Pumps & Systems, October 2008
If the question is "How can our company grow?" the answer, according to many experts in the pump industry, is simple-globalize.
The uncomplicated concept of reaching out to growing economies comes with complex obstacles such as supply chain establishment, protection of intellectual property and the rising cost of raw materials. With careful management, knowledge of another country's infrastructure and strategic timing, these challenges can be overshadowed by the growth experienced. Regardless, the industry as a whole feels the impact.
"The forces of globalization have impacted every company, whether they do business outside their own country or not. This is certainly true of the pump industry," says Colin Sabol, vice president for business development for ITT Fluid Technology. "Ideas and technologies are able to move across international boundaries more efficiently with fewer restrictions, opening up new markets and creating business opportunities for producers just about anywhere in the world. The big established brands that are well-known in the developed markets are up against new competitors that are perhaps less-known, but are hungry for market share."
Dennis Wierzbicki, president of Grundfos Pumps USA, has experienced the impact of globalization from various angles through the course of his 30-year career in the pump industry. He previously worked with companies looking to expand outside the United States before joining Grundfos, a Danish company looking for opportunities to globalize into the U.S.
"Regardless of the perspective-whether you are a U.S. company trying to expand overseas, or whether you are another country trying to globalize into the United States-the most important thing to understand is that globalization is real, and it is necessary," Wierzbicki says. "If you are a pump manufacturer, a consultant, an engineer or even an end user and you expect your business to grow, you are going to have to think about growing globally and not just outside of where you participate today. Globalization is a key to growth so you have to embrace it."
Wierzbicki's pump career began in the late 1970s. Like many pump industry experts, he has experienced changes in business practices and in the industry. "If you look at the ‘70s, ‘80s and ‘90s, during most of that time there was enough industrial growth in the U.S. with plenty of opportunities to grow our businesses," he explains. "People saw pump markets outside and realized we would have to become more global and more participative in other countries. Most of us then would just establish sales offices overseas. What has happened in the past 10 years is that you not only have to be over there selling your products, but you have to be manufacturing there. You have to have a supply chain there, you need to have inventory and engineers and you have to be a real active participant. It is important now to become more of a Chinese company or an Indian company or a European company and not just owning some sales people in that region. That is probably the piece that has changed the most.
"So most U.S. companies have had to try and figure out how to be more than just a U.S. operated company using a U.S. mentality and approach to business. It is important to understand those local businesses and understand their ways of doing business . . . understand their sources of supply, find those opportunities for engineering talent and hire them in the local markets. You need to be active in those places with all of your resources."
As a company that has operated globally for more than 80 years, ITT has experienced the benefits of the free flow of goods and services, Sabol says. "Our Fluid Technology group does business in more than 140 countries, which means we have experience and knowledge of these local markets. Over the last 15 years, the removal of many barriers to free trade have enabled our business to grow, and have enabled us to utilize our best engineers to design products for local markets, and to produce in ways that are most efficient for us and our customers everywhere in the world. Today, more than half of our commercial revenues come from outside our home country (U.S.)."
Wierzbicki says that to succeed globally, it is important to adapt to other cultures and learn their specific ways of conducting business.
"The situation used to be . . . we have the pump products people want, so if we want to globalize they have to buy it the way we sell it," Wierzbicki explains. "We now need to provide our products in the way our customers want it. People in China and India and Africa and Europe are dictating the way they want their products. We now need to meet the standards the world is setting. It is not the way it used to be where we would make the products and if you want them, then you have to buy them the way we make them.
"Most of our old management style has gone away. Everyone realized that was not going to work. Up until about 2000, that was the philosophy. We now know that if you want to be in China, you need to own a facility there or partner with somebody and you need to have sourcing, manufacturing and engineering talent there. You have to change the way you do business, and most companies have figured that out.
"We see a lot of the major companies will acquire talent in another country, they will acquire companies in that country, but you have to actually be in those markets and not just have a sales force there. You have to be there with the local people and utilize their knowledge and skills, adapt your business to those local markets and learn their ways of doing business."
Sabol agrees. "With global opportunity comes global competitors," he says. "Globally competitive companies have to be able to meet customer requirements with local products at a competitive price, but they must be able to create value through better technology and service. Further, they need to educate global customers on their value proposition. Even as global trade barriers have fallen, local business practices and customs still vary widely from country to country."
