Imagine you run a lemonade stand in front of your house, and you do pretty well at it. Now suppose I live a thousand miles away from you, but I decide to invest my money in a lemonade stand in your neighborhood, I hire your neighbor's kid to run it, and I start to make some money too. My profit comes at your expense because I take some of the lemonade market from you. How can that possibly happen? How can I make money in your business in your neighborhood? I could do it by selling better lemonade then you, of course, or by selling lemonade cheaper; and I could succeed by offering better service or by staying open longer hours.
Any way you cut it, however, the only way I can succeed is by managing my lemonade stand better than you manage yours. And when I am able to out-manage you and make money in the lemonade business your whole neighborhood loses out. The ten cents per glass profit you used to make now goes to me. Instead of you spending it in your neighborhood, I start spending it in mine.
According to Deutsche Welle, "Sany, an exporter of cranes, concrete pumps and other construction machinery from China's Hunan province, has officially opened its assembly plant in Bedburg near Cologne and predicted it would be selling 1 billion euros ($ 1.43 billion) worth of machinery into Europe annually by 2015." If that happens and the Chinese company succeeds in selling a billion euros worth of machinery from their new German plant, how can that be anything other than proof of the Chinese outmanaging their German competitors?
Isn't the presence of Toyota, Honda, Volkswagen, BMW, Kia, Subaru and Nissan plants in the United States the direct result of those companies looking at GM, Ford and Chrysler and coming to the correct conclusion that they could make better cars, or at least make comparable cars and sell them cheaper … and then going out and proving that they were right? It seems to me that, had those American companies been better managed, the foreign car companies never would have invested billions of dollars in the USA, and all of the profits from those plants wouldn't be going back to their homelands.
I have to scratch my head a bit when Barack Obama says, "The United States consistently receives more foreign direct investment than any other country in the world," as if it were a good thing. Most of the $194 billion of foreign money he was bragging about went into manufacturing, and 6% of the goods made in the USA, made by some 5 million + people are made in foreign owned plants. When Obama says, "By voting with their balance sheets, businesses from abroad have clearly stated that the United States is one of the best places in the world to invest," he should be saying that by voting with their balance sheets businesses from abroad have clearly stated there is a lot of lousy manufacturing management in the United States.
Politicians and a lot of economists whose 'long term view' extends as far as a week from Tuesday get jazzed up about the foreign money coming in, but I think it is a pretty safe bet the Chinese crane company isn't a charitable concern, and they are putting a hundred million euros into Germany because they are convinced they will take a lot more than a hundred million euros back out eventually.
The politicians and economists get excited about the jobs the foreign companies create. It seems to me that either the market is flat and those jobs are going to be offset by jobs lost in the locally owned compaies, or the market is growing and those are jobs the locally owned company could have added had they run their business better.
The Chinese buillding the cranes in Germany is certainly better for Germany than having them invest their money in China, hire all Chinese workers, and simply export the cranes to Germany. This strikes me as the wrong comparison, though. It is like celebrating the fact that you are going to have your foot amputated because it is better than having your whole leg amputated. A lot better, don't you think, if the problem with your foot could have been healed and nothing had to be amputated at all?
It seems to me that, if foreign owned companies are looking at your industry and concluding that they should invest money in building a plant in your country to complete with you, they are sending a pretty loud and clear message that you have work to do.
Don Nelson says
Bill – Great post! Would love to see it submitted to and printed by “Industry Week”. Thanks for helping us all understand that we have work to do!
Jim Fernandez says
I agree that if any company, foreign or not, begins to compete with you, the message is you’ve got work to do. Good point.
However, consider this. Suppose there are only five financial activities for my company.
1. I buy materials.
2. I pay someone to make product.
3. I sell the product to someone.
4. I pay taxes.
5. I make a profit.
Let’s suppose the profit is 20%. If I do the first four things in your neighborhood does it benefit your neighborhood? It seems to me that it does. Also, if I compete with another company in your neighborhood, the price of the product goes down and that also helps your neighborhood.
I don’t claim to fully understand the workings of world economics. But, be it a good thing or not, we are living in a world without borders when it comes to making and selling things. It will be interesting to see how our business community will deal with this.
Thomas says
Bill,
(scratching my head) – I’m German but that’s not the point. I remember you writing often, and I believe rightly so, that the only good reason for a Western company to go produce in China is being close to local customers. Shouldn’t that also be true for Chinese companies that come produce in Europe or the US? Am I sensing a contradiction here on your part?
