A Positive Outsourcing Outcome

Visit to FactoryTualatin firm finds that outsourcing leads to growth
The Portland Business Journal – May 19, 2006
by Sean Meyers
Special to the Business Journal
Finally, a story about outsourcing to China that even a labor official might love.
In the late 1990s, Sure Power Inc., a longtime Tualatin designer and manufacturer of vehicle electronics, was feeling heat from customers and pressure from the market to simultaneously reduce product price and dramatically increase quality.

Like many other U.S. manufacturers caught in a similar bind, Sure Power turned to China. That’s nothing new, but the results of the effort might surprise some opponents of outsourcing.
“I can’t attribute a single layoff to outsourcing to China,” says Steve Scheidler, Sure Power president. “In fact, the result has been just the opposite.”
Local employment has increased 53 percent to about 160 and taxes paid to the state of Oregon have increased by 204 percent, not counting additional income taxes paid by the new employees. Sales are up 188 percent. Why? Outsourcing portions of manufacturing have freed up more of the company’s 115,000 square feet for research and development, he says. That has made the Tualatin location more competitive by making new products easier to build.
Outsourcing has improved cash flow and allowed Sure Power to better manage resources. “The purpose in going to China was not to shutter our factory. Our customers were compelling us to get aggressive on price and design,” Scheidler adds. “It’s allowed us to compete and gain business we may not otherwise have received [and] gives our customers a perceived best-cost opportunity even if that savings is not real or is insignificant.”
Going global may be the most important decision in the 47-year history of the company. “When you step back and take a look at the globe, doing business in another country today is not that much more complicated than doing business in an adjacent county,” he says.
“Really, what’s the sense in building an expensive new factory when there’s so much factory capacity already available around the world? I think we need to quit being afraid of outsourcing. The U.S. is the No. 1 economy in the world for a reason. We might take a hit, but we bounce back.”
Sure Power produces about 1 million parts annually, mostly for use on heavy truck, military, bus, marine and other nonpassenger vehicles. His father, Ralph, started the company by inventing a “battery isolator” that prevents the direct current electrical systems in boats and recreational vehicles from discharging when not in use. The product is still widely used today. Next stop? Outsourcing projects to Eastern Europe, but it’s still in the early development stages, Scheidler says. “I think it would be a good way to break into the market and get them to buy our products.”
Scheidler got the advice he needed to establish a foothold in China from suppliers that made referrals and from other manufacturers “who had already been there, done that.” He says he doesn’t know of any other manufacturers who have increased local employment while outsourcing to China.

What assistance would Scheidler like to see from government agencies for companies that want to outsource?
“I’m not the kind of guy who looks to the government for any help,” he says. “I’m not trying to be negative, but my feeling is, ‘Just stay out of the way.’”
So far, the government has been doing a pretty good job of that, says David Alexander, president of BaySource, a Tampa Bay, Fla., consulting firm that specializes in manufacturing in China. “The only assistance that I’ve seen provided to U.S. manufacturers that want to set up projects overseas, at any level of government, is by providing general information on trade.”
Many small or midsized manufacturers turn to a consultant to speed the process and to reduce setup costs, he says. A company that sends a fact-finding mission to China will spend an absolute minimum of $5,000 per person, with $8,000 to $10,000 being a more realistic figure, he says.
Alexander has daily contact with two very large Chinese manufacturing companies that often have the part an American manufacturer needs already sitting on the shelf. If they don’t have it stocked, they can often design and cast a new part and crank up production within a week, he says.
That’s an incredible turnaround time compared with a typical American manufacturing environment, says Alexander, who previously ran a U.S. factory that produced a famous brand of hair and beauty products.
Outsourcing is helping U.S. manufacturers improve efficiency, quality and profits, and stories like Sure Power’s are not as rare as people think, Alexander says. “We’re not looking to shut down factories. We’re in business to help companies stay in business.”
portland@bizjournals.com | 503-274-8733

Globalization and the Private Equity Community

danielle fugazy | Danielle.fugazy@sourcemedia.com | IP:

Globalization To Take Hold Of Middle Market
Globalization is a hot topic in the private equity community today, and rightfully so. With more and more companies outsourcing some part of their business to Asia and companies from abroad looking to sell their wares in America, it’s no wonder private equity shops are making efforts to become truly global. Of course, the big firms like Carlyle and TPG have had this capability for some time, but you know the trend is pervasive when almost every day you hear of another middle market investment bank or private equity shop aggressively looking for a presence overseas.

