Getting around the end-run
Domestic manufacturers can be outmaneuvered overseas
By Charles Rathmann, of SBT
Wisconsin companies can cut costs by manufacturing products or components overseas – but in the process, they can risk being cut out themselves.
Once customers realize where the product is coming from in China, they can easily set up their own relationships with those offshore suppliers, circumventing the domestic manufacturers entirely.
Just ask Joe Henessy, vice president of the OEM Group at Hankscraft Motors, or Tom Hoffman, senior manager of capital purchases/imports for Kewaskum-based Regal Ware Inc.
Henessy, whose company is headquartered in Reedsburg and manufactures electric motors in Random Lake in Sheboygan County, said that by April 1, Hankscraft expects to transform a joint venture manufacturing operation in China to a wholly-owned foreign enterprise – in part to gain more control of its offshore capabilities.
Henessy is involved in negotiating a lease with Hankscraft’s Chinese landlord.
Both Henessy and Hoffman were scheduled to speak at the March 6 Conference on Global Sourcing, an event sponsored by the Wisconsin World Trade Center, Small Business Times and Whyte Hirschboeck Dudek S.C.
Hoffman and Regal Ware have been the victims of an end-run tactic that resulted in the company leaving the consumer electric appliance business. Initially, the company did some overseas purchasing for cookware components, according to Hoffman.
"I’ve been buying product overseas since the ’80s," Hoffman said. "That was mainly Europe at that time. We were purchasing most of our fittings domestically – handles, knobs, things like that. There were some more upscale lines that were already designed, and we were finding those in Germany."
However, as the company delved into electrical kitchen appliances, Regal Ware changed its importing focus.
"When it moved towards electrical appliances – breadmakers – we moved into Asia," Hoffman said. "We got into some products that were relatively new in the market at the time, and with the lower cost overseas, it sure made sense to deal with the Asian people that already had the designs.
"We made a few changes to make it look like a Regal Ware product. We were supplementing that with electrical appliance products we were making here," Hoffman said. "Then it got to be that it was cheaper to make our coffee machines overseas too. So we had some products we could make here and were sending those overseas to create a little more profit margin."
The hot, new consumer product at the time was breadmakers, and Hoffman wanted to make sure Regal Ware had a piece of that pie.
"When we departed that market, we probably had 20% of the bread machine market. But the pricing was coming down, and the retailers were requiring deeper discounts. When we got into the market, they were in the $200-plus range. But when we got out, they were at $35 to $40 for faster and larger units."
The final straw came when Regal Ware’s largest supplier used the end-run.
"Wal-mart started to have their own brand name – Magic Chef – and buying from the same supplier we were," Hoffman said. "We departed that market."
Rather than fight the inevitable, Hoffman said Regal Ware threw in the towel.
"It was kind of a big-picture answer. We decided to get out of the retail electrics market because we could not compete," Hoffman said.
Hoffman said he and his associates learned two lessons from the experience.
"The first was maintaining confidentiality as to who your supplier is," Hoffman said. "We are also focusing on direct sales of high-end cookware. Someone like Wal-mart is not really interested in creating that new channel of distribution."
Hoffman said Regal Ware’s higher-end cookware, sold in homes through a network of distributors, is produced domestically at this time.
"There may be some optional pieces that are added to sets that maybe we can buy cheaper overseas. But it would make sense to make the bulk of the cookware here."
Of course, one way to avoid having a customer co-opt your overseas supply chain is to own that supply chain. And that is the process Henessy of Hankscraft Motors is going through now.
Hankscraft manufactures small electric AC and DC electric motors. both in Wisconsin and in China. Volumes smaller than 5,000 units are typically manufactured at the company’s plant in Random Lake, but larger production runs for consumer products typically are completed overseas.
As his company’s involvement overseas has increased, the number of people Hankscraft employs in Wisconsin has remained stable. In the weeks ahead, about 50 people will be hired for the manufacturing operation in China.
Taking on ownership of a company in China is not a simple process, perhaps because Chinese government officials know foreign ownership means a portion of the profits will leave the country.
According to Henessy, Chinese regulation requires a company to have an address in China before it can register as a company. However, to have an address, a foreign entity needs to be registered as a company.
Hankscraft has hired a Shanghai-based legal firm to resolve this chicken-and-egg conundrum.
While the company already has a US citizen managing Hexin Electric Appliance Co., its Chinese affiliate, the relationship is becoming more formalized.
"What we are doing now is evolving from a joint venture situation and moving to a wholly-owned foreign enterprise," Henessy said. "We are actually setting up our own building. It will be full ownership over there, basically. We are moving into the factory April 1. The transfer of ownership is a whole separate process, but it will happen on about the same day."
Another challenge is supplying the factory once it is up and running.
"People talk about the US being one of the most difficult companies to import to, but I know China is one of the most difficult to import to," Henessy said.
"Occasionally, we need to send product from the US to the factory in China to be put into some subassembly and ultimately shipped to the US. Plastic parts, gears – they’ll often usually get stuck in Chinese customs. The customs office will dance around as long as they possibly can to hold them up as long as possible."
Fortunately, Henessy has found a way around the customs bottleneck.
"If you FedEx many small packages rather than sending it all in one crate, you are likely to have better luck getting it in there," Henessy said. "It is something we do two or three times a year, if it absolutely has to get in the factory floor. Once something is stuck in Chinese customs, two months is not unheard of, sometimes three months. I’ve seen it happen."
March 7, 2003 Small Business Times, Milwaukee
