Volume 8, Issue 1 - January 2007

The Coming Wave
How Will Door and Window Companies Compete?

by Michael Collins

In recent months, our company has begun an assessment of the competitive threat faced by door and window manufacturers from companies in China.

 The growth of Chinese companies in the last 20 years has been unparalleled in history. In 1978, China ranked 27th in terms of trade with other countries. Its $20.6 billion of external trade that year consisted of a roughly equal mix of imports and exports. According to Ernest H. Preeg of the Manufacturers Alliance, China exported roughly $713 billion in manufactured goods in 2005. Preeg further estimates that China’s 2006 exports will, for the first time, place it ahead of the United States as the world’s largest manufactured goods exporter. In contrast, the Bureau of Labor Statistics reports that there are some 4 million fewer U.S. manufacturing jobs now than in January 2000. Government trade agencies estimate that our 2006 trade deficit with China will break the 2005 record of $202 billion.

In planning to operate in this evolving environment, American companies must make a realistic assessment of the strengths and weaknesses of Chinese companies. This will allow them a better understanding of their own company’s risk from foreign competition. Finally, companies that succeed in the years ahead must take advantage of the ways in which they can effectively compete with companies in China and other parts of the world.

Assessment of Chinese Companies
According to the Doors – China Sourcing Report published by Global Sources, Chinese door and window exports for 2006 are estimated at roughly $1 billion and are growing 50 percent per year. North America is not yet a major destination for these exports. However, that growth rate should convince American companies to prepare for the inevitable wave of future competition.

China’s door industry appears to be more developed than its window industry. Door producers are more numerous and companies that manufacture windows typically focus heavily on doors as well. Chinese door and window manufacturers represented at GlassBuild 2006 in Las Vegas were proud that their prices (including delivery) are 30-50 percent less than comparable American products. For certain products, particularly hollow metal doors, American companies have encountered foreign products whose delivered prices equal the cost of raw materials alone in the United States.

Chinese Company Advantages
Chinese companies enjoy numerous advantages, the most widely discussed of which is the low cost of labor, which makes it cheaper to produce goods and to build production facilities. Costs for land, energy and taxes are also lower than elsewhere and the government subsidizes the cost of certain commodities.

 Another important advantage is China’s favorable exchange rate versus other currencies. This makes Chinese goods cheaper for foreign buyers. Politicians often recommend that we adopt measures to pressure China to revalue its currency. However, even if such steps achieved a 20-30 percent revaluation, the benefit would be dwarfed by the labor cost differential. Since Chinese companies thrive in labor-intensive industries, the wage differential is more important than the currency imbalance. Also, in the door and window industry, a currency revaluation would at least partially be offset as imported wood became cheaper for Chinese manufacturers.

Other advantages include less costly safety, environmental and other regulations and much cheaper tooling costs. Some Chinese manufacturers even give away tooling to win business. Chinese companies also benefit from the toleration of rampant infringement of intellectual property rights. With some 350,000 engineers graduating each year in China, companies have access to an army of technically trained individuals whose jobs include reverse engineering products manufactured by other companies. Finally, Chinese companies benefit from the extension of government “loans” that need not be repaid.

 Companies in the United States also face a number of disadvantages at home. A study commissioned by the Manufacturers Alliance/MAPI and the National Association of Manufacturers showed that structural costs in the United States are 31.7 percent higher than in our major trading partners (Canada, China, France, Germany, Japan, Mexico, South Korea, Taiwan and the United Kingdom). Structural costs include items unrelated to direct production, such as corporate taxes, health care, retirement benefits, regulatory compliance, energy costs and legal expenses. Another problem facing American companies is the fact that research and development spending is viewed as a luxury rather than an absolute necessity. Also, many companies display a tendency to favor product development – making or improving a specific product for a specific need – rather than basic research. It is basic research, such as understanding how various materials behave relative to one another, that produces disruptive technologies capable of spurring growth in an industry.

