Checking in on Foreign Competition
Advantage of Lower Costs May Not Be Permanent
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.”
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
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
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 Door and Window Imports
To that end, we have once again completed a detailed analysis of the status
of foreign competition in 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
(see Figure 1). 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.
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
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.
Michael Collins is an investment banker with Jordan
Knauff and Co. He specializes in mergers and acquisitions in the door
and window industry.
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