Could globalization be happening in dog years?

Jan. 1, 2020
We can't limit our view of globalization as just the phenomenon of China alone.

About a year ago, I devoted a couple of columns to the "emerging" issue of China as an auto parts manufacturing power. When my editor suggested it was time to revisit the subject, I went back and reviewed what I said at the time. It was a sobering reminder of just how fast things move in today's business environment.

A year ago, I was writing about how China's emergence had caught most North American-based manufacturers flat-footed, and how accepting of offshore manufactured parts our automotive technicians were becoming. Most of what I had to say was an attempt to convince incredulous manufacturers that both issues were very real and needed to be taken seriously.

What a difference a year makes. It's almost as though globalization is happening in dog years, as everything seems to be moving seven times faster than normal. A year ago, I reported that country of origin no longer was a major issue with technicians. They had come to realize and accept that replacement parts have gone the same global route as car manufacturing. I said then that most techs would prefer to buy parts that are domestically manufactured, but had come to understand that the automotive business is a global business and quality parts can and do come from almost anywhere.

The position has changed

A recent round of focus group conversations with techs revealed they no longer expect parts to be made in North America. There has been a stunning shift in only about a year's time, with techs going from "wishing" parts were still made here to having no expectation that they will be. One tech eloquently summed up the situation by saying, "You know, I honestly can't remember the last time I got a part that was made here."

The end user's unequivocal acceptance of Chinese manufactured products is the essential issue in the true globalization of not only the aftermarket, but every area of our economy and every category of commercial goods. To borrow an old metaphor, it is only when the dogs eat the dog food that you know the deal is done. Technicians' acceptance of Chinese manufactured products signals the stark reality that globalization has firmly rooted itself in the aftermarket.

China, the cause célèbre of the globalization movement, is truly an economic phenomenon. Its economy grew at a rate of about 10 percent last year, accounting for one-third of total global economic growth. With one-fifth of the earth's population, China last year consumed one-third of the world's steel, half of the world's concrete and became the second largest purchaser of goods in the world. With more than one and a half billion people looking desperately for a "better life" and a mutating government telling them "it is glorious to become rich," China has size and tremendous momentum. However, this emerging nation should not be mistaken for globalization; it is simply one of many forces driving globalization.

The thing everyone talks about is the low cost of labor in China compared to that in North America. The mainstream media presents a rather one-dimensional view of this issue, typically in the context of jobs leaving here for there to satisfy the greed of American businesses.

I often get an earful at cocktail parties when I talk about helping my customers globalize their operations. Many people don't seem to be able to view our emerging global economy in the broader context of the free market, which dictates where money will flow naturally. They see it as being more about "greedy businessmen trying to grab excessive profits" than consumers expecting and demanding greater value for their purchases. Anyone who thinks it through will see the culpability of those involved, from investors to management to workers and ultimately consumers. Sure, there may be some profiteering going on...there always is. The real issue we're living through is more about survival than windfall profits.

The sooner we understand the "process" of globalization, the sooner we stop wringing our hands and gnashing our teeth. And the sooner we adapt to the inevitability of a global destiny, the sooner we will arrive at that destination.

Let me give you an example. Consider the whole automotive OEM industry in this country. At the initial onslaught of global competition, it reacted completely wrong. When the Japanese sent their vehicles to our shores in the 1970s, U.S. automakers in their arrogance were convinced the Japanese had no idea what U.S. consumers wanted and were confident in American loyalty to domestic products. U.S. drivers gleefully accepted the Japanese products, but still the OEMs resisted. As the sales of the foreign nameplates grew in North America, those Japanese companies embraced the tenets of globalization and started opening assembly plants here. They, in essence, became global companies.

Soon, many offshore OEM suppliers started coming to North America to open plants to supply their transplanted OEM customers. Once established, some began making inroads into the North American aftermarket as well. Denny Welvaert, the president of Dayco who oversees both its OEM and aftermarket operations, made an interesting observation a few weeks ago. He said it is an interesting juxtaposition that as North American auto parts makers continue to migrate more and more of the manufacturing overseas, an increasing number of OEM parts suppliers from Asia and Europe are opening plants here.

