One Way To Save U.S. Manufacturing Jobs
Christopher Steiner, 04.02.09, 06:00 PM EDT
Forbes Magazine dated April 27, 2009
By farming out some factory work to China and Mexico, Doug Smith helps the U.S. manufacturing sector cling to what’s left.
The way to save U.S. manufacturing jobs is to export some of them. That seeming illogic lies behind the business model of SmithCNC-USA, a North Lawrence, Ohio firm that helps midwestern manufacturers get components and raw materials abroad. By leaning on cheap Chinese suppliers, they keep at least some value-added work in the hands of domestic factories. Absent the partial outsourcing, these American goods producers might be so uncompetitive that they’d be out of business.
The founder and sole owner of SmithCNC-USA is Douglas Smith, a chatty 50-year-old ex-machinist with both cost-cutting and patriotic streaks. He says he’s doing his part to preserve the shrinking U.S. manufacturing sector, which since 2000 has shed 4 million jobs, or 27% of its workforce. (That compares with a 2.5% decline and a 2.9% increase, respectively, for the freshly gutted construction and financial industries.)
Since launching his company in 2002, Smith has trekked to places like Pingliang, China, 1,000 miles from the coast and bordering a desert that stretches north into Mongolia. He was there to check out a company that had sounded good on paper and was bidding to supply large machined castings. What he walked into: a dilapidated, Soviet-built military factory where light bulbs swung from wires, birds frolicked in the hallways, and people in cold, broken-windowed conference rooms could see their breath. Cross that one off the list. Smith got the parts from a factory in Xi’an, 200 miles away, with better amenities.
Smith owns a four-bedroom house in North Lawrence and a small apartment in Jining (600 miles into the interior from Shanghai), but he is essentially a full-time road warrior. Last year he spent 225 days in China and 60 in Mexico, logging 200,000 miles in the air. He rarely spends more than two days in one place and has choked down plenty of challenging meals–donkey, dog and locust included–for the cause. “I’ll never look at my golden retrievers the same,” he says.
There are other reminders that life is very different in places where manufacturing labor is cheap. In 2004, while staying at a supposed four-star hotel in Jining, Smith heard a thud outside his window. On one of the side roofs lay the body of a man who had just fallen to his death from an upper level. “That kind of stuff just happens over there,” Smith recalls. “I see a fatality almost every trip.”
Smith’s customers are U.S. manufacturers doing small and medium-size production runs, either for their own end products or as contract suppliers to other U.S. manufacturing firms. If they are lucky, they eke out gross profit margins between 20% and 30%. That is, after paying for labor and raw materials, they have at best 30 cents of the revenue dollar remaining to cover overhead and depreciation on their machinery. Smith says that by subcontracting some of the work abroad–for example, the intake manifold in a car’s air system–these contractors can add 20 points to that gross margin, and that’s after paying Smith his fee of 5% to 7% of the foreign invoices. In seven years Smith has amassed 225 vendors in Mexico and China that do the subcontract work.
Smith expects revenue of at least $15 million this year, up from $10 million in 2008 and $3 million in 2007. His top line includes the value of the parts, his brokerage fees and any additional consulting charges for determining which parts should be made in-house and which should be outsourced. He employs no factory hands; his 12 employees push paper and make sales calls.
Smith started out making parts, not ordering them. After getting a mechanical engineering degree from Stark Technical College in Canton, Ohio, he worked for various manufacturers in the Midwest. In 1997, staked with $200,000 in savings and a patchwork of small business loans, he started his own machine shop but was forced to shut down in 2002 because he couldn’t compete on price. He then took a job as head of factory automation for nearby ASC Industries, maker of automobile water pumps and one of his old customers. ASC was setting up a joint venture with a parts supplier in China and tapped Smith to get it off the ground. “I didn’t know anything about China, and I didn’t want to know anything,” he says. “If we couldn’t do it here, I figured, it wasn’t worth doing.”
Within months Smith had set up a 1,000-person plant in Yanzhou filled with equipment from his defunct machine shop and others. ASC slashed its production costs by 25%, enabling it to lower prices and snag more orders. Since 2004 ASC has grown from 50 to 300 employees, including 200 factory workers; its revenue is up twentyfold, to more than $100 million.
Most of Smith’s 30 clients don’t want to set up whole manufacturing arms in China; they just want cheap quality parts and tools. Take Derek Lidderdale, vice president of Omni Die Casting in Massillon, Ohio. Omni sells metal parts like the aluminum housings that go into lighting fixtures in factories. These are made by injecting molten aluminum into 3,000-pound molds made out of steel. Tooling up these custom-made molds, which wear out after 100,000 injections, is a big part of Omni’s cost structure. “We were getting killed by foreign tooling,” he says. “We were looking for a source but didn’t want somebody who wasn’t going to go over there and examine the process and the product in person.”
Smith found a Chinese outfit in Ningbo in Zhejiang Province to make the molds for $40,000, a third what they cost when Omni used U.S. tool-and-die workers. Since signing up with Smith 18 months ago, Omni has made 45 new kinds of parts, all requiring separate molds or tools. In that time Omni hasn’t had to eliminate any production jobs.
Smith stitched together a more elaborate supply chain for Broadstar Wind Systems, a 12-month-old company in Dallas that makes wind turbines. Smith took Broadstar’s design and rousted 65 suppliers to crank out 225 different parts, allowing the company to piece together a prototype in less than two months. Brent Myers, Broadstar’s vice president of global procurement, says Smith has saved the company 43% compared with domestically sourced parts, allowing Broadstar to hire 30 people in the last year.
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