Local job shops grapple with China factor
According to a national industry survey conducted by D-M-E Co., a Madison Heights, Mich.-based supplier to mold-and-die shops, 30% of responding manufacturers would consider partnering with Chinese firms. About 32% said they would be willing to partner with companies in Taiwan or Hong Kong.
A new venture started by a couple of Racine companies, with help from the Sturtevant-based Center for Applied Technology and Innovation (CATI), may be the first example of southeastern Wisconsin manufacturers actually forming substantial partnerships with their lower-cost Asian counterparts.
The two companies — Summit Tool Works and Merit Models — are both based at 1833 Oakdale Ave. in Racine.
Like other owners of job shops in southeastern Wisconsin, Hans Hansen, owner and president of Summit Tool Works, and Thomas Smith, owner and president of Merit Models, were struggling with a sluggish manufacturing economy and overseas competition.
Japan, the bane of US manufacturers in the 1970s and ’80s, has been supplanted by China.
Chinese tool-and-die manufacturers, mold makers foundries and other contract manufacturers benefit from the remnants of a centrally planned economy focused on building its manufacturing sector.
With wages of about $2.50 a day, lax environmental and human rights standards and favorable currency exchange and tariff rates, China is able to produce dies and molds for a fraction of the costs US companies must endure.
In some situations, the Chinese companies’ costs for molds, dies and finished products is equivalent to a US firm’s raw materials costs.
Steel tariffs and the high cost of natural gas (used in the manufacture of plastic resin) in the United States mean manufacturers reliant on those commodities are at an even greater disadvantage.
"We were losing a job a month overseas," Smith said. "And then we heard from our customer that they never got the tool. But we still lost the job."
Quality control and timely service are common problems for US companies that source tools and molds from China.
When a long import timeline, combined with delays caused by a faulty machine tool, put a product behind schedule, that Chinese tool can look like less of a bargain.
But purchasers at manufacturing companies in southeastern Wisconsin and elsewhere are routinely looking abroad for tooling, and the industry here is suffering.
So about a year ago, Smith, Hansen and Smith’s wife, Mary Jo, who serves as controller for the two companies, decided to start a company to combine stateside and offshore tooling services.
"We have watched the market switch dramatically toward many projects shifting overseas, mostly to China," said Mary Jo Smith, president of the newly-formed Maha Solutions, Inc. The company is named for her and vice president Hansen. "Realistically, we have realized we cannot compete with those places. Feedback we get from our customers is that the quality issues and the lead time dealing with China are issues. We offer our services in conjunction with the tooling overseas to resolve those issues," she said.
Summit Toolworks and Merit Models each have eight employees, she said, adding that the new company plans to hire up to three project managers within the next year.
"We are offering the services of doing the design stateside and sending the design over for the tooling to be made; so we could conceivably add designers," she said.
Early in the planning process, the three started cultivating relationships with select suppliers in China. They would offer clients access to the domestic services of Merit Model and Summit Tool Works, but would, where appropriate, farm projects out to their Chinese partners.
A representative of Maha Solutions then travels to China to directly manage each project completed overseas.
"On a 90-day project, we will spend 30 days overseas," Thomas Smith said.
While this high-touch approach is not unique to large manufacturers, Maha Solutions may be the only entrepreneurial-size firm in the Midwest doing business in this fashion.
"When we were researching for our business plan, we had to look at competition," Mary Jo Smith said. "Our searches brought up four companies — mostly on the West Coast — but none in our area. I am sure more people will be doing this. But it does take a lot of risk. A lot of tool shops don’t want to go into the future that way."
Apart from the direct oversight by Maha staff, the Smiths and Hansen believe they can maintain stateside quality standards, because, according to Thomas Smith, two of their offshore shops are ISO-certified, and the remaining three are working on it. ISO designation certifies that a company has a plan that conforms to technical specifications and other criteria to ensure that materials, products, processes and services are fit for their purpose.
According to Thomas Smith, when it comes to automation and technology, the Chinese shops are light years ahead of shops in the US.
"I have not seen any shops here in Wisconsin that have as up-to-date equipment or software," Thomas Smith said.
Despite the technology gap, Smith said Maha is still able to share CAD files of any format with its Chinese partners.
The hands-on management and high-end nature of the Chinese firms involved means Maha Solutions could still be undercut by US firms acting as agents or brokers of offshore manufacturers.
"It is a lot of money and a lot of time," Thomas Smith said. "But if you don’t do it first-class and you don’t do it right, you won’t have happy customers. Our prices are higher than broker prices. They are not doing exactly what we are doing. They are not adding the value we are adding to the process."
The business plan
According to Thomas Smith, the team began working on the idea about a year ago. But after months of struggle, it became apparent that outside help was needed. That’s when the management team brought in Matt Wagner from CATI.
"Matt Wagner brought together resources for us to work with," Thomas Smith said. "We had been working on this for six months or so, and we weren’t getting as far as we wanted to. CATI brought in a couple people. One of them was Arthur Cyr, former president of the World Trade Center in Chicago. Another was Doug Arion, (who, like Cyr, is a professor at Carthage College, Kenosha). They started getting us
lined up with how it all works overseas, how to get contacts over there. At
the same time, Matt Wagner through CATI was working with us to get our business plan together."
Wagner not only worked directly on the business plan, but he referred the Smiths and Hansen to a Wisconsin Department of Commerce (DOC) program. The successful grant application delivered $2,625 that paid for 75% of the planning services.
The Early Planning Grant (EPG) provides money to small businesses for planning and feasibility studies associated with starting or expanding operations. To be eligible, a business must have fewer than 50 employees and belong to one of a handful of high-potential industry clusters identified by DOC.
The jumpstart paid off, as Maha was incorporated in June of this year and is already engaged in overseas work.
The newly formed corporation will act as an umbrella company for Summit Toolworks and Merit Models. Jobs will be farmed out domestically and overseas as appropriate.
"We are leaving it up to the customer," Mary Jo Smith said. "If it is a lead time issue, most likely it would be done in the states. If it is pricing, most likely it would be done overseas. If it is labor-intensive, most likely it will be done overseas."
The customers
Maha Solutions’ business model is designed to be appealing to purchasers just getting their feet wet with overseas sourcing, as well as those who have tried working with Chinese tool and die companies, but received late or inferior products.
"Companies that are just starting to know the ropes of doing business in China and don’t know quite how to get in," will be attracted to Maha Solutions, Mary Jo Smith said. "And there are the people who have been in China already and have encountered problems because they are dealing with agents who take the job over to China and leave it."
Going forward, intellectual property issues may be a deterrent to automotive manufacturers from sending tooling for components overseas, she said.
The new venture has already retained the services of two manufacturer representatives, and several of the projects either in production in China or on their way across the pond originated from this channel of distribution.
"Right now, we have completed one project," Thomas Smith said. "We are going to China for a good portion of September, furthering our relationships with our shops. We are taking four projects over there with us."
According to Mary Jo Smith, China is the center of the overseas tooling industry Maha solutions plans to tap into, but other geographic areas will soon become part of the plan.
"We realize we are not just limited to just China," Mary Jo Smith said. "Prices are starting to edge up there, and pricing is looking better in other places like India and Korea. We will work for the best deal we can get for our customers."
Oct. 11, 2002 Small Business Times, Milwaukee
