During the last 20 years, American manufacturing has undergone more changes than at any time since the introduction of interchangeable parts and assembly lines for mass production. Despite the fact that America’s manufacturing base is the most productive in the world, that it utilizes the most modern technologies, and that it has easy access to the world’s most important capital markets, the last couple of decades have made domestic manufacturers modify not only their strategies, but their entire paradigms of doing business.
A CHANGING LANDSCAPEThe reasons for the changing landscape are many and varied. They run the gamut of economic theory, labor relations and labor markets, environmental protection, geopolitics, education and training, health and safety, information technologies and the Internet, to name but a few.
If you manufacture forgings for the automotive market, you have probably seen more than your fair share of change and paradigm shift in the last two decades. Aside from what’s happened within the forging business itself, you’ve had to deal with profound change in the automotive industry. Twenty years ago, you served your customers best by locating near Detroit or visiting it often. Your earning power was based on how well you pleased the Big Three or, at very least, its Tier-I suppliers with whom you did business.
But, alas, the Big Three is no longer. General Motors is still the biggest, but its top slot is being threatened by Toyota, who is in relentless pursuit. GM is losing more money than the GDP of some countries, and its legacy costs to retired or idle employees are turning the company into one of the world’s largest health-care providers. Traditionally number two, Ford Motor Company has slipped to number three (because Toyota is now second). It, too, is hemorrhaging money at an alarming rate. Despite the best efforts of chairman Bill Ford to turn his company around, his board recently recruited and hired Alan R. Mulally, formerly president and CEO of Boeing. And DaimlerChrysler, which has scored with some of its recent product designs, is now a foreign-run company.
So if you are a supplier of automotive forgings, not only must you deal with the challenges facing all domestic manufacturers, but your key markets are in a state of rapid flux as well. Detroit, while still important, no longer calls all the shots in the automotive world. There are voices now emanating from cities in Japan, Korea and Germany, and many of these voices’ first language is not English.
IS DETROIT DYING?Does this mean Detroit is dying? According to Tim Leuliette, chairman, CEO and president of Metaldyne, Plymouth, Mich., (Metaldyne has since divested its forging business, which has become a new, privately held company called FormTech), in his address to the Forging Industry Association in 2004, Detroit “is not dying, it’s just changing.” If anything, this is an understatement, but a correct one. To the domestic forging industry, Detroit will remain the center of the automotive universe for a long time to come.
However, one of the megatrends in the North American automotive sector has been for the large foreign auto producers to build supply-and-assembly plants in the U.S., especially in the Midwest, the West and the Southeast. During the last 20 years, companies like Honda, Toyota, BMW, Volkswagen, Hyundai and Kia have made significant investments in the U.S., and North America.
The question then becomes from where will all the forging requirements for foreign-based manufacturing assembly plants be met? Will they be imported from the companies’ home base of origin, or will the foreign automakers use American production to satisfy their manufacturing needs?
A TALE OF TWO FORGESA case in point is Toyota Motor Manufacturing. Toyota presently produces 10 different models in the U.S. Last May, the company celebrated the 20th anniversary of its Georgetown, Ky., manufacturing plant, its first wholly owned facility in the U.S. The success of this facility led to two more plants within 10 years in Indiana and West Virginia, and 20 years later Toyota’s domestic plants number an even dozen, with a collaborative expansion with Subaru in Indiana and new plants in Texas and Ontario on the way.
In response to the expanded domestic manufacturing presence by Toyota and other companies like it, Kobe Steel and Sumitomo Metals, both Japanese companies with plants in Kentucky, have established or expanded forging operations there to serve Toyota and other automakers.
In July 2003 Kobe Steel, Mitsui & Co. Ltd., and Toyota Tsusho formed a joint-venture to manufacture and market aluminum forgings for automotive suspension systems in the U.S. The joint venture, called Kobe Aluminum Automotive Products (KAAP), was located in Bowling Green, Ky., on 32.6 acres of land in a 108,000-ft.2 facility. The plant was to employ 78 people and contain continuous casting equipment, 6,300-ton mechanical forging presses and heat-treating equipment. Total capital investment in the facility topped $30 million. Start-up occurred in June 2005, on time and as planned, with one-press production as a step toward full capacity utilization. The second press was brought on line this past April, and the dedication of the facility occurred in June of this year.
International Crankshaft Inc. (ICI), Georgetown, Ky., is an existing joint venture between Sumitomo Metal Industries Ltd. and Sumitomo Corporation to manufacture forged crankshafts. Manufacturing from this facility since 1992, ICI announced in July that it would install a third forging press to meet healthy demand for its products. ICI is currently running its two forging presses, which produce approximately 1.4 million crankshafts per year. The third press, when commissioned, will increase ICI’s annual production to 2.65 million crankshafts.
The overall pattern of foreign auto companies manufacturing in the U.S. is a positive one for the forging industry, according to Charles H. “Charlie” Hageman, executive vice president of the Forging Industry Association (FIA), Cleveland, Ohio.
“Sometimes incoming auto-manufacturing facilities bring their preferred suppliers along with them, but these domestic plants are all potential customers to domestic forges,” he says. “We have seen business levels from established foreign auto plants begin to increase.”
