The Secret of U.S. Exports: Great Products By making good stuff, modified when necessary for overseas customers, U.S. manufacturers have become potent global competitors.
(FORTUNE Magazine) – Read the headlines about U.S. export and import figures or listen to dour comments by TV pundits about the trade gap, and you might conclude that American industry has lost the ability to sell the rest of the world much of anything besides chicken parts. That conclusion would be dead wrong. International sales by U.S. manufacturers, helped by sophisticated products like the big work platforms shown on these pages, keep climbing year after year. They nearly doubled in the past decade and were heading for a record $650 billion as 1999 drew to a close.
Yes, for some time the U.S. has bought more from abroad than it has exported. In the past year or so, moreover, the disparity has widened because the U.S. has prospered and much of the rest of the world hasn't. They're not buying, but America is. It needs to. Only about 13% of the manufactured stuff it buys from other countries consists of the "Made in Someplace Else" shoes, shirts, toys, consumer electronics, small appliances, and other items for which low wages are often a deciding factor in production costs. But while these highly visible imports make it seem as though all manufacturing has moved offshore, a growing U.S. manufacturing sector consumes a far larger proportion of imports. These include metal ores, specialized production equipment, and components and subassemblies for the electronics and auto industries.
One reason U.S. manufacturers don't trumpet their export successes is that large companies no longer distinguish carefully between sales to Texas and to Thailand. The totals could be worked up, but why bother? It's one world, after all. Besides, it's incredibly complicated in some cases to determine the net contribution a manufacturer makes to the U.S. balance of trade. Lucent Technologies' Microelectronics Group, which exports half of what it makes to customers in Europe and Asia, is an extreme example. A wafer of Lucent's integrated circuits is often designed at its laboratories in Ascot, England, made in its plants in Pennsylvania or Florida, then shipped to Bangkok to be tested, diced, and packaged. After that the finished chips might move on to Germany to be used by Siemens in telecommunications equipment that, in turn, is shipped to BellSouth and installed in Charlotte, N.C.
A large portion of U.S. exports are high-tech or big-ticket items--transportation, construction, communications, and industrial equipment--for which orders can fall when the rest of the world encounters economic bumps. Boeing did a bang-up exporting job in 1999, selling foreigners some $30 billion of passenger jets. But the Seattle giant will be descending rapidly in 2000. Because of the long lead time for jets, economic troubles in Asia are only now showing up in deliveries. Moreover, a buying spree by the world's airlines that needed new planes to meet U.S. noise abatement regulations is over, and Europe's Airbus has been grabbing market share. The combined effect will be a decrease of nearly 40% in the number of planes Boeing ships to all buyers.
For most other U.S. manufacturers, though, 2000 should be a banner export year. That includes planemakers like Textron's Cessna Aircraft, which exports nearly half its sleek Citation business jets and its one-engine Caravan workhorse turboprops. David Huether, an economist with the National Association of Manufacturers, estimates that total exports of U.S. manufactured goods will rise some 10% in 2000, easily topping $700 billion. Many Asian and Latin American economies have at least stopped stumbling, and some are growing again. Europe, which usually takes about one-fourth of what the U.S. sells abroad, is expected to grow 50% faster in 2000 than it did in 1999. While about 70% of the dollar value of manufactured exports will be accounted for by big names like Ford, Intel, Kodak, and Merck, more than 90% of the orders are won by small and medium-sized firms you've never heard of unless you're in the business or live in the same town.
Large and small, hundreds of U.S. manufacturers have become potent competitors in world markets. They've learned to adjust strategies and modify products to meet the idiosyncrasies of foreign customers. But there's something even more important: U.S. companies design fine products, and U.S. workers turn out good stuff. Here's how three companies, all expecting to set export records in 2000, are doing it with products ranging from those giant aerial platforms to tiny chips for cell phones.