Chinese Window Companies
We have analyzed the products of 14 Chinese window companies in order to make an initial assessment of product similarities and differences compared to U.S. window manufacturers. The companies analyzed offered a product mixture similar to that of U.S. companies. Window styles included sliding, arch top, double hung, casement and others. Most of the products analyzed were intended for use in commercial applications. Companies appear to sell more unglazed window frames than whole windows. In our sample group, aluminum was the most commonly used material, followed by vinyl. Of the more than 60 products manufactured by the companies we analyzed, only three of them were made with wood. This reflects the greater cost advantage of aluminum and vinyl versus wood, which Chinese companies often must import.

Chinese Door Companies
An assessment of the products offered by a cross-section of Chinese door manufacturers indicates that the door industry in China is more developed. Using data provided in the Doors - China Sourcing Report, we analyzed production and other statistics for 79 Chinese door manufacturers. These companies ranged from start-ups to companies in business nearly 30 years. Of the 79 companies analyzed, 58 of them had achieved ISO registration and the registration of another seven companies was pending. The combined production capacity of these companies is roughly 1.3 million doors per month. They are currently producing nearly 900,000 doors per month, for a 65 percent capacity utilization rate. Asia, Eastern Europe and Africa are primary export markets for these companies, followed by the EU and the United States. The chart below shows the destination of the roughly $250 million in doors exported by these 79 companies.

The doors exported by these 79 companies fall into three categories: security doors, solid-wood doors and engineered wood doors. Security doors are the most important category of exports, accounting for just over half of sales. The following chart illustrates the importance of these various segments in total exports by the companies surveyed.

We have determined that Chinese companies enjoy a number of unique advantages and that they manufacture a wide variety of products similar to those of U.S. companies. The next step is to evaluate the segments of the industry to determine the extent to which they are threatened by foreign competition. *Our findings regarding the extent of the threat to various industry segments and product areas is displayed in the chart below.

*(Refers to Graphs and Charts on pages 35 and 36 of the DWM January Issues)

“At Risk” Products
The products at the greatest risk from Chinese competition are those produced in long, uniform runs that have a high labor content and a high ratio of value to weight. A large dollar amount of such products can be packed into a standard shipping container. The hardware industry, for example, displays all of these characteristics. Accordingly, a major portion of the hardware industry has already moved to China.

 Other segments in the high-risk category include architectural flat glass and vinyl and aluminum extrusions, both of which are produced in large, uniform runs. The curtainwall industry is seeing increasing Chinese competition, especially for large projects. Finally, the machinery used to produce doors and windows is similarly susceptible to Chinese competition.

The second group contains segments with a moderate risk of competition from Chinese companies. These products display some degree of customization but are produced in relatively large runs. Examples include doors or windows produced in stock sizes in large volumes to build inventory in the United States, such as for a big box retailer or large distributor. These products do not have an ideal ratio of value to weight, but that can usually be overcome with high volume.

 Products at moderate risk include high-volume commercial windows, such as those used in multi-family dwellings or office buildings. On the residential side, high-volume windows such as those manufactured for tract builders are at moderate risk of overseas competition. Other examples include entry or interior doors intended for use in new construction, such as those manufactured by the 79 Chinese companies profiled earlier.

The third and final category includes products that have relatively low risk of foreign competition, at least in the near term. These are products manufactured in highly-customized, low-volume production runs, such as custom doors and windows used in residential remodeling projects. Other products at low risk are those with a high technology content, which are difficult to reverse-engineer. Such products include doors or windows that are impact-resistant, bullet-proof, blast resistant, acoustical or fire-rated. Other products may have an unfavorable physical structure that makes them expensive to ship, such as overhead doors or garden windows. Products that already have a low labor content are also not likely candidates for sourcing in China. Still other products in the low-risk category would include those with stringent testing and safety requirements, such as automatic doors. A rapidly changing aesthetic component adds an element of safety to a product, as does being part of a niche market that is too small for Chinese companies to pursue. Products such as skylights, basement wells, sunrooms, impact doors and strip doors are examples of such niche markets.

Keeping It in Perspective
Having made an assessment of the threat level faced by the manufacturers of various products, we must caution companies in the industry to maintain the proper perspective. The companies at highest risk are most likely already competing with Chinese companies on a daily basis. Companies in the moderate risk category may encounter Chinese competition in the next couple of years. Companies in the low-risk category will not likely experience significant Chinese competition over the next several years. However, no company in the industry should feel safe in ignoring Chinese competition altogether.

