Volume 46, Issue 10 - Novmeber 2011


Foreign Competition in Check?
Lower Costs May Not Necessarily Spell an Advantage
by Michael Collins

There is meaningful evidence that lower cost overseas manufacturing may not maintain a permanent advantage over U.S. production of various products. For example, in response to rising costs along the Chinese coast, companies are downsizing and/or moving plants hundreds of miles inland in order to maintain their cost advantage. In early 2011, China raised minimum wages by as much as 21 percent in certain areas as a result of overall price inflation. The Economist recently reported that the wages of Chinese factory workers increased nearly 70 percent between 2005 and 2010. Hal Sirkin of the Boston Consulting Groups predicts that “sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America.”

Pluses for U.S. Manufacturing
This tipping of the scales will be aided by gains in U.S. worker productivity, rising wage and materials costs in China and a continued appreciation of the Chinese currency against the U.S. dollar. Numerous manufacturers, including Caterpillar, National Cash Register (NCR) and Coleman, already have brought the manufacturing of important products back to the United States.

No one is predicting a stampede of manufacturers back to this country. However, this balancing of costs will likely slow the flight of future manufacturers to Asia and prevent the closure of numerous U.S. manufacturing facilities.

All of this evidence is positive and bodes well for United States-based manufacturers in the future. However, until we witness the reversal of the current ability of overseas manufacturers to produce less expensive goods than domestic manufacturers, it is critical to continue to monitor the inroads into this market made by foreign manufacturers.

Tracking Imports
To that end, my company has completed a detailed analysis of the status of foreign competition in a related industry, the door and window industry. Door and window imports grew steadily from 2002 to 2007 at a compound annual growth rate (CAGR) of 10.6 percent. However, the decline in the U.S. door and window segment since 2007 also is reflected in a sharp drop in imports since that time. From 2007 to 2010, imports decreased by roughly 46 percent. As may be seen in Figure 1, total imports in this segment in 2010 were roughly $1.03 billion. This is more than $100 million lower than they were in 2002.

The primary factor limiting the growth of foreign door and window imports is the current slowness of many sectors of the U.S. fenestration market. The import of aluminum windows, in particular, has slowed because of a duty on imported Chinese aluminum profiles. This duty was imposed by the U.S. Department of Commerce in March 2011 in response to charges that Chinese manufacturers were dumping aluminum extrusions in the U.S. market. (Dumping is the practice of selling a product for less than its fair value in a given market, making it impossible for domestic producers to compete.)

Figure 2 illustrates the growth rate of imports from the top four countries of origin for doors and windows imported into the United States. Canada, not China, currently is the largest importer of doors and windows into this country. However, the annual growth rate of Chinese sales far exceeds that of the other top importers, at roughly 15.5 percent between 2002 and 2010. This CAGR is down significantly versus the 29.1 percent annual growth rate in Chinese imports reported in our 2009 analysis of foreign competition in the door and window industry, which covered the period between 2002 and 2008. If imports from all four countries continue at the same rate as they have in the past, Chinese exports of doors and windows to the United States would, by 2014, exceed those of Canada. Given the decline in Canadian and Mexican imports in 2009 and 2010, versus Chinese imports, it appears these two countries lost market share to China and Brazil.

In 2010, Canada exported $454 million worth of doors and windows to the United States, with wood being the most common material. As a result of Canadian door and window imports continuing to decline in 2010, Canada’s percentage of total U.S. door and window imports decreased. As a group, the top four importers (Canada, China/Taiwan, Mexico and Brazil) gained another 0.8 percent of additional market share of total door and window imports, indicating that market share of secondary suppliers declined slightly as well.

If a trend emerges over the next several years of manufacturer indifference between producing in the United States versus Asia, future analyses of door and window import data will confirm that trend. Until then, United States-based manufacturers should implement lean manufacturing, focus on product and material innovation, enhance their ability to fulfill highly customized requests in a short period of time, and take similar steps to leverage their proximity to customers. Taking steps like these will make manufacturers tough to beat in the market, whether they face domestic or foreign competitors.

This article is reprinted from Door and Window Manufacturer (DWM) Magazine (www.dwmmag.com).

Michael Collins is a Chicago-based investment banker with a specialized merger and acquisition practice in the door and window industry.

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