I'm sure many regular readers interpret my rants about companies going down the drain by chasing cheap labor in China and points south of it as anti-globalization, but that is not the case. I'm not anti-globalization – I'm just anti-cheap. And I am pro-value. The recurring theme in Simple Excellence is that success comes to the best value producer – not the lowest cost producer. A great example of this and how it is accomplished comes from Estonia – not usually a place manufacturing turns to for leadership and inspiration.
The story of the Estonia Piano Company offers great lessons on many levels, not the least of which is the country itself. Estonia came out from fifty years or so of Nazi, then communist oppression, but unlike most of their Eastern Block neighbors they did not set out to become a cheap labor source for Western Europe. They set out to become a high value source of stuff. With free markets, a flat tax scheme (that has steadily decreased), and commitments to supporting education and technology, they became an incubator for outfits like Estonia Piano.
The company itself went from being state owned to becoming employee owned after the fall of the Soviet Union. Under Soviet control they had degenerated into a company making pianos only a vodka-soaked Communist could love. The serious music world had pretty well written them off. Then a New Yorker took an interest in them. Not a Wall Street New Yorker, lucky for them however, but an Estonian native, Julliard School New Yorker by the name of Indrek Laul. Unburdened by an MBA and an obsession with numbers and cost cutting, this guy set out to make good pianos with the cost falling where it may.
While competitors like Baldwin viewed globalization and free trade as an opportunity to cut labor costs and make cheaper pianos, Laul saw it as a chance to get the best materials in the world and sell into the biggest markets in the world. While I wouldn't know a B flat from an F sharp, Laul appreciated things like the value of trees that grow in cold places to make better sounding music, and he appreciated German mechanisms, and he knew that he needed to control string making in his own plant, having it done by guys who knew what they were doing.
Estonian labor costs are not as high as those in the USA and Germany, but Estonians don't work cheap either. The average wage is about $7.50 an hour, with the piano makers pulling down a lot more. They especially make a lot more because Laul has them all on a profit-based bonus scheme, and sales have increased by a thousand percent or more since Laul set out to be the best piano maker. Said a New York piano dealer a few years back, "This great piano is giving pause to a lot of other manufacturers, because they'll have to meet the standard of the Estonia if they want to survive." A lot of them haven't survived.
The story has repeated itself many times recently, and will continue to do so over and over. Lean manufacturing is not about cost cutting – it is about eliminating waste – costs that do not create value for customers. The lean producer is not the one who spends the least, but the one with the highest percentage of spending going to value creation. Estonia pianos are cheaper than Steinways, more expensive than Chinese made – they succeed because they are a better value for the price than either.