Market Distortions


Market Distortions

There are four market distortions that have adversely affected competition and the free enterprise system, the global special machine tool industry, and very likely other industries as well. They may be seen by some as “sour grapes.”

First, it is fact that the people involved in the acquisition of special machine tools in industrialized nations outside the U.S., even Canada, can be extremely nationalistic and will buy locally, if at all possible. It’s true even if the equipment is to be used in a neutral country, and even if it might be supplied from a base in the buyer’s home country belonging to the American competitor. In many cases, they will admit that preference.

Ironically, their counterparts in the U.S. demonstrate a preference to buy from abroad. The lure of foreign travel, with amenities provided by the sellers, is very attractive. The perception that a particular culture, German for example, can provide superior quality or craftsmanship is a potent sales pitch, whether or not it is true.

In recent history, currency exchange rates have been a very serious handicap for purely American companies. Those companies with multinational bases can mix content for favorable pricing tactics, which is the case with several of the European companies competing in the U.S. market. Some have manufacturing facilities in South America and supply bases in Eastern Europe, further enhancing their cost structure. This is a fair approach and American companies should consider that strategy as well.

Second, many industries, including the American special machine tool industry, practice customer gratuity relationships. That is, they do a certain amount of entertaining, such as lunches, dinners, golf and sporting events, all considered appropriate and proper. One special machine tool company went well beyond the norm in that practice which significantly distorted the competitive landscape.

In many cases, the product to be produced or the equipment being proposed is in its early stages of design and subject to change along the way. The prospective corresponding change to the production equipment in process can present an opportunity, at some later time, to recover a financial shortfall that may have been precipitated by a low bid to get the order.

That company cultivated close long-term relationships within certain customer organizations that had ineffective checks and balances. It was given an understanding of what the initial price had to be to get the purchase order. The anticipated change orders would then include the difference to make it profitable, as well as to cover a compensation of some sort to the customer or individual. Surprisingly, this practice continued for many years and had a significant negative effect on the industry.

There is no question that orders would have been spread more evenly across the competing companies if the procedure had been done properly. The same company appeared to have a policy that let other companies invent new processes and hardware and they would follow. It makes sense, as it would not be intelligent to take risks when not required. So not only did the undeserving company get the business, but manufacturing progress was retarded because it was not necessary to push the envelope to get the business. The purchasing companies were at least as responsible for the practice as the supplier and had the most to lose, both in terms of the total cost and in the technology level of the acquisition. Competing companies may have been able to acquire more advanced equipment for less cost, the products of a truly free market.

Third, major automotive companies have adopted the principles of auction based target pricing - the concept of one individual. He was originally revered as nearly god-like in cost saving results at the highest levels. On the other hand, he was run out of the automotive business for his dishonest and subversive activities.

The auction process focuses on driving the quoted price down to the lowest possible level without full regard to the value of the solution being offered and the life cycle cost impact on the product to be produced. To have the best chance to receive a purchase order the machine tool companies must offer the low initial cost solution, regardless of other numerous considerations that could affect the cost of the product component to be produced and its quality.

This concept polluted the free enterprise bid process for companies that adopted that practice in acquiring special machine tools. The high integrity sealed bid (solution and price) concept that not long ago was respected and fostered technology advance for the buyer is now passť.

Fourth, the European, and specifically the German, business climate regarding knowledge of and respect for the machine tool industry provides the basis for favorable treatment from their local government and financial community. Companies that have survived in Europe during very difficult business years and now are very difficult and aggressive global competitors may not have survived in the U.S. Terms for capital needs can be more favorable and flexible to the local companies, and the governments have provided various kinds of support and protection.

These market distortions have a definite affect on the pitch and yaw of the playing field in the special machine tool industry. They distort the free enterprise system. Worse, they dramatically degrade the result for the buyer in terms of the true value of his purchase and the advance of manufacturing technology for the entire manufacturing community.

Once put into effect, newly developed ideas and concepts from real competition eventually become public domain, so everybody everywhere loses when less competitively-inspired solutions are utilized. Further, the really great ideas temporarily protected by patents force competitors to find an even better way or they lose big time right now and for years to come - the free enterprise system in action!