A steady stream of factory closings and movement of jobs and companies to China is proof of how the country's entrepreneurial spirit is taking its toll on U.S. manufacturers and distributors in various sectors. The fastener industry hasn't been spared, according to Dave Merrifield, executive vice president the Cleveland-based National Fastener Distributors Assn., who has watched an increasing number of firms take their business overseas, leaving U.S.-based manufacturers and distributors wondering where the trend leaves them.

"The impact has been slowly rising over the last few years, with China really coming on strong in the last two," says Merrifield, who blames currency manipulation for creating the U.S.'s largest trade deficit ever recorded—$103 billion in 2002, according to the World Trade Organization. Since 2001, the WTO says China has become the second-largest U.S. trading partner, up from 24th in 1980.

"China is manipulating the yuan so that it doesn't fluctuate with the market commerce but instead stays pegged to the U.S. dollar," says Merrifield. "Combine that with the cheap, cheap labor (the average Chinese manufacturing worker brings home $2,087 annually) and it becomes very attractive for companies that can't compete in the U.S."

And as an increasing number of manufacturers move operations offshore, they take with them business that industrial distributors and their suppliers must scramble to replace—something that's been easier said than done in a lengthy economic downturn.

"Large OEMs that would typically buy from domestic distributors are realizing that they can just build factories in China, which is more economical than building here and shipping over there," says Merrifield.

That China is luring factories from the U.S. is not new news, according to Rob Harris, managing director of The Industrial Fasteners Institute in Cleveland, which represents North American fastener manufacturers. The trend has been in force for decades, starting with Taiwan and Japan as early as 1980.

Today, Harris says the U.S. consumes about $7.5 billion in fasteners annually, with $6.8 billion of those fasteners produced domestically. Of that $6.8 billion, about $1.5 billion worth are exported to other countries while another $2.2 billion worth (29 percent of domestic consumption) are imported from other countries. Two years ago, China stepped up to the plate, and in 2002, made its most significant mark on both the fastener and metalworking industries when Chinese imports jumped to 10.5 percent of total fastener imports to the U.S.

"The impact from China was both sudden and immediate, and represented an importation of about 511 million pounds of Chinese fasteners," Harris says. Where distributors felt it most, says Harris, was from the mid-tier manufacturers who started assembling in China. "U.S. distributors are losing out because they won't get to distribute a product that is both made and assembled in China."

Companies want to do business in China for many reasons, not the least of them being the cheap labor and lower costs of raw materials. Merrifield says age-old steel tariffs in the U.S., which forced domestic manufacturers to look elsewhere for less expensive steel, also forced manufacturers to look elsewhere, thus undermining the industry. Also fueling the trend is advanced technology, which makes it easier to do business overseas in a seamless fashion.

"It used to be the proverbial 'slow boat to China,'" says Merrifield. "Now everything can be done in a heartbeat, except for the actual movement of the products."

One company that helps facilitate that movement is East-West Logistics LLC of Scottsdale, Ariz., which handles myriad tasks for companies looking to do business in and with China. Jim Taylor, company president, says most people are under the misconception that factories are moving to China to lower costs, while they're really going there to take advantage of a growing economy.

"China has 25 percent of the world's population, but is just in the early stages of becoming a consumer-based economy," says Taylor. "Factories are moving there to position themselves to take advantage of what will become the largest consumer market in the world by 2005."

Whether companies are moving to China to escape high costs or to tap a new customer base, U.S. distributors are feeling it where it hurts. At Fuchs Machinery in Omaha, Neb., president Tom Berger says his customers are leaving the country and taking with them jobs that will never come back to domestic shores. A distributor to the metalworking industry, Fuchs Machinery has said goodbye to a number of key accounts over the last two years.

"Our customers are moving their products and manufacturing operations offshore, or choosing to have products manufactured for them offshore rather than doing it themselves," says Berger. As that trend continues, Berger says the distributor's role in the supply chain will change dramatically. No longer just the "providers of stuff," he says distributors are finding ways to add value to the items that they sell, thus entrenching themselves as vital components of the chain.

"We have to bring value to the manufacturers and help them find ways to lower their operating costs," says Berger. "We have a responsibility to help our customers increase their productivity. If we don't become active participants in that process, we won't survive."

Merrifield says distributors are gaining a competitive edge by helping customers realize that while China may be cheaper, it can't do everything. "The Asian companies can't offer value-added services like just-in-time inventory or bin stocking," says Merrifield. "And if a customer gets a defective part, they can't just walk down the street and get a replacement when they're dealing with the Asian market."