Bill Waddell says
Jim,
Of course if there is a monopoly competition would be helpful, but why isn’t someone else in your neighborhood seeing the opportunity and stepping up to it?
Thomas,
Certainly western companies are (and should) go into China to manufacture and sell into that market. They are only able to succeed, however, because they can outperform the Chinese companies that are already there. If the Chinese were well managed, there would be no justification for a US (or German) company to come into their backyard and sell to their market – then send the profits back home to the USA or Germany.
S Hodg says
And to add to Jim’s point – we are almost all free to invest in the foreign company and share in point 5.
David M. Kasprzak says
Well, yes and no…
Any time there’s a large market, people will try to penetrate it. Even if the home-grown businesses are doing a good job, others will be willing to try and take away a piece of the action. In many respects, that kind of competition is good. Even if the Big 3 had better management, someone would be willing to try and enter into the US Market, due to the profit motive. With tariffs and such, there’s incentive to build manufacturing capability in-country rather than simply import the finish goods.
The bigger problem, as I see it, is one of innovation, or the lack thereof. Not just technological innovation, but innovations in managerial and entrepreneurial spaces, too. I think the problem is one of having become complacent. That alone leaves you ripe for the picking, as someone willing to work harder and longer will certainly upset your lemonade stand. Add into that mix an earnest desire to work smarter by means of technical and managerial innovations, and the home team is destined to fail.
Going back to your lemonade example, if someone from 1,000 miles away simply does it better than you do – you need to do more than just manage better. You need to have the ability to address problems and do something innovative that the other guy is not.
I think that, if you have very little exposure or practice with innovating your way out of a dilemma, you’ll simply end up trying to do more of what got you there, more quickly, at a lower cost. All of which will prevent you from ever identifying not where you are, but where you need to go, and creating the mechansims for getting you there ahead of the other guy.
The poor management we’re seeing might be more of a symptom than a direct cause.
Bill Waddell says
Steve,
You would be surprised at how rarely that is true. For instance, good luck investing in the Sany Group – the company I referenced in the blog post. It is much more common for American companies investing in foreign countries to be publicly traded than vice versa.
David,
If the foreign company is here on the strength of proprietary technology that may be an exception, but also a failure in management to allow the other guy to get the R&D jump on them.
For my money I think ‘innovation’ is more often than not a crutch. Poorly run companies get their proverbial butts kicked by better run companies, then have to fall back on whiz-bang innovation to get back in the game. Innovation is quite often the triple reverse halfback hail Mary play with the clock running down by the team that has been out-blocked and out-tackled all day long. Toyota is not here because of product innovation, neither is Honda, or Siemens; but a lot of American money is going into innovation to try to compete with them.
Rick Bohan says
So…countries with more poorly run organizations will attract more investment than will countries with fewer poorly run organizations? You sure you want to run with that?
Bill Waddell says
With the standard caveat, everything else being equal, that is exactly what I want to run with, Rick. The evidence seems to be pretty strong.
David Redpath says
I think there are a few related points to be made: many Western manufacturing companies moved production into China to utilise cheaper and more educated labour with the short term objective of maximising profit. The downside of that is over time you eventually lose the capability and expertise in your own country.
The Chinese company is obviously not doing that as manufacturing costs in Germany are not cheap.So they must be reasonably confident that the location and shipping savings will be saved, and that being in the local market will be a marketing and sales advantage.
They are not closing down their Chinese operations, unlike similar situations in the US in the past where short term profit is the mantra.
Deming is probably turning in his grave.
David
Bill Waddell says
David,
You make good points, but “cheaper and more educated labour”???????
Cheaper, certainly, but the typical worker in a Chinese factory has the compulsory national 6th grade education, at best. While they may or may not possess native intelligence, Chinese factory workers on the whole are a very ignorant lot – especially compared to the typical German factory worker.
LITNE says
An example to prove Bill’s point: The old Saginaw Steering Gear plant in Saginaw, MI–later part of Delphi–was slated to be closed after the GM / Delphi bankruptcy-bailout deal was done. A Chinese company bought it and kept it open. (And you should have heard the idiots howl about that–not “thanks for keeping all these good jobs here in struggling Michigan,” but more along the lines of “how dare they buy and run this iconic piece of history?” As Moriarity so eloquently put it to Oddball, “Crap.”)
Nissei Machines says
If workers are under educated it’s the company’s fault. A) you hired them B) you responsible for training them. Love the article Bill!