26/06/2020 Metalcasting Growth Strategies II: How Foundries Make their Money | Foundry Management & Technology

ISSUES AND IDEAS

Metalcasting Growth Strategies II: How Foundries Make their

Money
A foundry strategist offers perspectives on metalcasting business models, discusses their
merits from a growth strategy perspective.

Mike Swartzlander
NOV 12, 2012

Understanding the competitive dynamics of an industry is a critical part of any growth strategy
effort. The metalcasting industry can be analyzed from an overall strategic perspective using the
well-known "Porter's 5 Forces" as a useful starting point.

Determining a company's business model, both the current model and the desired model, is also
a key part of a growth strategy. Having a grasp of the foundry industry's competitive dynamics,
as well as an understanding of business models, lays the foundation for building robust growth
strategies capable of sustaining long-term growth.

Metalcasting industry analysis

Developed first by Michael E Porter in 1979 at Harvard University, "Porter's Five Forces" is now
a bedrock tool used by business strategists. Especially useful for understanding the competitive
intensity of an industry, Five Forces helps define the environment in which a company must
find, grow, and protect its profits. Following is a summary of Porter's Five Forces applied to the
metalcasting industry. This is a general overview that would be applied on a customized basis
for a particular foundry.

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Force 1: Customer Bargaining Power. A key question from a customer base perspective:
How easy is it for customers to drive down prices? Pricing is driven by a number of factors, such
as the number of buyers, the importance of any one customer to your business, the total cost of
switching, the ability to switch to substitute products, and so on.

In the U.S. metalcasting industry, perennial overcapacity compared to demand has given
casting buyers huge bargaining power. Also, fast-growing capabilities of overseas foundries
coupled with lower costs in sourcing from Low Cost Countries have given significant advantages
to casting buyers. Over the past decade, consolidation of casting-consuming OEMs, especially as
they centralize and leverage increasingly sophisticated global supply chains, is perhaps the
single biggest development giving the advantage to casting buyers. My company estimates that
less than 200 companies consume more than 50% of all castings, by value, globally. It seems
fair to say that customers of castings have very high bargaining power overall in the industry.

Force 2: Supplier Bargaining Power

Force 2: Supplier Bargaining Power. As raw materials, consumables, and specialized

equipment are key requirements for metalcasting, understanding the suppliers' bargaining
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power is important, too. In addition to the number of suppliers, bargaining power is influenced
by availability, unique performance attributes, service capabilities, and a foundry's cost of
switching, to name a few factors.

Even more so than consolidation of customers, the U.S. foundry supplier base has shrunk
dramatically over the past two decades. Consumables and equipment suppliers specific to
foundries now number only a few for any given material or specialized equipment. Suppliers of
commodity metals, scrap, alloys, and the like, price and supply on a global basis. Often, other
sectors drive the pricing of these materials, as foundry consumption is small by comparison.
Even the supply of sand has become problematic for foundries, with the competition for limited
sand supplies from the shale-gas fracking markets.

Here, too, it seems fair to say that suppliers to foundries have high bargaining power overall.
Generally speaking, it is no wonder many foundries feel they are between a rock and a hard
place, given the bargaining power of both suppliers and customers!

Force 3: Intensity of Competitive Rivalry

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Force 3: Intensity of Competitive Rivalry. How many competitors do you have? What are
their relative capabilities compared to yours? This is perhaps the most critical factor to analyze,
carefully and objectively. Yet, it is often overlooked or not well understood by most foundries.
Granted, some metalcasters do have such a well-developed, differentiated, and protectable
position that they have few competitors – perhaps investment casters of jet engine blades fit
this category. In the slow growth market of the U.S., there has been a significant number of
closings and consolidation of foundries as well. This can lead, and has led, to less competition.
However, the consolidation of the customer base, coupled with a proliferation of Low Cost
Countries' competition has kept foundries' competitive rivalry high.

Metalcasting is not an industry, it's a manufacturing process, and as a result the

operators tend to be removed from the OEMs they supply.

The ease of entry for new competitors in the foundry industry is an interesting one in the U.S.
Heavily influencing ease of entry for several decades has been the over-supply of readily
available cheap equipment from shuttered foundries. Likewise, entire bankrupt foundries
available at a small fraction of the initial investment seem to be a recurring theme.

This situation may be changing, finally. Even old foundry equipment eventually cannot be
repaired, or it becomes technically obsolete. Also, new foundries are almost impossible to get
permitted in the U.S., and existing foundries are hitting their air permit and other regulatory
limits. Indeed, in many casting markets domestic supply seems currently to be very tight, with
lead times increasing dramatically.

Unfortunately, huge amounts of new casting capacity have been added internationally.
Especially in China and India, substantial new capacity has been built. Costs are inherently
lower, and will remain so. While the bulk of output from these foundries is thankfully
consumed in their home markets, the potential of availability in the U.S. market is significant.
Especially if there are significant slowdowns in their home markets, imported castings would
pose significant competitive threat.

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Force 5: Threat of Substitute Products. There is, and always will be substitution of one
material for another, for example plastics instead of metal for some components. Likewise,
there always will be the rivalry offered between metal choices, for example, iron versus
aluminum. Alternatives to making a metal component via machining and weldments, via
forging, via powdered metals, etc., are part of the strategic discussion for metalcasters.
Fortunately, major changes in materials take enough time for metalcasters to proactively adjust.
Likewise, there are ample opportunities pursued by pro-active metal casters that counter
substitution, such as converting weldments to castings.