U.S. distributors, on the other hand, have been working for years to hone their value-added services. Because they deal in smaller lots, offer such services, focus on timely delivery and offer personal care, domestic fastener distributors can prove themselves as the value leader, rather than just the price leader.

"Hopefully, customers will begin to see that they may be paying more for the part," Merrifield says, "but that they're getting all the services that make it much more cost effective to use a U.S.-based distributor."

Don Westby, president of Westby Production Components in Port Washington, Wis., hopes that realization comes sooner rather than later. Where he once fretted over less expensive import components coming into the country, Westby now loses sleep over his customers leaving the country and taking their production and assembly plants with them. "When that happens," says Westby, "we don't have any opportunity to provide them with components or products."

On the other side of the equation, offshore manufacturing has placed added strain on distributors by forcing them to carry more inventory to compensate for the long manufacturing lead times. Right now, for example, Westby says the lead-time for fasteners coming from overseas is 16 to 20 weeks (four of those weeks are spent in transit), whereas domestic lead times are just six to eight weeks.

Calling the Chinese the "most entrepreneurial people in the world," Barry Porteous, president of Porteous Fastener Company in Carson, Calif., says the Chinese economy is growing at 8 percent annually with infrastructure being built at an unprecedented rate, including high-speed rail lines, bridges and dams. Currently, 30 percent of the world's active cranes are in China, and the country's demand for construction rebar is "threatening the world's steel supply," he adds.

Lately, Porteous says China has felt an energy crisis, with factories only able to power up three or four days a week because the household energy usage has grown so rapidly. And while the U.S. is still the largest consuming nation in the world, experts predict that by 2020 China will pass the U.S. in consumption. That news doesn't bode well for U.S. manufacturers and distributors who are already buckling under the strain of increased competition from overseas.

"As we move toward that, more and more manufacturing will relocate to China, not just from the U.S., but from Europe and other parts of the world," says Porteous. "As manufacturing leaves this country, so does the need for manufacturing components and repair and maintenance items related to manufacturing that are supplied by distributors. The future doesn't look particularly bright for either the manufacturers or the distributors who supply them."

Jim Sullivan, national sales manager with Chicago Hardware and Fixture Company in Franklin Park, Ill., is a manufacturer of industrial and marine hardware made up of steel forging and wire forms. Sullivan says the firm has found itself operating in a very different business environment over the last two years, thanks to "a flood of product hailing from foreign sources and the undercutting of our own domestic prices." Sullivan credits China's extremely low labor costs with creating the "unfair" competition.

"China is also using unfair trade practices by freezing its currency against the U.S. dollar and imposing import restrictions on American products," he adds.

To deal with it, Sullivan says Chicago Hardware promotes its U.S.-made products from a quality standpoint while also adding more value to the products that it sells. "We let customers know that we're right here, which means they don't have to wait for shipments to come from overseas," he says.

Still, most agree that the once-coveted "Made in the U.S.A." stamp has lost traction over the last few years. The reasoning is twofold: people aren't afraid to buy products made in China anymore, and most realize that those products carrying the U.S. stamp probably aren't made 100 percent in the U.S. anyway.

"Consumers are so unaware of how much of our products are being made offshore that they lose sight of it," says Merrifield. "The general consumer realizes that Toshiba or Sony are just as good a quality as the U.S.-made products, so the U.S.-made trend has taken a backseat."

Taylor sees a glimmer of light ahead for U.S. manufacturers grappling with the China issue: soon, he says, the booming country could run out of the materials needed to create its growing infrastructure. With an economy that's growing at 8.5 percent annually, China has become a good customer for those fastener companies based there, which means less exports to the U.S.

"Companies are realizing that they can make more money selling their product in China than they can exporting it back to the U.S.," says Taylor. "We could even start seeing shortages here as more capacity moves to China, and that spells opportunity for the American manufacturer." Still, he sees challenges ahead for distributors who are feeling the effects of limited OEM margins. "The OEMs located here face stiff competition from companies with Chinese factories, so their costs are being squeezed and they're starting to look at buying directly overseas themselves. To deal with it, distributors will have to beef up their value-added services to justify their own margins," he says.

Sullivan says U.S. distributors must also wake up to the fact that the bulk (90 to 95 percent) of their customers are based in America, and that the same should go for their vendors. "We're shooting ourselves in the foot by not dealing with each other first and putting the global economy second," he explains. "The U.S. still has the strongest economy in the world, but if we don't take care of things in our own backyard first, what business do we have conducting business with everyone else?"

"We've lost our electronics and textile industries, with steel and automotive looking like the next two to go overseas," says Sullivan. "If we don't start getting back to the basics and keeping industry here, we're soon going to find ourselves a second or third-class nation."

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