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Canadians move manufacturing closer to demand

Superior Radiant Products will meet growing Chinese demand and avoid hefty duties by moving manufacturing of its infrared heaters to Qingdao, China from its Stoney Creek, Ont., facility.

Booming demand for its infrared heaters, particularly in China's rapidly-growing chicken farm industry, has led Ontario-based exporter Superior Radiant Products Ltd. to the next logical step: "next-shore" production of its industrial and commercial heaters to Qingdao in China.

The Canadian manufacturer has supplied the Chinese market for these products from its plant in Stoney Creek, Ont., since 2000 – but business as usual is no longer an option, Superior president Kevin Merritt says.

For one thing, the Chinese government has imposed a 20-per-cent duty on its goods.

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For another, "there's a lot of competition, so we are on our toes now," Mr. Merritt said in an interview. "We got fairly well established in the early stages of the market. It wasn't a big market until now, but it's started to expand, we want to take advantage of that, and it requires that we do our final production of the product over there."

"We want to be close to the market, it will help with lead times. … For North American companies to continue to be involved in China, they need to next-shore, if you will; they need to be willing to invest in manufacturing in China for that market."

And that market is voracious, said Bruce Simpson, who leads McKinsey & Co.'s global operations practice and recently prepared a report for the Canadian Council of Chief Executives entitled Canada-China Relations: Keeping up the Momentum.

"In 10 years, China will have triple the urbanites that the United States has today which, of course, means massive growth in the consumer population in China," said Mr. Simpson, who is based in Toronto. "One of the key concepts of next-shoring is moving your manufacturing close to areas of demand and innovation, and I think that we [Canadians] are underestimating the opportunity in China, where the demand will be enormous."

This postrecession "new normal" requires a radical change in thinking on the part of manufacturers, as developing economies such as China and India morph from the world's source of low-cost manufacturing capacity to the world's best market opportunities, McKinsey said in one of its many reports on next-shoring.

Rather than focus on offshoring (moving production to low-wage countries) or even reshoring (returning manufacturing to developed markets as wages rise in emerging ones), today's manufacturing strategies need to concentrate on what's coming next, McKinsey wrote.

"Companies really need to understand how important proximity to demand is and realize that, more and more, companies are successfully finding hybrid models of manufacturing, both in developed economies near developed-market demand and in developing economies near the exploding demand … in those economies," McKinsey wrote.

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In today's survival-of-the-nimblest world, Superior Radiant Products is constantly thinking ahead about where best to make its products. (The company also produces high-end patio heaters customized for luxury hotels in North America, infrared heaters for deicing aircraft and outdoor heaters for the latest rage in high-tech golf entertainment, where performance on the driving range is tracked by microchip-embedded balls.)

"Every time, [the decision to locate, or relocate] is a decision based on what works best, and there are always different things at play," Mr. Merritt said.

For instance, while Superior is next-shoring production of industrial and commercial heaters destined for the Chinese market, the company recently decided to reshore its high-end patio heaters, moving production back to Stoney Creek from China.

The customers were here, the production was there, and the company concluded that the patio heaters were not being made with the "white glove" finesse required by such clients as Four Seasons Hotels Inc. and Fairmont Raffles Hotels International.

"We are about a month away from releasing the first production model out of Canada, and there is a line at the door of dealers waiting. We have informed them that there is going to be a significant price increase, but the word back is that – just due to the fact that it's being made in North America – they will be able to push through the price increase."

Closer to home, the company's next move most likely will be to establish a manufacturing presence in the southern United States. There are a number of reasons for this, including financial incentives to set up shop and the "Buy America" sentiment of U.S. consumers and authorities, Mr. Merritt said, noting that his firm already has a warehouse operation in Atlanta.

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"Looking generally at the U.S. market, we feel that, in order to penetrate more, we need to at least partially manufacture in the U.S.," Mr. Merritt said.

He said the next-shoring of production of heavy-duty heaters destined for the Chinese market was, in part, driven by a sudden surge in demand resulting from an alliance the company has formed with U.S.-based Tyson Foods Inc. to support its expansion of poultry operations in China. "We helped them develop a heating system that works really well [in the chicken farms], so that's a market that's growing rapidly for us."

At the same time, there have been enormous improvements in infrastructure to support commercial and manufacturing operations in the past few years in China. "The gas pipeline development has been tremendous. Even these chicken farms in the middle of nowhere have access to gas, which two years ago they didn't," Mr. Merritt said.

The research and development, quality control and construction of the heater controls will continue to be handled out of Stoney Creek, he said. "But we will just send some key components from here and the rest will be made in China, so we can compete and continue to grow. Because if we don't, if we just continue to export complete goods, eventually we will lose our market."

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