JLG INDUSTRIES. Anybody in rural McConnellsburg, in the hills of south-central Pennsylvania, can tell you where to find this company, whose local payroll of 2,200 people is bigger than the town's population. However, visitors are still told to look "behind Ott Brothers Furniture." Behind the store is something of a surprise: 530,000 square feet of buildings spread over 60 acres, and the headquarters of a company with $720 million in sales in fiscal 1999, including $193 million in exports. JLG is the world leader in self-propelled aerial work platforms--machines used at construction sites, refineries, and other places where workers and their tools need to be lifted high in the air easily and safely. One monster will hoist you and a couple of friends 150 feet. While up there, you can drive the whole contraption, but do keep it under three miles an hour.
The company's initials are those of founder John L. Grove, now 78 and retired, who spotted powered platforms lifting workers into California fruit trees. Figuring he could do better, Grove started in his garage in 1969 and then bought a job shop in McConnellsburg to earn enough to meet overhead and provide space to tinker. He came up with a hydraulically actuated machine with a self-propelled base and a telescoping boom that could lift several workers 27 feet. Developing the product was easier than selling it. An aerial platform is a good deal more expensive than scaffolding or an array of ladders. The answer, then and now, is to show and tell. Let people try it out to see that it's fast, easy, safe, and usually cheaper when all the costs are figured in. Grove got things started by lending demonstrator machines to industrial-equipment rental yards.
Today's product line, powered by batteries as well as gasoline and diesel engines, includes telescopic boom lifts that rise from 40 to 120 feet. That 150-foot rig and its smaller brothers are slightly different: articulating booms like the leg of a praying mantis that go up and over obstacles. JLG also makes scissors lifts that need little further description and small lifts that get in your way in the aisles at Home Depot. Today 80% of the company's equipment is still sold to rental yards. But the business has gone through a cycle. Earlier, airlines, shipyards, big contractors, convention centers, and sizable manufacturers bought their own. More recently, even these users, or the companies to which they outsource maintenance, have tended to rent.
JLG's international expansion went slowly at first. Outside the U.S., rental yards were rare, and many of those that did exist couldn't afford to carry many aerial platforms: The current price on a 60-footer is around $110,000. But the advantages were obvious, and sales to both users and yards gradually picked up. JLG opened plants in Scotland and Australia during the 1970s. These did okay for a while. But in 1991, as the U.S. economy slowed, JLG's sales dropped 37% and profits evaporated. Management, focusing all efforts on bettering the U.S. operation, closed the foreign plants.
Improvements in operations not only brought back profitability but also cut costs enough to lower some prices as much as 20%. Despite inflation, a scissors lift that sold for more than $12,000 in the 1980s is now closer to $10,000. From 1994 to the year ending last July 31, JLG's revenues rose at a compound annual rate of 33%. In 2000 they'll jump again, helped in part by the acquisition last June of Gradall Industries, a maker of telescopic material handlers and excavators, which has two plants in eastern Ohio and 1998 sales of $182 million.
JLG's international sales are now greater than total sales just five years ago. Europe, where revenues increased 48% in 1999, is the main market. The company's goal is to increase foreign business from the present 27% of sales to a fifty-fifty split. To that end it's collapsing its foreign distribution channels, eliminating middlemen between itself and the market. Two years ago JLG set up a dealership joint venture in Brazil, and it has since seen revenues there go from near zero to $10 million despite that country's economic troubles. This has been followed by a joint venture in Thailand and, early this year, one in the Netherlands. During the same period, the company bought distributors in Germany, Norway, Sweden, and England, and started sales and service businesses from scratch in Scotland, Italy, and South Africa.
While shortening the supply chain, JLG works to keep its market lead in product development. It's now demonstrating a 40-foot boom lift powered by a nonpolluting hydrogen fuel cell. That pleases environmentalists, even though fuel cells are an expensive solution despite progress in lowering their costs. JLG envisions not only a green alternative but also competitive machines that can run indoors and don't need to stop for recharging. Says Wayne MacDonald, JLG's director of advanced concepts development: "You don't want just a niche machine where you sell a couple in California or Germany. You want to make this widely acceptable. It can't cost any more." Ambitious? Sure. How long to a commercial product? How about "a few years"?
