The Cost of 'Best Cost' in Commodity Cast Steel Valves by Kyle Nix
When I first entered the PVF industry in the late 1990's one of my managers told me our customers (the end users) all want the same three things--the best price, the best delivery, and the best quality, but it was our job to figure out which one of those mattered most in that moment because nobody could deliver all three. "At best we can give them two out of three," he had said. "But usually, it comes down to just one."
In the past twenty years, with each new RFQ, I've had to ask myself this question many times and each time the answer varied greatly depending on the situation. For instance, was this for a project or a turnaround? Was there a sense of urgency in the buyer’s voice, or did he have time for small talk meaning he could wait for the cheaper overseas quote?
If you know, you know.
Anyway, although I did not keep a tally of which answer I got most often--and I hate to say quality usually came last which is why this article will focus on the other two--but if I had to say which of the big three (price, delivery, or quality) typically won the day, one would need only to look at the shifting geographic location of cast steel valve manufacturers to know what end users valued most--price.
But the question of where to find the 'best price' has become harder to answer, and it’s not only about the tariffs. Especially in the case of cast steel valves.
How Did We Get Here? The Journey from Mexico to China
Cast steel manufacturing has undergone a dramatic geographic shift over the past three decades. In the 1990s, thanks to the removal of tariffs by NAFTA, Mexico became the hub for the U.S. cast steel market. In fact, at my first distribution job, all the cast steel valves we had in stock were made in Mexico.
Mexico also had the advantage of being less than a five-hour drive from the U.S. Gulf Coast, which is one of the largest users of cast steel valves in the world. No container, no problem.
tariffs. Especially in the case of cast steel valves.
How Did We Get Here? The Journey from Mexico to China
Cast steel manufacturing has undergone a dramatic geographic shift over the past three decades. In the 1990s, thanks to the removal of tariffs by NAFTA, Mexico became the hub for the U.S. cast steel market. In fact, at my first distribution job, all the cast steel valves we had in stock were made in Mexico.
Mexico also had the advantage of being less than a five-hour drive from the U.S. Gulf Coast, which is one of the largest users of cast steel valves in the world. No container, no problem.
However, the benefits of NAFTA for Mexico would be short lived when in 2001, China was granted entry into global markets by the World Trade Organization. By the mid-2000s, China quickly outpaced all other industrial countries, especially in castings, becoming the factory of the world, drawing cast steel production away from Mexico and other countries.
The biggest driver for China's competitive advantage was low labor cost. In 2001 Mexican manufacturing labor cost more than three times as much as Chinese labor. This gap made it dramatically cheaper to produce a labor-intensive product like cast steel valves in China despite the distance and extra freight cost.
In addition to low cost, China’s labor productivity was improving quickly, meaning even if another country had lower nominal wages, China’s higher output per worker kept its effective labor cost below its rivals. In the early 2000s, Mexico’s workforce was skilled and productive, but China could provide adequate productivity at far lower pay – a compelling combination for manufacturers. From here, it wasn't long before the Market started accepting Chinese product.
For the next several decades China kept up its dominance by bolstering its manufacturing infrastructure by building up an ecosystem suited for high-volume production--in other words, full supply chain integration. Manufacturers who moved their factories to China could source specialized alloys for their castings locally, not to mention they had thousands of toolmakers and machine shops capable of mold-making, machining, and assembly.