Going International Can Spread The Risks
Other goals, according to a recent study on globalising in manufacturing by Arthur D Little, the consultancy, include taking advantage of lower production and delivery costs, reducing currency risks, and meeting the demands for local supply from customers in specific countries. Perhaps the most important aspect for companies is that by spreading their sales internationally they can multiply the benefits from set amounts of investment in areas such as product development and manufacturing know-how.
An important consideration is the use of modern information technology systems both to help managers/engineers in geographically diverse areas to work on joint projects, and disseminate as widely as possible the fruits of their work around the companys operations.
A good example of a company fitting in with these trends is Johnson Controls, a US manufacturer of automotive parts and control systems for buildings. In the 80s, it took notice of car companies need to outsource production of vehicle seats, an activity they had until then undertaken mainly at their own plants. Now Johnson produces some $7bn of seats and other car interior parts for cars a year, with much of the growth having resulted from the company following customers such as GM and Ford in their own international operations by setting up components factories close to the car-makers plants.
While Johnsons seats sales are currently split roughly 70:30 between North America and western Europe, Jim Keyes, the chairman, says that by 2000 the company will have significant sales in these products in other regions, particularly eastern Europe, South America and east Asia.
Also implementing the follow your customersstrategy is AMP, the US company which is the worlds biggest makers of electrical connectors for industries such as computing, telecom, white goods, vehicles and power engineering.
AMP, with sales of more than $5bn a year, started its non-US plants in the 1950s at the behest of customers, including International Business Machines (IBM), which were setting up foreign manufacturing operations. By splitting itself into five main global product groups the company hopes to match as fully as possible its customers requirements with its own internal resources,according to Bill Hudson, AMPs chief executive.
While the goal of reducing labour costs explains many multinationals efforts to set up plants in low-cost regions such as eastern Europe and China (particularly for supplying local markets such as western Europe and other parts of Asia), most companies realise that, given the tendencies for world manufacturing costs eventually to level out, these moves are essentially no more than short-term strategies.
A more potent approach is to internationalise, either to secure access to new markets which would be difficult to reach from the companies home base, or to tap technologies that would be difficult to acquire in any other way.
A joint venture between Worthington Industries and Armstrong World Industries, two US engineering companies, is an example of the first stance. In five years it has carved out a 19 per cent share of the European market in ceiling support systems, a niche yet fast-growing part of the construction industry.
The two companies came together to set up the first of three European plants in 1992, to capitalise on their previous expertise in supplying the US industry. By the end of the century, the joint venture - called Wave - intends to open more plants in Europe to push their share of the market within the continent to more than one-third, according to Ralph Roberts, Worthingtons vice-president.
An example of a company branching out into new technology through foreign operations is Cincinnati Milacron, the US machinery company which in the 1990s took over two strategically-important German companies in an effort to widen its product range.
The acquisitions of Ferromatik in 1993 and Widia in 1995 - makers of plastics production machinery and cutting tools respectively - helped the company to move more deeply into these fields and away from its traditional reliance on machine tools. At the same time, according to Dan Meyer, chairman, they helped Cincinnatis switch away from the US as the dominant place for its business. In 1997, almost half the companys sales of nearly $2bn came from outside the US, up from just one-third in 1990.
Even given the trends to internationalisation in many companies, according to Arthur D Little, too few have given sufficient global thought when it comes to component supply - an important field which in many manufacturing companies can account for 50 percent of total costs.
According to the consultants study of 25 European companies with 500 plants in 38 countries, only 60 percent had harmonised most or all of their supply operations, such as through forming lists of global suppliers who could provide components to a number of plants. This is surprising says the consultancy because in our view all important suppliers should be selected at a global level.