In this two-part series, Zilliant Director of Professional Services Rick Chappel discusses globalization and the downward pricing pressure it's placed on U.S. manufacturers.
Like the rest of the world, I’ve been watching the U.S. presidential campaigns with bated breath. It’s certainly an election like no other in memory.
One topic that has come up again and again is Globalization. It incites emotion with voters, and for good reason. Prior to the Great Depression, the U.S. (like most countries) placed significant tariffs on many imported goods. Similar tariffs were placed on goods we exported. But, beginning with the Reciprocal Trade Agreements of 1934, the U.S. and other industrialized countries began moving away from tariffs. This made a variety of goods we buy from offshore cheaper and made U.S. goods cheaper in countries to which we export. The good news is, it worked! But, the flip side is that it’s created enormous pricing pressure on domestic sellers when a foreign manufacturer can produce a comparable good cheaper — or is willing to accept a lower margin — or both.
Other forces are also at work to put downward pressure on price. Globalization aside, I see many of our customers operating in a “destructive price” environment, one where competitors race to be the cheapest in an effort to buy share, while simultaneously decimating margin for all players. I also see the effects of commoditization. Many of our manufacturing customers were early, or even the first, movers in their space. It was their founders’ creation that created their company or even an industry. Some of these companies have been in business for a decades or even a century! Original patents have long since expired. But more troubling, even innovations that are just 20 years old may be expired.
See figure 2, which shows the volume of U.S. Patents expiring each year. While the products you manufacture which are losing patent protection may still enjoy a strong demand, each year your competitors are free to copy what was once protected intellectual property. And your highly-engineered solution starts to become a commodity, faced with destructive pricing and on- and off-shore competition.
Stay tuned for Thursday's blog post where Rick digs into the effects globalization has had on pricing power in the global marketplace.