Manufacturers struggle with China’s risk, opportunity: Currency valuation one of many competitive issues

Eighteen months ago, 110 people worked for Swiss Plywood Co., a Tell City-based cabinet-maker in business since 1945. The average tenure was 17 years.

Today, only 65 employees are left at the controls of Swiss Plywood’s machines. Chairman Bill Borders blames China.

“We’ve weathered storms over the years,” Borders said. “But nothing approaching this.”

Manufacturers in Indiana and across the nation have long complained about what they call Chinese currency manipulation. It’s one of a litany of grumbles about Chinese business practices. In theory, a free-floating yuan could rise in value, making Chinese goods a bit more expensive. That would be good for U.S. manufacturers, who are looking for any edge.

But when the Chinese government finally unpegged the yuan from the dollar July 21, the move was widely considered merely symbolic. U.S. manufacturers got only a scrap of the relief they sought. Relative currency values barely moved.

Meanwhile, the enormous economic forces that make China the most feared of all Asian tigers are only getting stronger. Indiana manufacturers can and will press policymakers until they’re blue in the face about currency valuation, intellectual property rights and unfair Chinese market subsidies. Their efforts might even pay off, in the short term.

But in the competition with China, business leaders say, only one strategy seems a sure, long-term bet for Hoosier manufacturers: innovation.

“We have to focus on technology. We understand the Chinese at some point in time will come up the learning curve and will be able to compete with products we’re producing today,” said Jim Fabris, president of local machine tool-maker Hurco Cos. Inc. “Its our challenge to stay ‘X’ amount of years ahead of them.”

In many ways, Hurco and Swiss Plywood are at opposite ends of the China curve. Swiss Plywood, which makes wood-case goods like piano, organ and curio cabinets, is struggling to compete against Chinese counterparts that can hire a near-endless supply of laborers at rockbottom pay rates below 50 cents an hour-without the overhead of health insurance or U.S. environmental standards.

Two years ago, Borders said, his biggest customer was still buying from Swiss Plywood by the pallet. Today, that customer buys all its manufactured wood products from China.

“The problem being the Chinese actually make some pretty darn good stuff,” Borders said. “Years ago, you could say, ‘Their stuff’s just junk.’ Some of it still is. But they manufacture some very good stuff anymore.”

Hurco’s highly specialized machine tools, on the other hand, seem exactly what a rapidly industrializing economy like China’s needs. And since the Chinese can’t yet produce them on their own, Hurco approaches the country like any other emerging market.

So far, the only negative impact Hurco can identify is China’s rabid appetite for sheet metal and other raw resources, which drive up their price.

“You can be a very good company with a good outlook. But the world is changing so rapidly that you have to be more progressive and aggressive to try to keep your position in the global market,” Fab- ris said. “No one wants to regress. If we try to hang on to those sacred cows we’ve established, we’ll find ourselves falling behind the curve.”

Hurco first embraced a global perspective about a dozen years ago, Fabris said, when the machine tool industry fell into recession. Today, about 65 percent of its sales are outside the United States.

Indiana investors who concentrate on the manufacturing sector are keenly aware of both sides of the China coin. Hammond Kennedy Whitney & Co., which performs managed buyouts of small to midsize manufacturing companies, has a policy on “China risk” that it applies to every transaction.

Because China has an enormous pool of low-cost labor, CEO Glenn Scolnik said Hammond Kennedy Whitney prefers to buy manufacturing companies that make highly engineered products, often in the medical device field, that are expensive to ship overseas. These markets are easier for the United States to defend against the Chinese.

Scolnik also mulls whether an acquisition target could penetrate the Chinese market. Often, a U.S. manufacturer can set up a subsidiary in China and make a variation of its product for sale to Chinese customers at a mere 40 percent of its domestic price.

There’s no changing the fact that China can produce high volumes of many lowcost products more cheaply than Americans can. The best response, Scolnik argued, is to understand China and embrace it.

“The reality is, the world is not going to allow us to be protectionist,” he said. “If we want to participate in other economies, we have to let them participate in ours.”

A head-in-the-sand approach isn’t a realistic alternative, said Ball State University economist Patrick Barkey. The United States long ago abandoned many industries it once dominated. Today’s cost structures will keep them from coming back.

“You can revalue [the yuan] as much as you want,” Barkey said. “You’re not going to stimulate production of domestic television sets, because they’re not made here anymore.”

China is still a nation with enormous challenges, said Indiana Manufacturers Association President Patrick Kiely. Some barriers must be torn down before American businesses are comfortable operating there.

Manufacturers still clamor that the Chinese government should go further with its currency and allow the yuan to float freely, Kiely said. They also worry about widespread piracy of intellectual property. And because the Chinese government is communist, many industries remain state-owned. That allows them to make pricing decisions as no for-profit operation would, or get no-interest loans with repayment never required.

In the face of such competition, manufacturers here should simultaneously aim to maximize the efficiency of their own operations, Kiely said, as well as that of their suppliers and customers.

“China’s not going to go away. I still think, under the right circumstances, we’re pretty good at what we do here,” Kiely said. “But at the end of the day, manufacturers have to be good at not just their production, but managing their entire value chain.”

Even manufacturers on the wrong side of the China curve understand the obstacles they face. Borders still hopes to retire one day from a viable operation in Tell City. So Swiss Plywood is now searching for niche markets the Chinese don’t yet serve.

“We simply have to figure out how to do it all in a more timely manner,” he said. “It’s a business. Every day it’s another challenge.”