While adaptation must happen, it is important to keep company ideals intact, Sabol says. "ITT and many other companies have global ethics and standards of conduct. We have a rigorous program in place to ensure that our representatives and agents all over the world are trained on our ethics and conduct standards, and that they adhere to those standards regardless of local practice. This is non-negotiable.
"Our view is that over the long term, most markets will adopt the high standards of ethics that govern business in developed markets, and that our high ethical standards will position us well as that change occurs."
John Allen, president of the newly-formed Pump Solutions Group (which includes the brands Wilden, Blackmer, Neptune, Almatec and Griswold), agrees that globalization requires some modification. However, the key element, he says, is positioning a company at the heart of where the need is the most abundant.
"When the focus is globalization, I don't care who is growing . . . I just need to be where they are growing," he says. "For example, 200 years ago textiles were made in New England. A hundred years ago they were made in the Carolinas. Ten years ago they were made in China, and now they are made in Bangladesh. The moral of the story . . . I don't care where they make T-shirts, just be in Bangladesh. For the textile colorants needed to make a T-shirt blue, I have a pump. So I need to be in Bangladesh because that is where Old Navy makes its T-shirts. I really don't care where Old Navy is, I just need to be there. That, for the mindset of many American businesses, can be a hurdle.
"One of the key reasons for Wilden's success is that all of its key people are global citizens. The mindset is blurring geopolitical nation states. It doesn't matter where you are . . . just go there, embrace the culture and business practices and get the job done."
Wierzbicki says the biggest impact for Grundfos has been in China as a direct result of embracing the Chinese culture.
"When China started to grow 10 years ago, we became active in setting up the supply chain and sales channel there. Now you see the market grow and start to develop business. As you start to see the population grow and the market grow, you realize you cannot just handle that business as an export business and say, ‘I'm going to sell there.' You have to go there . . . move there and be on the ground, become a citizen of China and attack that market.
"It is happening everywhere, but for us, China is the most obvious one. If you want to play in China, you have to have a company in China and not just sales people. You have to have manufacturing, engineering, sales and sales support. We have always had the majority of our resources in one place, but if you want to grow in another country, you have to put people there. We call it ‘The 501 Rule.' If you have 500 employees in the U.S., the next person you hire going forward has to be put in the next market where you are trying to grow."
There are several obstacles that can make globalizing a challenging task.
Sabol explains that companies like ITT strive to adhere to a global code of conduct. "We choose to compete while within the boundaries of our ethics," he says. "There are many companies who will practice business in ways that we will not, and we have to accept that we will therefore be unable to compete in portions of these markets."
Another obstacle is hiring and retaining local talent. "With a great brand and global reputation, we attract some of the best talent," Sabol says. "The market value of these employees increases as we invest in enhancing their skills and capabilities, creating retention challenges. We have addressed this by developing innovative incentives, mentoring programs and challenging assignments that engage and inspire our employees."
Wierzbicki says supply chain has become a concern. "The key to globalization is really about how you participate in those markets," he says. "The easy part is how to sell. The biggest obstacle today is the supply chain. You are now seeing raw materials sources coming from China and India. How do you gain access to them? How do you acquire them? How do you develop the supply chain to get them where you want them?
"When China became a real opportunity about 10 years ago, they have moved from just being a source of products to a quality source. It is great to find someone to partner with, but then you have to figure out how to get it shipped and how to make it productive and how to offset the cost of fuel.
"Everybody can say I want to partner with . . . or I want to get to that country . . . or I want to hire people locally to sell my products there, and you can develop prices to sell there. The problem is how do you gain access to those raw materials and those manufacturing sources? China and India are great sources for not only manufacturing, but finished products."
Wierzbicki agrees with Sabol about the challenges of retaining intellectual property. "There is great engineering talent out there today," Wierzbicki says. "Globalization is also happening with regard to the access to people. If you watched the women's marathon on the Olympics, they ran by the Harvard of Asia. Harvard has built an MBA school there and so has Wharton, and others. We all want access to the talent of the future. The majority of the engineers are going to come out of China. They won't be shipping engineers over here to go to school. They will be training them right there in the American systems. So how do you gain access to those sources that are being educated in those countries, maybe at a better level than in the United States, and get them to come work for you?"
