RSM Resources

The challenges of manufacturing in the United States are nothing new to Minnesota-based Despatch Industries, a 104-year-old diversified manufacturer.

Unlike many other manufacturers that find it increasingly difficult to compete globally, Despatch has found a formula for winning at home. In fact, Despatch has successfully maintained domestic manufacturing operations while generating impressive exports to Asia, especially China.

Despatch, which got its start manufacturing a product that provided electric heat to Minneapolis streetcars, has been doing business internationally for more than 20 years. Despatch has equipment in more than 60 countries,and 40 percent of the company’s revenue stems from international service and sales of a wide array of products — from small bench-top ovens for laboratory settings to giant drive-in environmental simulation chambers for automobile manufacturing.

What keeps Despatch from moving manufacturing operations overseas to be closer to markets, labor and materials? It’s not patriotism, says CEO Patrick Peyton, who traveled to China last year on a trade mission with other Minnesota business, government and civic leaders, and whose company earned the Governor’s International Trade Award from the Minnesota Trade Office for its export success. Stateside manufacturing simply works best for the company for several reasons, he says.

Why here?

"We do a lot of business in China, so of course we looked into manufacturing there," Peyton says. "But there are very good reasons for our success that I’m convinced can’t be replicated in China. Ultimately, it might make sense for us to move some additional assembly or testing there. That will help us reduce the lead time to customers, but I don’t think it will change the way we manufacture our products."

Explaining his company’s success in domestic manufacturing, Peyton highlights the following:

U.S. labor advantage. Many companies manufacture abroad to benefit from cheaper labor costs.But Despatch manufacturing isn’t labor-intensive, Peyton says. For example, the company makes a small number of highly complex, gigantic ovens for aerospace manufacturing. The manufacturing process doesn’t require hundreds of assembly-line workers. It requires only a small team of skilled workers, not the type of large, unskilled labor force China typically offers, Peyton says.

Not all welding is created equal. In Peyton’s experience, top-quality welding is not a highly valued skill in China, where finding qualified employees can be almost impossible. So, even though the supply of cost-efficient labor is seemingly limitless in the country, finding skilled labor is more challenging.

No central component source. Critical source components for Despatch products might include thermostats from Western Europe and raw materials from South America. To Peyton, moving operations to Asia would not produce any logistical efficiencies and might generate higher transportation costs.

Innovation as a competitive advantage

It’s no secret that protecting intellectual property is a barrier to conducting business in China. In a recent statement to a German trade delegation, Wen Jiabao, the Chinese prime minister, said that China will take fresh measures to fight product piracy, conceding that "many problems" remain.

Peyton says he doesn’t worry about violations of patents or other intellectual property in China. Instead he focuses on how Despatch Industries can invent the next big thing —something that no other company could produce. Peyton ties much of his company’s success in Asia and elsewhere to constant innovation.

"I feel comfortable saying that none of our competitors put as much capital behind speed and innovation as we do," he says. "A lot of our earnings go straight back into R&D — and it has to be that way.

"Moreover, I really believe that the Midwestern work ethic is as good as anywhere else in the world. We’ve been selling internationally since the 1940s, and nowhere has our innovative spirit been matched."

Two industries where Despatch has a particularly strong presence in China are carbon fiber materials, which aircraft producers use extensively, and solar-cell production, where manufacturers benefit from infrared furnaces that increase output while lowering production costs.

"We have the capacity to help China address some of the most pressing issues associated with its rapid economic growth," Peyton says. "One of those issues is the demand for clean, renewable energy. Our goal is to be China’s No. 1 supplier of thermal processing solutions for the solar-cell market."

Beyond that, Peyton says, "We simply want to show Chinese enterprises that are not yet familiar with us how a Minnesota company can help them implement world-class thermal and environmental simulation processes for R&D, testing and manufacturing — processes that are vital for producing clean, safe,reliable products."

Against the odds

While Despatch Industries has shown steady performance in the U.S. export market, the prevailing trend paints a much darker picture.

Today,the U.S. trade deficit hovers around 5 percent of gross domestic product (GDP). To many, this deficit ties directly to a steady decline in U.S. manufacturing as a percentage of worldwide capacity. The United States borrows more than $1 billion each day to pay for manufactured goods that are consumed but not produced here, and Americans must pay interest on this borrowed money.

According to the Budget of the United States Government, Fiscal Year 2006, the United States owed $2.3 trillion in 2001, or close to 23 percent of GDP. The 2006 debt estimate is 27.8 percent of GDP.