Monday, June 14, 2010

2x4 Redux

One of the themes I picked up on while participating in last week’s LASYS show in Stuttgart was the idea that the German manufacturing sector needs to become more competitive in world markets. Although the obvious target for competition was China, that country was never named.

I say "obvious" because in a Lasers and Laser Systems for Material Processing Working Committee meeting of the Verband Deutscher Maschinen und Anlagenbau e.V. (VDMA), to which I was invited, reference was made to the Asian market, primarily China, being the largest export market for German-made industrial laser systems outside of Western Europe.

Last year systems valued at $315 million (down 48.4% from 2008) were exported outside of Germany. Asia received 27.4% of these systems, of which China took 13.3%. Contrast this with exports to the U.S. of only 5.3% (it was a recession year, remember). In 2008 70% (~$629 million) of orders for laser systems were from foreign customers; last year it was 75%, but only $340 million. Even so, Germany is a major laser system exporter.

It was suggested that it would be better if those laser systems were put to work in Germany producing products to be exported in competition with the countries in Asia. The implication was thatautomated laser systems could reduce labor costs and contribute to improved productivity that would enable German manufacturers to become more competitive. A statement to the effect that the lower labor rates in China, for example, could be countered by productive, automated laser systems is true, as exemplified by experience in the U.S.

However, one should not denigrate the engineering talent in China, most educated in the U.S. and Europe, who have the ability, when needed, to install automated systems as that country's labor rates begin to climb, which has already started with increases of 35% or more being common. My view is that companies in China do what is necessary to meet domestic consumer demand. If this means goods of less than “world-class” stature, so be it. When consumer demand shifts, these companies are able to improve production technology to meet it, and some are already doing it.

German manufacturers have a burden that many competitors don't and that is onerous labor laws that contribute to high manufacturing costs. Unless regulations are eased, an unlikely scenario, new producers will be forced to become lean, mean manufacturing machines as has happened in the U.S.

In last week's Blog, I facetiously used the analogy of hitting someone on the head with a 2x4 to get his attention. For U.S. manufacturers it was the competition from China and outsourcing that was their 2x4 three years ago. Last year, at the depth of the recession, manufacturers reversed the trend and resourcing (bringing the business back) became common. And what reversed the trend was lean manufacturing (aided by the fall-out from the recession) which made these manufacturers more competitive.

U.S. industrial production has increased 10 months in a row as anaysts have noted. So my message to German manufacturers is that, to meet your competition in the world markets, shipping products rather than lasers to China, for example, you need to lean down and rethink your productivity plan, with lasers being part of this as they are key to many automated processes. And that is my 2x4 whack to you.

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