Patti McCracken is a freelance journalist based in Austria.
The US was the world's business leader for much of the 20th century, but today it is facing a serious challenge from new, emerging economies. With many firms looking east to China and India, Patti McCracken analyses how US family businesses are reacting
It was a stunning and bold concept. To bring together under one roof every piece of metal, every pane of glass, every engine part, every last bit of the undercarriage, and every detail of the interior, right on down to the cushions; and then use hundreds of individuals to assemble the pieces into automobiles on one snaky, layered line. It was a demonstration of breathtaking efficiency.
Henry Ford paid his workers handsomely for their work on the assembly line, enough so they could afford their own cars after they rolled out of production. High pay equalled high profits, or so went the theory of Fordism.
But the mass production and muscly labour unions that defined the 20th century have proven too inflexible and rigid for the global 21st; so American Fordism has taken a back seat, and China and India (Chindia) are driving the new model of capitalism.
New style of business
The emergence of Chindia is now forcing American companies to redefine the way in which big business operates. India's economy grew 9.4% in 2006, the fastest in nearly 20 years, while China's economy grew even faster, at a rate of 10.7%.
"Family-owned businesses – along with all businesses – are being affected dramatically," said Stephen Hochberg, CEO of Mage, a business consulting firm specialising in private companies. "Many businesses now find that their suppliers have moved to China with their operations, which pushes them to start up actual operations in China. Or they find that their suppliers are travelling there to create direct sourcing arrangements."
One of the US's largest family-owned businesses, San Francisco-based Bechtel, has been at the forefront of the move toward China and beyond.
"For global projects, we have to draw more and more on global resources to remain agile and competitive," says Bechtel spokesperson Jonathan Marshall. "For example, the aluminum smelter we are building in Iceland was designed in Montreal and New Delhi, uses steel from China, has casting pots purchased in Bahrain and got most of its labour from Poland."
While China and other emerging markets are the favoured locations for plant facilities, India's strength is in backroom services: IT resources, call centres and engineering strategies. The pull towards India is still primarily from small- and medium-sized businesses, according to Hochberg, although that may not be for long. "The expectation is that as the Indian business community becomes more educated, the business landscape within the US will experience major change," he says.
Stavis Seafoods, Inc, a second-generation family firm based in Boston, MA, has been relying on imports for about 40 years, starting with Canada in the late 1960s and Taiwan in the 70s. It now imports from China. "In the last 10 years, China really has exploded," says CEO Rich Stavis.
Stavis lauds the Chinese factories his seafood firm uses, saying they are better equipped and better staffed. "There are some smaller filets, such as parch, which have small bones. If they are processed in Canada, the bones are left in, but if they're processed in China, they pull them out, because they have more people working in the plant."
Another benefit Stavis sees is better physical plants. "Because they've come relatively late to the dance, they have state-of-the-art facilities. This is much better than some that are 20- or 30-years-old," says Stavis. "They can make a very high-quality product."
Some would disagree, including the US government, which last month banned the import of some seafood from China, declaring the products unsafe for consumers, and forcing Chinese officials to crack down on factories.
But Stavis is quick to respond. "We've been proactive in our imported products. We are buying from reputable vendors and have visited a vast majority of the plants that pack our brands," he says.
Carefully choosing partners in China is key, as Stavis has found, but so is devoting time and effort into training them and fostering relationships.
Steel company TWMetals, which is part of Alabama-based O'Neal Steel Inc – the country's largest family-owned metals service centre – works closely with its international customers to help stay competitive abroad, concentrating on their specific, local needs, and cooperating with them.
"Our customers want us to be a bigger part of their business and manage portions of their global supply chains," says Bob Mraz, director of sales and marketing. "We identified opportunities early on and deployed in-country teams to assess how best to serve them." O'Neal's profits jumped from $800 illion in 2004, to $1.3 billion the following year, in part because of success abroad.
Capital expenditures by US companies is set to fall dramatically, from 51% last year to 45% in 2007. This is normally a harbinger of bad news, causing profits to plunge. But economists say that a factor in the decrease is the trend by US and European firms to work out of facilities in developing countries, such as China and Eastern Europe, where it's cheaper. In turn, the relative economic growth in these regions means more opportunities to do business.
Bechtel has already taken advantage of the improving economy in some of these regions. As a diversified company, it can compete in several sectors, including energy, power, telecommunications, mining, and in the case of its project in Romania where Bechtel is building a highway, civil infrastructure.
"Rising standards of living increase demand for the kind of infrastructure we build, and make our business less
dependent on the US market," says Marshall.
Chindia is fast becoming an economic superpower, which has many in the US fearful. But analysts point out that the rise of these emerging markets can, in fact, be beneficial to American firms. As the manufacturing sector has shifted east, the innovation sector has been born to replace it.
More importantly, the economic base of second- and third-world countries, including post-communist regions, is rising rapidly. India's new middle class, for example, has reached 300 million people, which is the same as the entire US population, and has opened up an entirely new market for US companies.
Successful corporations tend to see Chindia, not as a threat to profits, but as an opportunity for growth. "We are located in both [India and China] and our business is growing exponentially," says Mraz. "Many American companies are opening in these countries and want to keep the benefit of material aggregation, quality and exceptional service for their global vendors. Globalisation is now the cornerstone of our strategy."
Bechtel also views Chindia as positive, not a negative. "We've worked on major projects in both China and India – we don't lump them together – and we have established engineering offices in each, as a sign of our commitment to them," says Marshall.
So, while Chindia provides many companies with a chance to do what they could not otherwise afford to do domestically, it does not does not always entail cutting domestic jobs and shipping them overseas. It can mean expanding services instead, and at a reduced cost.
Nevertheless, as in the case of the banned goods from China into the US, it pays to be vigilant about finding quality partners abroad. "We're not necessarily getting the cheapest product at the cheapest price," says Stavis. "We need to get the premium quality for our customer." And that is something the US still has in common with Henry Ford.