BISON GEAR. "Wow!" That's what Ron Bullock, 57, CEO and owner of Bison Gear & Engineering of St. Charles, Ill., recalls saying to himself the first day he toured a 1989 trade fair in Hanover, Germany. Bullock discovered booth after booth of European and Japanese competitors for his line of small gear motors. He had gone to work for Bison in 1981, when the company's yearly sales were around $4 million. Six years later he took over in a leveraged buyout. At one point about a fourth of Bison's sales evaporated when a major customer got "his head handed to him by foreign competition." That convinced Bullock that his company should get "more active in selling our products around the world so we would know who the competition is and be prepared to respond."
Bison's products are small electric motors ranging from one-fifty-fifth to three horsepower, integrated with a gearbox from which a drive shaft extends parallel or at right angles to the motor. The gears alter speed and torque (the force that the unit can apply to turn something). Prices range from $85 for a simple conveyor drive to thousands of dollars for a custom-designed communications-antenna positioner. Bison buys motors from General Electric plants in Indiana and Mexico and makes them in a sister business in Elgin, Ill. The gears are machined--"hobbed" is the proper term--and the rest of the unit is made and mated to motors in a recently built plant in St. Charles, where the materials manager is Bullock's 29-year-old son, Jeff.
When Bullock aimed his first export effort at Britain, he thought that all he had to do to offer a "global" line was to change the dimensions of Bison's drive shafts from inches to metric sizes. He was certain Bison had a world-class gear motor. And the company has done well in the U.S. with units that, it claims, produce more torque per horsepower than competing makes. After losing about $1 million trying to conquer the world, Bison had to conclude that it might take a bit more effort.
In most cases, gear motors are part of somebody else's equipment or system: conveyors, mixers, ventilation systems, packaging equipment, and on and on. Work out on a treadmill? A small gear motor raises and lowers your taut body as you trot. Ever use the London Underground? A Bison unit is a key part of the automatic turnstiles that let you pass when you insert a magnetic-stripe ticket. Bison has a catalog of stock products sold by distributors as replacements, or for use by small-equipment makers or plant engineers who are building conveyors or other systems in-house. The largest Bison customer is W.W. Grainger, the industrial equipment catalog house--now an Internet supplier as well--for which Bullock once worked. But custom products sold directly to large manufacturers account for about 60% of sales.
Customization can mean as little as a change in color from standard Bison black or in the location of a mounting hole, but it can also mean substantial modifications. Back in the early 1990s it should have been obvious, but wasn't, that the company would need more than metric sizes to penetrate non-U.S. markets, where designs, fasteners, tools, and equipment are all different. If nothing else, the motors must meet European electrical specifications.
After its initial frustrations, Bison returned to the drawing board and designed a global line from scratch, with motors and gears built to European standards. But just as that was getting done, says Bullock, the company encountered "an example of the technological trade barriers you have to overcome to do business outside the U.S." The Europeans adopted a new electric-motor standard for electromagnetic compatibility, the sort of thing your small appliance doesn't have when it causes static on the radio. By 1995, after another motor redesign, Bison was able to display its own global line in a Hanover trade-fair booth. By then it had also formed a partnership in the Netherlands to handle European distribution, stock parts, and assemble kits sent from Illinois.
Bison's exports have now climbed to about 15% of its $40 million in annual sales. Like larger JLG, Bison wants to raise that to 50%. In the meantime Bullock is trying to avoid any more surprises in the form of changes in standards. Bison engineers--more than two dozen of the company's 190 employees have engineering degrees--now participate in international standardization programs. And Bullock travels to Europe to take part in the Transatlantic Business Dialogue, a government-industry effort to harmonize product standards and lower trade barriers. Bison is also keeping up with e-commerce. Its catalog is now on a CD-Rom that can be regularly updated from the company's Website. While the company has yet to make a major effort in Asia, the site has already pulled in orders from a circuitboard plant in Malaysia.