Regarding the issue of foreign automakers importing their preferred suppliers, Hageman says that’s a “two way street.” Sometimes it happens in reverse, where an American forging company follows an auto producer or Tier-I supplier to compete in foreign markets.
DOMESTIC FORGING INDUSTRYDemand for automotive forgings on a global scale is on the increase, and that is because of the emergence of significant consumer markets in China, India, Asia, Eastern Europe and other growing regional economies. Despite this, nearly 200 American forging operations have gone dark in the last 25 years. Others could only survive by merging and consolidating with other forging companies. Still others are operating under the bankruptcy cloud we know as Chapter 11.
Truly, the domestic forging industry has sustained some injury and has become weakened because of it. But not all the news is bad. According to FIA statistics, the North American custom forging industry, for all metals and to all markets, contributed $7.7 billion in durable intermediate goods in 2005. This represents an overall jump of 47% from the low of $5.3 billion in 2002.
The U.S. forging industry, like Detroit, is not dying, but it is fighting for its long-term health and survival. The industry is facing serious challenges on broad fronts. According to Rick Dauch, executive vice president of manufacturing for American Axle & Manufacturing, Detroit, Mich., the three root causes of structural change within the forging industry are “global competition, customer demand for global pricing, and escalating production costs.”
Even on a broader scale, global competition threatens the dominance of the U.S. manufacturing base. For some products it’s already too late. For others, there is not only hope, but promise. Yet, on a cautionary note, the National Association of Manufacturers (NAM), Washington, D.C., estimates that external overhead costs (of excessive or burdensome regulations, rising energy, tort litigation, tax rates, etc.), over which companies have no control, add 22.4%to the price of production of American manufacturers relative to their top nine key trading countries. This is a difficult burden to overcome, but those forging companies that will survive global competition will do so because they have adopted global strategies.
SURVIVAL STRATEGIESSome forging buyers, over time, have come to view forgings as commodities rather than value added products. In 2004, while his company Metaldyne still had forging interests, Tim Leuliette said, “The forging process itself represents only 20% of the value of a forged product that reaches the end user. And that’s the first 20%. For every dollar of value that forging produces, someone else has to add four or five dollars of value before you have a marketable product. When you are at that end of the value chain – the bottom end – you are a commodity. And when you are a commodity in a global market, you are extremely vulnerable. The leverage goes to the person who adds the last dollar of value to the product, not the first.”
Those who make forgings know their products as the engineered, high-performance components they are, but Leuliette’s insightful comments suggest a key strategy that successful forgers must consider to compete globally. That is for the forging house to add more value to its output and more capability to its operation. As much as possible, it should become a full-service supplier to its customers. Strive to be the one that adds that last dollar of value to the end product.
A second strategy is for forges to become versatile enough to move with their customers. If your customer is a Tier-I auto supplier that decides to manufacture offshore, then consider starting a venture (or partnering with a foreign company) near their new location. In a shifting global market, mobility, expansion and the willingness to form favorable foreign partnerships should probably be part of your strategic plan.
This next one is trite but still important. Keep innovation alive in your operation. Don’t just think out of the box, but think as if the box was never there. Today’s manufacturers have more automation, technology and informational tools at their disposal than at any time in history. Invest in them and use them if they can help you. Can a robot lower your unit costs? Can remote, real-time monitoring of your plant’s activities via the Internet improve your operation? Is the flow of materials through your plant optimum? Are your maintenance programs preventative or reactive? Can your die life be improved? These are the questions that help stimulate innovation. They should be considered regularly in pursuit of optimum plant or process performance and competitiveness.
Dovetailing the need for innovation is that the cost of all the major inputs to forging processes - materials, energy and labor - has increased significantly in modern times. The cost of many metals, especially steel, has risen dramatically because high demand from growing economies like China and India, coupled with a decline in domestic steel production, have put a strain on supply and demand relationships. Energy markets are in a similar imbalance - the price for crude oil having reached record highs on world markets this past summer. Finally, the cost of labor - wages and benefits - is far higher in the U.S. than it is in the emerging Asian countries. As productive as domestic labor is, the cost differential is often too hard to overcome.
CONCLUSIONThe saving grace of the forging industry is that global demand for automotive forgings is on the rise.
But who will be the survivors in this global market, which Rick Dauch terms “Darwinian?” The obvious answer is: the fittest. In modern context, this seems vaguely reminiscent of some TV reality show in which he or she that performs the best jungle stunts wins the prize. The comparison is not so farfetched, though the stakes for an entire industry are far higher.
Basically, forges and the forging industry are contestants in a competition for survival. Organizations that will succeed are those with carefully crafted strategies designed to add value to their basic product, to stay flexible enough to accommodate the changing needs of their customers, to innovate in pursuit of optimum product and process designs and to find ways of minimizing the cost of forging process inputs.
The industry’s outlook was succinctly stated by FIA’s Hageman, who said, “Forging companies are carefully attuned to the needs of their customers. As these needs change, the industry is more resolved to support and meet those changes.”