Exports heat up as some of the Ontario manufacturer's production returns from China.
Kevin Merritt’s decision to bring production of Superior Radiant Products’ (SRP’s) EvenGlo infrared patio heaters back to Canada from China was a move that bucked the offshore manufacturing trend that even his company followed. But the president and CEO of the Stoney Creek, Ont.-based manufacturer of infrared heating products says it was necessary to gain better quality control of the product, which sells for $2,000 and up, to meet the needs of demanding five-star hotel clients and others in the North American market.
Low labour costs and currency, not to mention access to a burgeoning consumer market, once made China an attractive place to invest, but that’s changing now. Reshoring is a growing trend credited with contributing at least 25% of the 500,000 new jobs in the US between 2010 and 2012.
What’s causing this dramatic shift? China’s cost-competitive advantage in manufacturing over the US shrank to less than 5% by 2012, according to a TD Economics report on offshoring. At the turn of the century, American labour costs were 40 times that of the Chinese. Since then wage inflation in China has risen dramatically – three times the rate in the US – and now labour costs in the American south are a more manageable four times as high. The remninbi is appreciating, oil and transportation costs are volatile and tariffs rose 20% in 2013.
“Producing in China is becoming more and more difficult. Costs are going up, lead times are going up; the trading requirements are becoming more difficult to deal with because you can’t count on the quality and we are expected to pay upfront for the goods. It just wasn’t working out for us,” Merritt says.
The patented element on SRP’s patio heaters was developed and made in Quebec. These were shipped to China for further manufacturing and assembly, and then the value-added goods were shipped back for sale to the North American market. Now those patio heaters, are being made in Stoney Creek.
However, SRP still “controls 100%” of its Chinese production of commercial and industrial space heating units – used in factories, stadiums and chicken barns – through its wholly foreign-owned entity (WFOE) Qingdao Thermpro Ltd. in China.
Serving end-user markets
It’s a nimble manufacturer that builds a global strategy for coping with the ups and downs of the world economy. This has certainly worked for SRP, which first set up shop in China in 2000 after being approached by a foreign representative office there. SRP shipped product for large projects including Great Wall Motor Co. and ThyssenKrupp AG China. Problem was, the Canadian company was not allowed to sell to its Chinese customers directly. Nor was it allowed to invoice, says SRP export director Lily Ning.
So in 2009, SRP created a holding company in Hong Kong that in turn owns Qingdao Thermpro Ltd. With the WFOE – which took two years to set up – SRP buys and sells from overseas, and manufactures in China. Thermpro has an extensive dealer network there and is responsible for all sales. Most of the products sold in China are developed and supplied from the Stoney Creek facility, Ning says, except some components of the industrial and commercial heaters that are made for the local market and required to meet China’s tariffs regulations. Sometimes it just makes sense to make goods close to the end-user market.
“All of the R&D, all of the core components, the critical parts all come from the Canadian operation,” says Merritt. “We control the quality that way.”
He says business opportunities outweigh the challenges in China as the country’s economy continues to boom. “They are building huge factories. Where a typical large job in North America might be 50 to 100 heaters; a large job in China would be 300 to 500 heaters, or more. One operation in China has installed more than 1,600 of our heaters.”
He notes the “unbelievable” size of buildings. “I’ve worked in buildings in China that were a kilometre long and 250 metres wide. You can hardly see the end of the building. Just massive.”
SRP’s infrared industrial and commercial heaters are “just perfect for those buildings because they can maintain a comfortable temperature for working without having to keep a higher heat for the rest of the building,” Merritt says.
And it doesn’t hurt that the Chinese government is encouraging natural gas as an energy source for heating to curtail pollution levels.
The US has also changed its energy policy thanks to new supplies of shale gas. SRP expects to grow market share in the US, where it has a light assembly plant in Kennesaw, Ga.
In Europe, SRP has a strategic partnership with GoGas Goch GmbH, a Dormund, Germany-based manufacturer of heating equipment for soccer stadiums, but it also specializes in developing railcar defrosting and other infrared heat systems. Although there were 15 or so competitors in the European market, GoGas approached SRP because it provides as good a quality product, but at a lower price.
Under the 2010 alliance, SRP products are marketed in Europe, while GoGas products are marketed in North America and China. The strategy also allows for the sharing of product technology and engineering for future developments. Merritt credits this arrangement for the company’s growth in its next biggest offshore market: Turkey, where apparently there are a lot of soccer stadiums being built. SRP also has marketing arrangements in Saint Petersburg, Russia.
“We’re a net exporter to China. How many Canadian manufacturers can say that? Forty per cent of our business is in exports,” John Robinson, SRP’s operations manager told PLANT during the August grand opening of the new Stoney Creek plant.
Since its inception in 1995, SRP has grown from three employees in a 2,800 square-foot facility to 60 employees worldwide. The company recently moved its headquarters to a 50,000 square-foot facility, including a 40,000 square-foot fabricating and assembly plant, around the corner from its previous location. Merritt places annual revenues in the “eight figures” range.
The move to a larger footprint was the perfect opportunity to implement lean manufacturing principles from the get go.
Management consultant Nigel Southway served as sensei, encouraging input from everyone involved in production. This includes those stamping and bending the sheet metal, assembling components, to packaging and shipping. Key criteria included a build-to-order capability, ensuring the plant was responsive to seasonality, supporting a high mix of products, providing wide-aisle material handling, developing flexible work cells, and cross-training all staff. Interestingly, Southway is involved with SME (Toronto chapter) and the Take Back Manufacturing Initiative, which encourages companies to bring manufacturing back to Canada from overseas.Ontario’s resources
Because there are so many variations of BTUs used in SRP’s burners, the decision was made to adopt a new ERP software. Plant manager Bruno Brieri says this has helped enormously with the company’s customized manufacturing approach. Each item is produced as needed. Items are made just-in-time so there’s very little inventory kept in the plant.
Why would a global manufacturing company choose to stay in Stoney Creek? Merritt credits Hamilton and Toronto’s “tremendous” resources in both blue- and white-collar workers, proximity to major transportation arteries that offer easy access to Detroit and Buffalo border crossings and the GTA, “all of which are major markets for us.”
It doesn’t hurt that it’s also a beautiful area near Niagara Falls and great for entertaining foreign visitors.
But another plus is Ontario’s corporate tax.
“Don’t say that too loud. But I think it’s a favourable situation for corporations in Ontario now compared to the US. Certainly the labour costs and overheads might be a little higher, but the corporate tax rates are certainly lower,” Merritt says.
“We all rushed to get our products made offshore because labour costs were so much lower in China,” says Merritt, who observes low labour cost isn’t everything.
There are many other factors to consider. Take a closer look at your other costs. As SRP discovered, manufacturing closer to home is more feasible than you might think.
Kim Laudrum is an award winning, Toronto-based business writer specializing in manufacturing. E-mail email@example.com.
This article appears in the October 2014 issue of PLANT.