CX Technology

In 2009, CX Technology (CX) was one of the leading global manufacturers of cold forged steel speaker components. They supplied some of the world's best-known speaker brands, and many had been loyal customers for over 20 years. The company however sensed that changes needed to be made. While revenue was reasonably stable, the rate at which new business was coming in was not reassuring. Cold forged steel speaker components were a commodity product, whose supply chain was susceptible to consolidation. Furthermore, industry cost containment measures were relentless in squeezing the margins of suppliers such as CX. To secure the company's future, CX knew they needed to diversify and develop the business. One options for CX is to expand into the automotive industry. But the pending global economic crisis of 2009 but doubt over the viability of this market, and embarking CX on a road not yet traveled would be precarious.

Cold Forging

Cold forging involved forging steel at or near room temperatures. The parts produced were typically symmetrical and rarely exceeded 12 kilos. The primary advantage of cold forging was the material savings achieved as well as the resultant high-precision shapes that required little finishing. Cold forged parts were typically components - washers, screws, clips, etc. There were countless applications in which they could potentially be used, from airplanes, automobiles, oil drilling equipment and missiles to smaller products such as bicycles and air conditioners. Since cold forging did not involve intense heat treatment, the steel maintained high strength. These properties made cold forging suitable for parts that underwent tremendous stress.

Quality assurance depended on the parts being produced. For example, automotive and military applications required extremely tight tolerances due to safety and thermal considerations, while air conditioners had less stringent requirements. Manufacturing scalability and flexibility requirements were also important, since any given part could take on any number of shapes and sizes, with product specifications varying by application. This meant that cold forging manufacturers had to have enough capacity and quick enough reactions to win new projects from new and existing customers. Even long-standing cold forging experts had to have the flexibility to meet or anticipate shifting customer needs.

CX Technology

By 2009 CX had become a dominant supplier with over 86 customers worldwide, including some of the largest names in audio equipment. Roughly 60% of CX's production served the automobile industry with the remaining 40% targeted at retail sales, i.e., home theater systems and stereo speakers. As a critical link in the supply chain of many of its customers, CX's ability to deliver products up to specification on time earned the firm significant recognition over the years, and CX was reputed for its reliability and high quality products. In fact, the majority of its sales revenues came from repeat business. Additionally, due to its' track record, CX was able to leverage its impressive roster of customers to gain even more customers. In addition to its long-term relationships with its customers, CX felt its competitive advantage was its quality and ability to include all steps of the cold forging process in-house, which allowed it to charge a small price premium. CX also surpassed its customers in quality assurance.

Sales and Marketing

Since the majority of CX's revenue came from long-term relationships and repeat business, the company's sales and marketing department did not have a lot of experience. In an effort to generate new business, the sales team pursued every lead and had the engineering team evaluate potential products for production. Due to the at times sensitive nature of the customer's product design, it was typical for CX to meet with potential customers several times before they would agree to send CX any product specifications. The total sales process, from first customer visit to prototype evaluation, could last between 1 and 4 years. This meant that CX often expended a considerable amount of sales and R&D resources on pursuing opportunities, often to discover that the component couldn't even be produced by CX at all.

This approach to sales was further complicated by the fact that many potential customers were not aware that certain parts of their product could be cold forged. Nor did they care. A buyer's primary concern was finding a part that met physical specifications at a competitive price. Because it had to be more aggressive in pursuing this customer segment, CX bore the upfront costs of investigating the technical and market opportunity aspects of products believed to contain cold forged parts.

Challenges

CX knew the company's future depended on diversification. This imperative stemmed from two observations. CX's revenue was flattening, and the company had the ability to handle new growth. As Vietnam's largest cold-forged steel manufacturer, CX had honed its operations over the years, and showed operational excellence with the fiscal discipline few of its competitors had. This put CX at a strategic advantage. With centrally located operations in Southeast Asia, the company was in striking distance of other Southeast Asian economies as well as China, the fastest growing economy at the time. With overall production at only 60% of capacity, CX knew it was poised to handle new business growth. The big question was where. CX's leadership had long pondered broadening beyond automobile speaker components and directly entering the automotive industry, a sector that also prized the high quality and high volume CX was especially suited to provide. But in 2009 the future of the automotive industry looked bleak. In the United States, the center of the automotive world, growth had reached a plateau, volumes had stagnated, and major manufacturers faced bankruptcy. Elsewhere car production was up but competition fierce, particularly among the suppliers popping up wherever labor was cheap. CX believed that if they were to pursue the automotive industry three markets would be viable for entry: the United States, China, and Vietnam. Each of these markets plays to CX' strengths in its own way.

