It's Chinese government policy to gain control over intellectual property

For Peerless A/V, the Costs of Doing Business in China Weren't Worth the Savings

Two years after pulling out, the Aurora, Ill.-based manufacturer of audio/visual mounts still pays 'seven figures' in legal fees to fight intellectual-property theft in China.

Tuesday, January 17, 2012
By Josh Cable Some time after Peerless Industries Inc. decided to outsource a portion of its manufacturing to China in the mid 2000s, a strange thing happened.

The Chicago-based manufacturer of audio/visual mounts began noticing its patented products "showing up on the Internet, around the world," recalls company President and COO Michael Campagna.

"And not in our boxes," Campagna adds. "And not in our sales."

Nearly two years after Peerless pulled out of China, the company still spends "over seven figures every year chasing, litigating and trying to shut down the knockoff artists," Campagna says.

"You can buy Louis Vuitton and Gucci purses all over China for real cheap," Campagna says. "Everyone's getting knocked off."

Campagna: When Peerless looked at the total cost of doing business in China, "we made the strategic decision in 2009 to bring everything back."

The cost of intellectual-property protection was just one factor that pushed Peerless out of China, where the company had sought to perform aluminum die-casting more cheaply than it could in the United States.

When company leaders analyzed the cost of freight, the cost of carrying extra inventory, and the cost of conducting additional product inspections due to quality concerns, "we found that the total cost of manufacturing in the U.S. was not that much more than manufacturing in China," Campagna explains.

"So we made the strategic decision in 2009 to bring everything back," he says.

In May 2010, Peerless consolidated its China operations and two of its Illinois sites into a 319,000-square-foot facility in the Chicago suburb of Aurora. The new 22.5-acre campus, which also houses the company's corporate offices, employs some 400 people.

The timing of the move was fortuitous, Campagna says. The company took advantage of the slump in the commercial real estate market and the collapse of the auto industry in 2009 to purchase the building and the die-casting machines at a deep discount.

"We paid pennies on the dollar for our equipment," Campagna says.

Less Inventory, More Cash

Since pulling out of China, Campagna notes that the company's lead time to the customer hasn't changed. Peerless sells to OEMS, dealers and commercial installers, who typically demand same-day or next-day shipment -- "two days at the most."

"They don't stock anything," Campagna says. "And if we don't have it, they just move on to our competitors."

What has changed, though, is the amount of inventory that Peerless now carries.

"Our ability to react and not have one, two, three, four months' worth of inventory because our stuff is being made halfway across the world has been a major savings," Campagna explains. "We've been able to bring our inventory down 20%. So that just frees up 20% more cash."

Peerless, with a product portfolio that includes flat-panel mounts, projector mounts, A/V carts and cables, also has found that its ability to implement product or process changes has improved since pulling out of China.

When you're making product in China, "you have to have at least a 30-day supply, if not a 60-day supply, in your inventory," Campagna says.

"You have another 30 days on the boat. Your supplier is working on the next 30 days of inventory, and then his supplier making all the components has another 30 or 60 days of supply.

"So your supply chain is huge. If you want to make a design change, it takes forever."

Add up the costs of IP protection, quality control, freight and other factors, and Campagna estimates that it was 10% to 15% cheaper for Peerless to manufacture in China versus the United States.

"So for 10% to 15%, we'd rather have a little bit less profit and a lot more control."

International business is economic warfare