Dr. Masahiko Mori is the president of Mori Seiki, a Japan-based machine tool builder. Dr. Mori takes pride in the fact that it is Japan-based. That the machinery the company manufactures is produced there. Dr. Mori also knows about geography and economics. He knows that China is not all that far from Japan. He knows that while raw materials are scarce in Japan, they are comparatively abundant in China. That while Japan is a high-wage country, China is still an exceedingly low-wage country. And he knows that while Eastern Europe is further way from Nagoya City, the same sorts of resource and cost advantages can be found there, too. The largest portion of any machine tool is the base. Depending on the size of the machine, the base, a casting (in most cases), weighs thousands of pounds. There are two things to know about casting things the size of a base for a machine: (1) it is resource-intensive and (2) it can be a labor-intensive task. In the ‘90s, Dr. Mori saw that other companies—his competitors as well as other industrial and consumer product manufacturers—were going to China and the Czech Republic to source things. Things like machine base castings. It was far more cost-effective than doing the work in Japan. But he resisted. He kept the capability in house. Even though the Japanese economy went south when its bubble burst, even though the demand for machines fell off precipitously, even though cost reductions were the order of the day for all Japanese companies that were interested in staying in business, he kept casting internal. He felt—and feels—that it is important to have the wherewithal within the company to be capable of doing things that can help provide an advantage. And casting is, in his estimation, one of those key capabilities. His company prospers.
So what does the case of a Japanese machine tool builder and its casting operation have to do with the U.S. auto industry? Plenty. As labor and material costs have risen (or are at a balance-sheet disadvantage vs. China and Eastern Europe), there is a hell-bent rush to outsource and to build capacity elsewhere. Yes, it may make economic sense. At least for the moment. And then there’s all of the talk about how other markets are growing faster than the U.S. market. To be sure, that’s true. The number of cars and trucks per capita in China and India is infinitesimal compared to what’s parked in the garages and driveways of American households. But does this mean that the 17-million unit market is going to disappear? Not immediately. But I surely think that the market is going to be profoundly realigned if the good-paying manufacturing jobs give way to Wal-Mart wages: Just watch the shift from pickups and SUVs to small cars that the Big Three seem not to be able to do a good job of producing, which will add to the spiraling down.
Process knowledge is essential. While it may be easy for companies to say, “We’ll design and engineer the components and then outsource the production,” particularly easy as “capital equipment” is so called because it is capital-intensive, the only way to be able to do a superlative job is to have deep knowledge—hands-on, not theoretical—of something. In the case of making cars and trucks (or the constituent components), this means knowing what goes into the bending and cutting of metal and the forming and attaching plastics and all the rest. Knowing from doing, not knowing by having someone else somewhere else do it. What happens when the knowledge is gone?*
*This is not to say that there isn’t something to be said for the localization or regionalization of production and/or development activities. This has been effectively and efficiently done by companies ranging from a Mori Seiki competitor, Mazak Corp., to Toyota. However, these companies are not taking an outsourcing or off-shoring strategy that’s strictly predicated on chasing cheap labor or materials because these companies are making significant investments in capabilities and technologies. But understand that all too often the approach taken by companies—the names of which many of us are all-too familiar with—is to hollow out their knowledge by having other people do the work. For many, something as comparatively simple as a machine base would be called a “no-brainer”; it would be outsourced in a heartbeat. And therein lies the problem. Or starts the slippery slope. Or what have you.