United States

The recession of 2008-09 had created a precarious situation for both U.S. automotive manufacturers and foreign manufacturers. Declining consumer demand and increasing sensitivity to rising gas prices resulted in a significant decline of new vehicle purchases, though stabilization was expected by 2012. It wasn't clear that many big players would survive that long however, as many had approached the U.S. government in late 2008 for financial support. Suppliers, too, were feeling the crunch with a reduction in engine and parts manufacturing revenues from US$38.3 billion in 2004 to US$31.8 billion in 2008. This resulted in dramatic consolidation of both manufacturers and suppliers as profits disappeared. Concerned about declining profitability, manufacturers paid increased attention to their suppliers' per piece costs and the overall stability of their supply chain. Suppliers were required to guarantee annual reductions in costs and were subject to annual renegotiations of contracts. This implied that suppliers also had to become more rigorous in their own supplier selection process. In some cases, manufacturers even involved themselves in their suppliers' selection processes to further protect their supply chains. For CX the major appeal of the United States was size. Although the very notion of a solvent U.S. automobile industry was in doubt in 2009, the American market for cars was still by far the largest in the world. With softening sales through the prior decade, manufacturers had shifted towards a more consolidated and higher quality supply chain. CX's products fit the mold for high quality, with the added advantage of offering cost competitiveness because of comparatively lower labor costs relative to U.S. cold forgers.

China

The Chinese automotive market was everything the United States market wasn't: growing and relatively young. By 2008, China possessed the fastest growing consumer market in the world. With an automobile penetration of only 3% (world average was 12%), China presented a significant opportunity for growth. Automotive manufacturers, both local and global, had opened operations in China with the majority of production allocated for domestic sales. As the industry matured, manufacturers and suppliers began to look towards exporting to the global market. Automobile production in China was forecasted to grow from 4.6 million units in 2004 to 13.6 million in 2012. Large domestic manufacturers commanded the largest portion of the local markets with 28.7% of sales volume. In 2006, China surpassed Germany to become the third largest automobile maker in the world behind the United States and Japan. The rapid entry of automotive manufacturers in China had created unmet demand for reliable suppliers. Though many suppliers had already entered China, few had established a commanding presence in this fragmented industry. The situation was further emphasized deeper in the supply chain, with an uncountable and growing number of firms vying for contracts. However, if the United States was any indicator of what the industry would evolve into, it was only a matter of time before incumbent firms developed strong relationships.

Vietnam

Even closer to home was Vietnam itself. Although few local Vietnamese could afford cars thanks to an annual per capita GDP of US$2,900, income was growing at a rate of 8.0%, foreshadowing demand growth in the region. Labor was still cheap, as the average monthly income for a factory worker in Vietnam was around US$100 - and the government was aggressively emphasizing low technology skills, export processing zones, and a business climate friendly to foreign direct investment. The abundance of low-cost trained workers had already attracted industries such as oil, garment, tires, and bicycles. More recently a few big automotive brands such as Mercedes and Toyota opened shop to cater to the rising appetites of the nearby emerging economies. In early 2009 such manufacturers remained rare, however. Nearly all those that had entered focused only on final assembly, sales, and marketing, though plans were in place to ramp up assembly and perhaps manufacturing. Few suppliers had entered so far, and many in the supplier community wondered whether manufacturers would indeed increase automotive assembly in Vietnam. Even if they did, no one knew which parts the manufacturers would trust local suppliers to produce and which they would they continue to import from surrounding regions such as China and Thailand. Because the Vietnamese market was in such an early stage of development, CX could begin with something simple - steering and suspension pieces, for example - and still be a leader in their field.

Table 1: Total automobile sales per country per year, in millions of units. Numbers for 2009 onwards are expectations at the time.

Table 1: Total automobile sales per country per year, in millions of units. Numbers for 2009 onwards are exepectations at the time. 2004 2005 2006 2007 2008 2009(e) 2010(e) United 2011(e) 2012(e) States 16.0 16.1 15.8 15.4 14.9 15.1 15.4 15.9 16.5 China 4.7 5.2 6.3 8.1 9.0 10.1 11.7 12.3 Vietnam 0.03 13.8 0.042 0.044 0.051 0.058 0.066 0.076 0.089 0.103