It is an interesting observation because at first examination it seems to fly in the face of the reason or logic that is driving most North American companies to places like China, specifically for lower labor costs. It seems too many North American companies look at their global competitors and their global opportunities and see only the low-cost labor. They examine the situation, see the lower costs and surmise, "that's how they do it, look at how little they pay for labor; I gotta get me some of that."

I think it is profoundly shortsighted for companies to chase low labor rates around the globe. That is not to imply that controlling labor costs by taking advantage of lower labor rates is not smart; it is. It's only shortsighted when that is the only reason for doing it. The success of the offshore companies that build plants, employ high priced North American labor and still manage to compete effectively is evidence that there is a lot more to be gained by globalizing than just lowering labor costs.

There is a popular expression that goes "think globally and act locally." For businesspeople, that means being insightful enough to use low-cost country manufacturing as more than a device to make products cheaply and export them back to established markets. It means to "act locally" and use those plants to capture market opportunities in the emerging economies and become a global company. Remember, I said that China's economy grew at a 10 percent rate last year. It has been decades since our economy has seen real growth in a double-digit range.

But in addition to lower labor costs, it is also about operating a business efficiently, as in keeping up with "world class" standards. The newness of these operations creates a significant opportunity for efficiency. A "greenfield" plant is, quite literally, a fresh start. It has all the newest technology and automation as well as the latest in efficient manufacturing processes. There is a stark difference between the sparkling new plants and grievously neglected manufacturing operations most North America-based manufacturers are shutting down. Far too many of them failed to keep manufacturing operations up to "world class" standards and, in doing so, created their own uncompetitiveness.

Other advantages to a fresh start are not so obvious. Local governments anxious to attract new jobs and new revenue streams often negotiate tax abatements, tax increment financing, bond initiatives and other incentives to bring new facilities to their communities. Likewise, companies often start from scratch with their labor agreements. Most are opening in "right to work" states and are able to do so without burdensome union agreements. Even those that do have to make union deals are making far fewer onerous deals than most legacy domestic manufacturers have had: in particular, the United Auto Workers deals negotiated primarily by the OEM, many of which spilled over into the aftermarket.

All these factors have contributed to the success of companies coming from Europe or Asia and succeeding where North American companies have not. It's the same formula the North American OEM eventually woke up to: there is a difference between acting global and being global. It took the OEMs a while, but they are getting their act together. Now the aftermarket must do the same.

Globalization is the aftermarket's new reality. Too many of us view China as a malevolent factor, rather than the most recent beneficiary of the ever-expanding global economy. Too many aftermarket practitioners are acting as if globalization is a fad they can wait out. As long as there are major nations "emerging," we will have disparities in wages, living conditions, types of economies, views on rights versus privileges and other foundational issues. It will bring access to new markets to North American companies savvy enough to embrace emerging markets and provide them with the growth we lack at home. It will bring wealth and stability to impoverished nations around the world and improve their quality of life. It will bring consumers here high quality products at lower prices. It can benefit everyone, except those who resist. In a bit of irony, overly cautious businesspeople will be like the sign-carrying protesters, aligned against a force of nature no one can hold back.

While my editor was right that it was time to "revisit China," we can't limit our view of globalization as simply the phenomenon of China alone. China has been the force multiplier that has accelerated the global revolution to the next level. But China is simply the Japan, Taiwan or Mexico of yesterday and the Vietnam, Sri Lanka or Myanmar of tomorrow. Our traditional view of a world with geographic or political borders does not apply in the new global economy. Those borders already vanished. The question is, how many think they still exist?

Bob Moore is president of Bob Moore & Partners, a consulting firm that specializes in the automotive aftermarket. Moore can be reached at [email protected].

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