Differentiation – Part four

Part Four: The response

To this point, everything we’ve discussed in this series has been a trip down memory lane. Today we start to examine the latest changes, and where things stand today.

Western equipment suppliers had already been in a race to remain competitive, and cost reduction was a major focus for the reasons described in Part two of this essay. With the threat of Chinese competition on the horizon this accelerated rapidly. While few suppliers felt they could compete with the Chinese on a cost basis alone, it was clear that costs would have to be reduced.

As we discussed, the suppliers had already outsourced the vast majority of their manufacturing, mostly to former eastern bloc countries and other well established low cost manufacturing centers. Soon China as a low cost supplier was part of the strategy for everyone. After all, if Chinese manufacturers had the capability to produce equipment for local supply, they could produce it for the western OEM’s as well. And after all, western designs and specifications were superior and the OEM’s depth of experience was so great that there seemed very little risk in using Chinese factories. In fact the greatest risk feared by most boards of directors was theft of their intellectual property, and the lure of low cost proved too tantalizing to resist.

With very few exceptions, the entire process was treated as a pure cost savings exercise, the stuff of accountant’s dreams. “We’ll just do what we’ve always done, except we’ll do it in China and it will cost less.” Spreadsheets and charts with circles and arrows and PowerPoint presentations proved it to be so. Everything had been considered, shipping costs and risks, intellectual property issues, even additional costs resulting from expected ‘minor’ quality hiccups.

Engineering was approached in a different way, at least initially. The Asian boom and bust cycle and the consolidation of the previous period had reduced the number of suppliers, and these suppliers had emerged with a lean workforce. The more visionary suppliers first looked to low cost engineering centers as a way for them to increase their capacity while maintaining the highest skill sets and flexibility in the western centers. The “experts” would keep the most critical activities in their hands, working together with the customers to provide the highest level of service and the most appropriate solutions. At the same time, they would guide and oversee the activities of skilled but inexperienced engineers and designers in far away lands to take care of the detail work.

Teething pains for these pioneers were not insignificant. Communications technology, while improving daily, was not a substitute for personal relationships and side by side working. Language and cultural barriers had to be addressed, quality was not what was expected and required significant rework in the west. Still, the low cost engineering centers improved and the engineers in the west learned how to work effectively in this new framework.

These “western” engineering centers became the OEM’s key differentiators (aside from technology) between one another, and ultimately in the face of Chinese competition. These were the centers of customer service and innovation, filled with people who could build and maintain relationships with corporate and plant people and stay in touch with their needs. Larger suppliers could boast of fully qualified and capable engineering centers on multiple continents ready to serve the cement producers’ needs.

But for many, engineering was not a differentiator, but another cost to be minimized. Armed with the evidence that SOME outsourcing had been beneficial to the company, allowing more work to be done at a lower cost, it only stood to reason that MORE outsourcing would lead to more benefit. They could even allow themselves to dream of COMPLETE outsourcing, if only engineering could be brought to do things in a more standard, easily replicated way!

The push to standardize design had very little to do with providing the customer with the solution he wanted, and much more to do with providing the solution with the lowest internal cost for the supplier. This is not to say that there are not many valid end user benefits to standardized solutions such as shorter engineering lead times, potential reduced initial and continuing costs and possibilities for improved quality through repetition. All of these factors helped push the concept in the most recent boom. All these factors ALSO helped erode the remaining differentiation between the equipment suppliers on the basis of customized or optimized solutions. Standard solutions moved the traditional OEM’s closer to the Chinese competitors, rather then creating additional differentiation.

Still the strategy was successful. Such was the demand for projects that it was possible to sell standard solutions AND maintain a price premium for the “western expertise” of the traditional OEM’s. But this party would not last forever.

What followed was a near complete breakdown of the “system” that had served the industry for so long. The quality of engineering from the low cost centers was not suitable for the project environment in the Americas or Europe. Project overruns soared and fingers were pointed. Chinese manufacturers, bulging with record levels of business from everywhere, failed to uphold quality to the expectations of the suppliers and had no interest in entertaining any thoughts of re-work. Schedules slipped, costs rose, inferior products shipped, and fingers were pointed. the promise of the traditional OEM’s, seamless and integrated project management and execution, on time and on cost, failed to materialize. Projects were considered successful if the parties involved “only” lost their contingency.

The final installment of this series is next, and there we will look at the new realities of the cement project business. Join us for  Part five – A new reality and the way forward.