 The real question is not whether Chinese companies will enter a given market. The better question is how the U.S. companies whose markets they do enter will respond. Will those companies respond by entering your market? If so, they represent a much closer competitor with a better knowledge of your customer and they will be a far greater worry than any Chinese manufacturer. Another question to ask is what will happen when the Chinese domestic market slows down and the companies whose products are currently being absorbed by the construction boom in China must find a new market for their goods.

Plan of Action
Finally, it is not sufficient to think that your company is safe from overseas competition simply because your customers demand delivery of products in two or three weeks. The better question to ask is whether your customers, if you offered them a 30-50 percent discount, would find a way to order from you six to eight weeks in advance. Those who would may eventually seek to source your product in China.

It is critical for every company in the industry to make a plan for dealing with increasing foreign competition in the future. Despite numerous advantages, Chinese companies face a number of significant disadvantages that provide U.S. companies with the opportunity to compete successfully. The primary disadvantage faced by Chinese companies is the time required to ship products from China. Total delivery times of six to eight weeks are not uncommon and it can take as long as 150 days to develop and take delivery of new products. A disadvantage often overlooked by those who believe that “China is taking over the world” is that Chinese manufacturers lack a complete understanding of the U.S. market and of American customers. There are numerous communication problems that frustrate their efforts to work with American partners and they do not have a full understanding of U.S. testing requirements and aesthetic preferences.

 A flexible U.S. company utilizing lean manufacturing can deliver solutions faster than the best overseas competitor. Customers are willing to pay for speed and new products that meet their needs completely. When it comes to such innovation, no country in the world can rival the United States. Dominique Patton reports in “A Strategy for Beating China” that patents filed by Chinese companies total just 1 percent of the number filed in the U.S. and Europe. Another advantage of U.S. door and window companies is that the vast majority of them are privately-held. This provides the freedom to maintain a long-term focus, unlike public companies that are under pressure to hit quarterly earnings estimates.

When U.S. companies compete with their Chinese counterparts, it is critical to maintain an emphasis on branding products. Americans are extremely brand-conscious and are willing to pay a premium for brands associated with high quality or prestige. With regard to the work force, it is critical that they be properly motivated. An employee stock ownership plan (ESOP) can ensure that employees have an ownership mentality. It is also important for companies to spend as much time as possible with their distributors and the final end users of their products. It is vital to know how dealers sell your product, how installers feel about working with your product and how the homeowner actually makes use of the product once it is in the home.

 Many ideas that provided strong differentiation a few years ago–including lean manufacturing, decreased lead times and achieving extremely high quality–have become part of minimum expectations today. Companies must continue to drive innovations that meet the ever-changing needs of customers. This type of innovation is more prevalent among the small and medium companies that are common in the door and window industry. Larger companies tend to focus on improving existing products by adding features or making them less expensive. Smaller companies usually focus on radical innovations. In fact, the U.S. Council on Competitiveness has found that small company patents are twice as likely to be among the top one percent of high impact patents as those of large companies.

In order to accept rush orders with extremely short lead times, some companies make the decision to operate machinery at less than full capacity. These orders typically carry premium prices.

 Finally, our analysis would be incomplete without mentioning a very common competitive strategy– selectively outsourcing components or whole products, often as a matter of financial survival. Some companies have moved to a pure distributor model, outsourcing manufacturing altogether. These decisions, though, only serve to emphasize the value of customer relationships. Manufacturing can be outsourced to China relatively easily, but customer relationships and market knowledge cannot.

It would be prudent for companies to consider the time horizon over which the wave of competition from Chinese companies will arrive. In other words, what will happen to companies that do nothing and simply continue to operate their businesses as they have in the past? Companies in the high-risk category will probably lose significant share to Chinese competitors. Those at moderate or low risk might not suffer over the next several years. However, the companies that prosper in the longer term will be those that begin to focus immediately on operating as lean, flexible machines that deliver innovative products that meet the ever-changing needs of their customers.

the author
Michael Collins is affiliated with Jordan, Knauff and Company, an investment bank that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com.


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