Benefits and Opportunities
Regardless of any obvious obstacles, Allen says globalization presents abundant opportunity.
"Internationally there has never been a better time to be in the pump industry-ever-in the history of pumps," Allen says. "The infrastructure push worldwide with the average economy outside the U.S. is growing 5 percent, led by the BRIC nations (Brazil, Russia, India and China); this has never before been seen. There is double digit growth in infrastructure, which are pumps for irrigation and water. Seventy percent of the world does not have running water. As a middle class is created in emerging nations, the first thing they want to be able to do is have a flushing toilet.
"Nationally, you will see some struggles as there is manufacturing, offshoring and migration. Taken as a whole, the entire pump industry is riding a high right now because 60 to 70 percent of the world's pump requirements are outside the U.S."
Sabol confirms the rich growth opportunities in the BRIC nations. "They are growing at rates more than twice the rate of U.S. and Western Europe. Thanks to globalization (free trade), these markets have access to the same technology available to more advanced markets as their economies continue to develop, and globally competitive companies can enter these markets more freely."
However, not all globalization happens from the United States outward, Wierzbicki says. "There are very viable pump companies in Germany in China and in India saying, ‘How do we get into the United States?'" he explains. "Take KSB, one of the top five pump companies in the world. They are in Germany. They are trying to globalize in China and India like everyone else, but they are also trying to get into the U.S. market because that is still the largest pump market in the world today. You have companies coming out of China today who are very viable pump companies-they are not just component suppliers like they used to be. They have rock solid products that are as good as anyone else's on the market. Where do you think they are trying to globalize? They are trying to come to the United States."
The Future of Globalization
Potential for global growth is everywhere, experts say. Allen and PSG are exploring possibilities in the Gulf States.
"Growth is beyond comprehension in Dubai. It is unprecedented, even beyond China." he says. "In Los Angeles there are only four buildings taller than 40 stories. That is a huge city, so put this into perspective . . . there are 148 buildings over 40 stories going up in Dubai-all being built at the same time. They have a ton of money from the oil. Taxes are low or nonexistent. They are going into tourism, trade, banking. The Dubai stock market is already compared to New York or London. They are building a Universal Studios. They have a Disneyland bigger than our Disneyland . . . it goes on and on. The area is booming, and they all need pumps. They are in the middle of a desert, and they need water, water, water. So people like Goulds and Flowserve and all the people who make centrifugal pumps . . . their biggest problem should be capacity. Their only problem should be that they can't build enough pumps fast enough. That is not the case in the states, but as an overall theme for most pump companies . . . if you are global, you are going to be OK."
Sabol contends that ITT and most other global companies are already impacted by globalization. "Except in the most closed economies, every client or customer has access to engineering talent and products from somewhere outside of the U.S." he says. "The first thing anyone in business should do is get comfortable with the idea of change coming from anywhere in the world. One size (or one pump) does not fit all. There is a lot of opportunity to grow and innovate with localized products and solutions."
Wierzbicki predicts that by 2025 China will be the second largest user of pumps in the world with Asia as one of the largest manufacturing continents. "North America is the largest today," he says. "By 2025 we will still be that large, but China will be No. 2, due to the number of people and number of resources. Ten years ago you saw the infrastructure starting there with municipal applications and now it has moved into the residential homes and water treatment systems. The opportunities are growing as the number of people grows.
"India is the same way. Their infrastructure is not as strong as China's but eventually they will get it. Then you look at one of the world's largest population in Africa. That population needs to get access to water, which provides opportunities for the future. We have to help them figure out the technologies to live and survive."
Wierzbicki reiterates the idea that becoming global also means becoming local. "When you pay attention to the local markets, it helps you as a company," he says. "Engineers in the U.S. are all involved with global projects. We are more in tune to help get those projects sold overseas. Whether you are an engineer, a consultant, an OEM or a current user, most people are trying to duplicate what we are doing in the United States. We try to help them grow their businesses, which also helps us grow ours.
"Globalization and growth in the pump market in the future is not going to just happen inside our home company-wherever that may be. You are going to be a global player if you are in those markets that are growing."
Michelle Segrest is editor of Pumps & Systems.
Pumps & Systems, October 2008