Case in point: Lincoln International, an investment bank that has spent a great deal of time making this happen. In fact, they changed their name from Lincoln Partners to Lincoln International after partnering with Germany’s Peters Associates and then a different one in Asia last year. Additionally, they are expected to open another office somewhere in the world this summer.

Goldsmith Agio Helms, another investment bank, boasts a London office and says it contacts international buyers in virtually all transactions. Additionally, international buyers participate in the sale process in 95% of the firm’s transactions.

“Investment banks and private equity firms that become truly global will have the advantage,” says one middle-market private equity pro. “No businesses are located in just one place these days. To be able to help companies navigate in Eastern Europe or Asia is a huge competitive advantage.”

Clearly, this isn’t lost on the Association for Corporate Growth, our publishing partner, which has launched several chapters outside the U.S. and is hosting its first-ever China conference in early June.

So where does this leave middle market players that aren’t globalizing? “In the dust,” jokes the private equity pro. While that might be a little harsh, will private equity firms that don’t globalize be able to compete in years to come? Or more importantly, are we going to start seeing a consolidation take place in the community? Many say ‘yes’, but with the caveat that firms should have a game plan and spend their money in specific overseas locations, as opposed to setting up offices all over the world.

Please send me your ideas, and I will share my guesses. And of course, your emails will be kept confidential unless you indicate otherwise.

Danielle Fugazy

Baysource www.baysourceglobal.com continues to work with the private equity community in reaching out to identify portfolio companies, particularly those in niche manufacturing and distribution segments, who may not have the resources or infrastructure to embark on long range sourcing projects in China.  Several U.S. manufacturers have experienced dramatic reductions in cost of goods via strategic sourcing initiatives implemented by Baysource.

China as a thriving market

As a provider of sourcing services to U.S. companies with manufacturing projects in China, we undoubtedly hear of the negative stereotypes about lost jobs domestically. However, those companies savvy enough to recognize there is a huge market in China for their products, realize just how global our economy is. Note the following from a McKinsey report:

Article at a glance:
The value of China’s emerging middle class

As global companies have entered China, many of them focused mainly on serving its urban-affluent consumers. However, if these companies continue to use this strategy they risk missing the real opportunity—the emerging middle class.
During the next 20 years we expect a huge middle class, with enormous spending power, to emerge in China’s cities, following two distinctive waves of growth.
As incomes increase, the spending patterns of this consumer group will evolve, fueling various levels of growth across consumption categories.
Although it will be difficult, companies should broaden their focus to include this swiftly evolving middle class. Since this segment is a hard one to serve, companies must think creatively to succeed.

BaySource works with companies on manufacturing outsourcing projects for components of their finished goods, many of which could be headed right back to China markets. It is more the low value add/high labor projects that are ideal for tapping into China’s huge labor market. As well, we specialize in assisting U.S. companies with high value add projects that consist of high labor content in the final cost of goods.

The lopsided stereotype of Business in China

There has been an understandable bias against companies who outsource manufacturing in China. However, as the economy moves to a global marketplace, strategies need to consider emerging markets for goods and services in all parts of the world. Key points were made recently in a WSJ article by Jeremy Haft titled “The China Syndrome,” where he clearly points out that “China’s rise need not drive America’s fall.” The article looks at the overall U.S. economy, where he states that “efficiently produces a wide variety of goods and services.” He goes on to say that “In most industries, we’re decades ahead of China. And, huge swaths of our economy — like the services sector and high-tech manufacturing — don’t even exist in China yet.”

This should be enough to allay unfounded fears that exist about outsourcing in China. Companies like Baysource Global work on projects where there is a high degree of low value add/high labor requirement in the actual manufacturing of the product. It remains that the products’ engineering and innovation are the product of their U.S. intellectual property holders. The fact of the matter is that as the base of wealth grows, China consumers will want quality products and services. As Haft goes on to say, “China is increasingly buying American and growing five times faster than any other market for U.S. exports.”

So before the uneducated make claims about a lopsided relationship between the two countries, they should consider this exciting age we are in. As Mr. Haft ends, “By tapping into its expansion and capitalizing on our strengths, America’s companies have a once-in-a-century windfall opportunity to build value, make money and create jobs here at home — not shutter the shop.”

David Alexander
BaySource Outsourcing Solutions