The large U.S. nameplate companies and their suppliers operate in a much different world. U.S. multinationals face few political or industrial barriers to shifting procurement abroad. With few exceptions (see "It Can Happen Here," below), tightly knit, self-sustaining industrial regions that support fully integrated supply chains are rare in the United States. The result is a weakening supply base even as U.S. nameplate companies' sales increase.
Even though opening up Japan's notoriously closed automobile-component-manufacturing networks was the key issue in the recent U.S.-Japan automotive-trade dispute, the increasing reliance of U.S. companies on better-organized Japanese suppliers precluded from the outset any thought of imposing sanctions on actual parts imports. Indeed, because it failed to address the different organization and capabilities of U.S. and Japanese auto-supply chains, the Clinton administration's purported trade "victory" will do little to enhance, and will likely further harm, U.S. auto-industry employment and skill development.
The lesson is clear: in an era of multinational outsourcing and downsizing, countries that enable their small-scale suppliers to jointly coordinate and sell their production activities will triumph in world markets. Those that ignore such realities will suffer continuing employment losses and generate far less robust business growth.
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Strategies for the new competition
In a world where coping with existing business challenges already presses the limits of most small-company managers, dealing with the new supply-base competition may seem an impossible task. Even thinking about competition with organized suppliers from other countries seems alien, if not just plain wrong, in the United States' individualistic business culture.
Programs espousing joint research and development or other collective business endeavors -- consortia, regional technology "alliances," or big company/supplier "partnerships" -- often degenerate into pork-barrel spending boondoggles or mask efforts to squeeze even lower prices out of the U.S. supply base. Worse still, politicians from the smallest rural town to Capitol Hill celebrate the fragmentation of concentrated U.S. supplier regions -- fed by a smorgasbord of relocation subsidies and tax breaks -- as business "development" when in fact it weakens the United States' productive economy.
What can small businesses learn from all this? They must begin to think strategically about the need for long-term allies in product development and marketing. Companies that try to sell an isolated component in an anonymous parts market will almost certainly be supplanted by competitors that offer far more comprehensive ties to up- and downstream manufacturers. Just as new management strategies are necessary to foster the internal flexibility and skill modern markets require, learning to build alliances with other companies supplying discrete industries must become a priority management objective.
Most big companies now understand that self-managed supply chains are crucial to their own competitive success. Chrysler's procurement managers once tried to fill their company's parts requirements by encouraging suppliers to compete solely on the basis of price. They learned, however, that not only did this approach destabilize and thus weaken their suppliers, but also that critical opportunities to jointly improve product design and quality were being lost.
When Chrysler began to develop its best-selling cab-forward vehicles, it elected to coordinate the entire design and manufacture of many subsystems -- brakes, steering, electronics -- with a group of like-minded suppliers, becoming totally dependent on them for technologies it no longer maintained in-house. In return, Chrysler treated its suppliers in a far more collaborative fashion, relying on and working with its supply chains to perfect its worldwide products.
Small U.S. companies in other industries need to exploit these trends and seize opportunities to combine with affiliated companies and offer one-stop design and procurement services to their common customers. There are a variety of strategies for achieving these goals (see "Resources," below). All try to secure a share of worldwide procurement markets by allowing companies to compete as a fully integrated supply chain, not just as individual parts makers.
Small-company leaders also need to be far more discriminating about the public policies they endorse and the candidates they support. The plethora of business-relocation subsidies dangled by state and local officials may seem like a bonanza, but it actually harms each industry's supply base by fragmenting producers into artificial geographic regions and encouraging low-cost, rather than high-skill, manufacturing.
Trade policies that supposedly open markets like Japan to multinational companies' sales without also dealing with the problem that many such sales are likely to be in the form of foreign products marketed under a U.S. brand name may be good news for a few shareholders of big companies but bad news for the companies' suppliers. The most critical public-policy task for small companies in the United States is to make supply-base development a central industrial issue in this country -- as it is in most of the United States' advanced competitors.
U.S. industrial vitality depends on recognizing that simply becoming the most efficient, talented company is not enough to ensure success. Today business survival also depends on ensuring that all the participants in a supply chain achieve and operate at similarly high standards and collectively market their skills to global distributors. That is the challenge for small companies -- and the United States -- in the 21st century.
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David Friedman is a research fellow in the MIT Japan Program and a partner in a Los Angeles law firm.
U.S. Computer Equipment and Peripherals
Large U.S. computer companies enjoyed a major revival during the 1990s. Domestic shipments of computer equipment and peripherals jumped from $55 billion in 1991 to $66 billion in 1994. Yet much of that seeming growth was accounted for by imports -- largely from Asia -- repackaged as U.S.-labeled goods. Those imports doubled in value from 1990 to 1994, from $23 billion to $46 billion. Despite the boom in local shipments, U.S. computer-supply employment actually fell in the '90s, from 250,000 to fewer than 190,000 jobs, a 24% decline.
