spices, searching out the combination of quality and price that has made Tone’s Durkee, Spice Islands and French’s brands household names. Many of these spices grow only in well-defined regions, but plant geneticists have been working for decades to extend their growing conditions. Thompson is working with them now, at the world leader in advanced plant genetics, Hi-Bred International, Inc., which conducts research in 25 countries and production facilities throughout the world. Ironically, he says, “Now I don’t do a lot of global sourcing.”
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