Foundry Business Models

Foundry business models: Jobbing, captive, and in between

I prefer a simple but elegant definition of ‘business model' – how an organization captures and
sustains a commercial opportunity associated with a casting. With this in mind, we can discuss
the two basic business models for foundries: Jobbing and Captive. There also are two additional
important variations: Independent Foundries with a Market Focus, and Semi-Captive
Foundries.
Jobbing foundries pre-date the Industrial Revolution, and probably even pre-date written
history. Simply stated, a jobbing foundry produces whatever job shows up at its doorstep,
within its capabilities of metallurgy, size, etc. The critical factor historically has been the ability
to use a rough sketch, a broken part, or even a complete set of engineering drawings, and make
the mold and method it. The artisanal skill to make the mold, combined with technical
capability of metallurgy and foundry practice, was enough to set up and differentiate a foundry.
Even until recent times, this market was defined mostly geographically. Indeed, many foundries
took on the name of the town in which they were located. About 64% of all U.S. foundries are
estimated to fall into the Jobbing category.

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Jobbing foundries capture commercial opportunity primarily via a capabilities perspective,

making the capabilities available to anyone requiring them.

I prefer a simple but elegant definition of ‘business model’ – how an organization captures and
sustains a commercial opportunity associated with a casting. With this in mind, we can discuss
the two basic business models for foundries: Jobbing and Captive. There also are two additional
important variations:
Independent Foundries with a Market Focus, and Semi-Captive Foundries.

Jobbing foundries pre-date the Industrial Revolution, and probably even pre-date written
history. Simply stated, a jobbing foundry produces whatever job shows up at its doorstep,
within its capabilities of metallurgy, size, etc. The critical factor historically has been the ability
to use a rough sketch, a broken part, or even a complete set of engineering drawings, and make
the mold and method it. The artisanal skill to make the mold, combined with technical
capability of metallurgy and foundry practice, was enough to set up and differentiate a foundry.
Even until recent times, this market was defined mostly geographically. Indeed, many foundries
took on the name of the town in which they were located. About 64% of all U.S. foundries are
estimated to fall into the Jobbing category.

Jobbing foundries capture commercial opportunity primarily via a capabilities perspective,

making the capabilities available to anyone requiring them.

Captive foundries, owned by the organization that consumes the output, perhaps made their
debut with production of cannons and other weapons, where protecting and expanding the
technology was critical. After the dawn of the Industrial Revolution and especially with the
launch of mass production of automobiles, captive foundries became necessities to ensure
adequate supplies of critical components. Henry Ford's River Rouge Plant was perhaps the
mother of all modern captive foundries, with a daily production of some 2,000 tons in the

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1920s. As the industrial manufacturing giants in the U.S. were being established, many included
captive foundry operations.

However, few truly captive foundries remain as OEMs. Adequate sourcing from a plentiful and
more capable external supply base has led to the spin off or closure of most captive foundries.
Today, captive foundries comprise an estimated 14% of the U.S. foundries.

Captive Foundries, continued...

Captive foundries are still very much required in many emerging markets, where the alternative
of buying castings externally is not readily available. In the U.S., captive foundries are generally
surviving due to legacy requirements or to produce a limited percent of truly mission-critical,
hard-to-find, or truly proprietary parts. In some cases captive foundries do offer leverage over
independent foundries to allegedly make a decision, "make or buy."

Independent, Market-Focused foundry companies focus on a very limited number of market

segments, manufacturing specific castings for those segments. The intent is to create economies
of scale for lowering costs and market share leadership to provide more focus on the
requirements of a specific market, as well as to build more negotiating power with the OEM
customers. This category includes an estimated 19% of the number of U.S. foundries. As this
category covers mega-casters, such as Waupaca Foundry Inc., Grede Holdings LLC, and others,
the volume and value of castings from the Independents probably exceeds 50% of the
production.

As compared to jobbing foundries, the independent, market-focused foundry operations tend to

have far fewer, but larger, customers, and tend to be more externally focused on commercial
requirements. Technical requirements are more focused, specifically to meet the targeted
market requirements.

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Semi-Captive foundries are owned by their major internal customer, but also sell castings
externally. Representing about 3% of the foundries, these include a wide variety of companies,
such as Flowserve Corp., Mercury Marine, Lufkin Industries, Kohler Co.'s Kohler Industrial
Castings, and Charlotte Pipe & Foundry. Often the intent is to spread fixed costs over a larger
base, to make up for shrinking internal demand, or to monetize unique technology in castings.

It is hard to judge the merits and success of semi-captive foundries accurately. However, it
seems fair to conclude that these foundries are not generally in long-term growth mode.

Evaluating a specific foundry's operation within the context of one of these four basic business
models can derive a great deal of insight. Much can be learned from understanding how other
companies in the same category have positioned themselves in the competitive environment.
This is an obvious exercise to understand direct competitors. Perhaps more important is the
insight that comes from understanding other successful metalcasters for ideas to help with
strategy.

Mike Swartzlander is the Managing Director of Cast Strategies LLC, which provides
consulting services on growth strategies to manufacturers in the metalcasting s, specialty
chemicals, and composites parts markets. Visit www.cast-strategies.com.

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