International distribution for manufacturers

Distribution localization remains vital to US business interests abroad. Yesterday, I published an article in the Journal of Commerce. The gist of the article is that many multinational corporations, when they think about localization in a foreign market, view distribution partners as a necessary evil. I argue that companies make a mistake when they use local distributors as market entry point, a means to a short-term end. The right distribution localization partnership can be one of your greatest assets, and the Caterpillar story demonstrates that fact. A Harvard Business Review article tells of the rivalry between the two heavy equipment manufacturing giants, Caterpillar and Komatsu (the latter is a U.S. Translation Company client). Cat was losing market share rapidly to its rival. Then the company leveraged its hidden advantage: a legacy network of distribution localization partners.

Catarpillar’s dire straits, and an escape

With Komatsu boasting tremendous cost advantages (as much as 40% in some product lines) and excellent products, they [the press] accepted as a foregone conclusion that Komatsu would fulfill its vow to “encircle Cat” and become the dominant producer in our industry.

Komatsu and other Japanese companies had the edge in cost, having pioneered lean manufacturing. For poor Cat, 40% more expensive is, well, a lot more expensive. Caterpillar was clearly at a huge disadvantage. Nevertheless,

And after suffering some fearsome losses in 5 of the 11 years from 1982 through 1992, we have rebounded financially with record profits and a return on equity in the mid to high thirties.

From fearsome losses to record profits? That’s what I call an epic recovery.

Japan has its lean manufacturing, but the US has its distribution localization systems

So how did Cat make this comeback? They tried to innovate faster, cut costs, and get leaner. But, the primary strategy that saved Caterpillar was their approach to distribution. The author claims that “the global winners over the next 10 to 20 years are going to be the companies with the best distribution organizations that also provide superb customer support.” And, he asserts, American companies are far ahead in this regard.

Although many Japanese companies had the early advantage in manufacturing excellence, U.S. companies may have the edge this time around. Why? Because they know more about distribution than anyone else. Whether we’re talking about financial services or servicing products, U.S. companies have a real strength in service. So this is a revolution they can really capitalize on if they treat distribution as if it were as integral to their businesses as product design and manufacturing. That’s one reason I feel very bullish about my own company. We know how to do it. We have already built true partnerships with our dealers.

In short, distribution localization partnerships saved Caterpillar from a gruesome death at the claws of Komatsu.

Treating distributors as valuable assets

Accordingly, Caterpillar treated its distributors like integral components of the Cat family. Because heavy machinery needs extensive parts and maintenance, Cat invested in training and support so that Cat customers in Korea, Mexico and Nigeria all received the same high level of customer service.

While Japan, as previously noted, may have an edge on cost management in manufacturing, they are behind the game in terms of distribution localization systems and technologies. The article describes one of the reasons why:

Quite frankly, distribution traditionally has not been a strength of Japanese companies. Marketing people and salespeople historically have been looked down upon in Japanese society. I saw that firsthand when I lived there in the 1970s. We worked diligently with Mitsubishi Heavy Industries, our joint venture partner, to help them understand the importance that we placed on the distribution side of our business. At the time, a sales position just didn’t have the same status in the social or company hierarchy as an engineering or accounting position. I think that feeling still prevails in many Japanese companies.

So, take heart, US manufacturers who wish to enter foreign markets. You have a secret weapon. Use the US legacy of quality distribution localization. Give them the Caterpillar treatment.