HONG KONG —An Ohio man born and raised, Doug Smith, 54, never expected to end up doing business in China. Throughout his 20s and 30s he worked for a variety of Midwestern manufacturers, overseeing the production of car parts and industrial tools. By the early 2000s, he had his own machine shop.
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But then in 2002 a downturn came, and he, like thousands of American manufacturers over the last decade, had to shut it down.
It was a twist of fate that brought him to China. Shortly after his factory closed, a former client that made water pumps asked him to help them set up a plant in the Middle Kingdom. Without hesitating, he said yes.
“Before I came to China, I knew nothing about it and didn’t think about it,” he said. “I was just like any manufacturer and was fat, dumb and happy.”
Fast forward more than a decade, and he has gone from victim of America’s industrial decline to expert in helping US manufacturers use globalization to their benefit.
His company, SmithCNC-USA, describes itself as a “virtual” manufacturer that connects US companies with reliable suppliers in China or Mexico to cut costs and stay competitive.
Put simply, Smith serves as a liaison between American Rust Belt firms and Chinese factories that can produce industrial components cheaply, reliably, and on time.
This is not as simple as it may sound: many companies that come to China expecting cheap, easy business get burned. China’s hectic, sometimes punishing capitalist landscape is full of opportunities, as well as dangers.
Smith knows some of China’s pitfalls from personal experience. In his first year in China, he found that paying good salaries is not always enough to engender loyalty: He discovered staff members doing their own rival projects on the side.
“I would go into my office and see drawings that weren’t my drawings,” he remembers. “[Chinese workers] have a lot of entrepreneurial spirit, but not a lot of business ethics.”
Foreigners are typically surprised to find how quickly partners and colleagues can turn into competitors in China, he says.
“That’s usually the point when [foreign companies] give up and say, ‘We’re out of here.’”
But instead of pulling up stakes when he ran into difficulty, Smith adapted: He changed the pay structure to a low base salary, with bonuses and incentives for projects completed. To avoid giving any one employee too much control, he separated the engineering and management departments. And he learned the importance of personal relationships in doing business in China.
“In the US, you like a company’s part, you just make a phone call, and then they send it to you. Here, you have to invest the time and effort to get to know them. And it can be two to three years before an order is placed. If you aren’t willing to do that, [the Chinese companies] just bail.”
Once the relationships are in place, however, business in China can become remarkably smooth. When Smith first came to China, his translator turned out to be a close friend of the governor of Jining, a large industrial city in China’s eastern province of Shandong. This friendship allowed him to expedite the application for a business license by months. He remembers having a conversation with the governor before he was approved:
“I talked to him and said, ‘It takes months and has all these fees,’ and he said ‘No problem, it will be done Monday.’ That was Sunday. On Monday we had a dinner with maybe 15 people, including the governor, and lo and behold the paperwork was all done.”
Since then, Smith’s business makes $10 million in annual revenue.
Headquartered in North Lawrence, Ohio, SmithCNC has operations across China, from Beijing in the north to Shenzhen 1,300 miles to the south. It employs about a dozen people in Xian, Ningbo, Hangzhou, Jining, and other cities. (“They’re scattered all over by design,” he says.) He visits China every month or so to tour worksites and ensure that products are being made to specification.
While much of his business takes place in China, Smith remains a booster for American manufacturing. As China’s costs have gone up, he says, the US has become a more attractive place to do some business — and China’s burgeoning middle-class presents new opportunities to companies that can reach them.
“I see the outlook as, we’ve taken a hit for the better. It’s kind of a level playing field now,” he says.
“There’s going to be a transformation on the US economy — people are going to have to relearn that they can do good and compete. China wants US products, they love US products.”
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The way to save U.S. manufacturing jobs is to export some of them. That seeming illogic lies behind the business model of SmithCNC-USA, a North Lawrence, Ohio firm that helps midwestern manufacturers get components and raw materials abroad. By leaning on cheap Chinese suppliers, they keep at least some value-added work in the hands of domestic factories. Absent the partial outsourcing, these American goods producers might be so uncompetitive that they’d be out of business.