LUCENT. The headquarters of Lucent Technologies' Microelectronics Group, which posted $3.6 billion in sales in its 1999 fiscal year, is a greatly expanded former Western Electric plant in Allentown, Pa. Group president John Dickson calls it the "center of gravity." It could also be labeled the commercial birthplace of infotech, since it's where AT&T, Lucent's former parent, produced the first transistors in the late 1940s. (This writer worked there in his first factory job, as a test-set repairman.) Lucent now packs ten million transistors on a single chip that is a complete or near-complete electronic system.
Advanced chips have made possible what the electronics industry calls "hollowing out the box." A cell phone, for example, is little more than a case, display, and keyboard wrapped around a couple of chips. From a captive AT&T supplier, Lucent Microelectronics has metamorphosed into a producer of integrated circuits with some 350 customers around the world and an export business that makes up 50% of revenues. Lucent's integrated circuits used to be customer-designed. Now it does a lot of its own design work, providing systems on a chip with accompanying software and other support.
The group's growing capability has opened new markets. A couple of years ago, for instance, it was becoming obvious that, first, cell phones would be a very hot market for chips and, second, the really blistering market for the phones would be China. Lucent clearly had the brainpower to design cell phone circuits and the production capacity to make the chips. It has long been a major supplier to all the big cell phone producers--Ericsson, Motorola, and Nokia--which have their own plants and joint ventures in China.
But Lucent, which doesn't make a complete cell phone itself, saw another opportunity. As Aaron Fisher, general manager of wireless products for the group, explains, "There are a lot of screwdriver joint ventures in China, where a cell phone maker parachutes in a bag of parts and all the locals do is screw it together and ship it. There's no buildup of manufacturing know-how. The Chinese government is favoring companies that are doing more." There lay Lucent's chance, since "favoring" means choosing who does and who doesn't get a license to market cell phones in the country.
As a first step Lucent acquired more talent. In 1998 it bought Optima, a specialist in cell phone software based in Munich, for $65 million. Next it put together a team of Chinese nationals, including some working for other parts of its parent company, Lucent Technologies, which has six joint ventures and two wholly owned operations in China. The team then began approaching Chinese manufacturing companies with an offer they found hard to refuse: Let us put you in the cell phone business.
Lucent offered a basic design and production know-how for a phone circuitboard with--no surprise--a three-piece Lucent chip set. Most important, the circuitboard met requirements for approval worldwide as a GSM phone. GSM, or global system for mobile, is the most widely used cell phone technology in China as well as in Europe. Admonished not to change a thing in the basic design, the Chinese company was free to dream up its own exterior plastic case, display, and keypad. Then, using Optima software, it could program the phone with special features: a visual display with Chinese characters, and, when keys are touched, notes from the Chinese musical scale, which differs from the Western one.
In late 1998, Fisher landed his first customer, Eastern Communications Co., a state-owned communications equipment firm in Hangzhou, with annual revenues in excess of $600 million. In 1999 he added Haier, a government-owned company that makes consumer-electronics products, and two private firms: Konka Group, producer of China's best-selling color TVs, and Beijing Telecommunications Equipment Factory Group, with some $900 million in yearly sales. Eastcom, as the first customer is known, was to start selling phones in early 1999 but didn't get to market until summer.
"We've had to send in a lot of experts to help our new customers get over learning curves," Fisher says. The lessons are sinking in. Konka joined Eastcom in the market by December, and Beijing Telecommunications is bringing out a new Lucent design capable of operating at two different frequencies--much needed given the explosive growth of cell phone usage in the country. All these companies are new to the cell phone business and will face tough competition from world-class players like Nokia. Says Fisher: "There's always risk associated with relying on your customers to learn new tricks and develop new capabilities. We'll be constantly looking for how we can help, because we're all in it together."
If any of the new players don't make it, it won't be for lack of demand. Some 1.5 million Chinese are signing up for cell phones every month. In mid-1998 there were 9.8 million GSM subscribers in China; today the figure is approaching 40 million. As for Lucent, it shipped about two million chip sets to China in 1999, and expects to send over five million in 2000 and double that number in 2001. For the folks who produced the first commercial transistors, it will mean plenty of orders for their Pennsylvania and Florida plants.