The founder and sole owner of SmithCNC-USA is Douglas Smith, a chatty 50-year-old ex-machinist with both cost-cutting and patriotic streaks. He says he’s doing his part to preserve the shrinking U.S. manufacturing sector, which since 2000 has shed 4 million jobs, or 27% of its workforce. (That compares with a 2.5% decline and a 2.9% increase, respectively, for the freshly gutted construction and financial industries.)
Since launching his company in 2002, Smith has trekked to places like Pingliang, China, 1,000 miles from the coast and bordering a desert that stretches north into Mongolia. He was there to check out a company that had sounded good on paper and was bidding to supply large machined castings. What he walked into: a dilapidated, Soviet-built military factory where light bulbs swung from wires, birds frolicked in the hallways, and people in cold, broken-windowed conference rooms could see their breath. Cross that one off the list. Smith got the parts from a factory in Xi’an, 200 miles away, with better amenities.
Smith owns a four-bedroom house in North Lawrence and a small apartment in Jining (600 miles into the interior from Shanghai), but he is essentially a full-time road warrior. Last year he spent 225 days in China and 60 in Mexico, logging 200,000 miles in the air. He rarely spends more than two days in one place and has choked down plenty of challenging meals–donkey, dog and locust included–for the cause. “I’ll never look at my golden retrievers the same,” he says. There are other reminders that life is very different in places where manufacturing labor is cheap. In 2004, while staying at a supposed four-star hotel in Jining, Smith heard a thud outside his window. On one of the side roofs lay the body of a man who had just fallen to his death from an upper level. “That kind of stuff just happens over there,” Smith recalls. “I see a fatality almost every trip.”
Smith’s customers are U.S. manufacturers doing small and medium-size production runs, either for their own end products or as contract suppliers to other U.S. manufacturing firms. If they are lucky, they eke out gross profit margins between 20% and 30%. That is, after paying for labor and raw materials, they have at best 30 cents of the revenue dollar remaining to cover overhead and depreciation on their machinery. Smith says that by subcontracting some of the work abroad–for example, the intake manifold in a car’s air system–these contractors can add 20 points to that gross margin, and that’s after paying Smith his fee of 5% to 7% of the foreign invoices. In seven years Smith has amassed 225 vendors in Mexico and China that do the subcontract work.
Smith expects revenue of at least $15 million this year, up from $10 million in 2008 and $3 million in 2007. His top line includes the value of the parts, his brokerage fees and any additional consulting charges for determining which parts should be made in-house and which should be outsourced. He employs no factory hands; his 12 employees push paper and make sales calls. Smith started out making parts, not ordering them. After getting a mechanical engineering degree from Stark Technical College in Canton, Ohio, he worked for various manufacturers in the Midwest. In 1997, staked with $200,000 in savings and a patchwork of small business loans, he started his own machine shop but was forced to shut down in 2002 because he couldn’t compete on price. He then took a job as head of factory automation for nearby ASC Industries, maker of automobile water pumps and one of his old customers. ASC was setting up a joint venture with a parts supplier in China and tapped Smith to get it off the ground. “I didn’t know anything about China, and I didn’t want to know anything,” he says. “If we couldn’t do it here, I figured, it wasn’t worth doing.”
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SmithCNC-USA, LLC – Celebrating 38 years of manufacturing experience. SmithCNC-USA, LLC is a US based manufacturer and provides a vital service: it matches the demand from customers who need to have direct material manufactured with the most competitive, capable suppliers who can cost products competitively and make them to the highest standards.
SmithCNC-USA, LLC serves as a manufacturing management company. It does business with U.S. manufacturers seeking sources for manufactured products in China and Mexico. The company maintains and contracts with a selective group of suppliers, both open and captive, ranging from foundry castings, die castings, forgings, and welded fabrications to finish machined, on-site inspected and completely assembled parts. They offer exceptional resources in high quality plastic molds and stamping dies.
Simply put, what they do is; take the hard work off the customers by finding and qualifying all the necessary sources for them, get the work done, and deliver a finished product at the best total final price.
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