The Challenges of Global Business

The Company, owned by Steve and Janney Duncan, designs components for original equipment manufacturers producing primarily large mowers, post hole diggers, tillers and animal feeding equipment. Established in Dodge City in 2006 and relocated to Topeka in 2011, SD Engineering supplies its customers with gear boxes, drive shafts, wheels and shields, as well as repair and replacement parts for everything they make.

TARIFFS When the first tariff list was implemented on July 6, 2018, Steve said SD Engineering went from paying zero in taxes to paying 25 percent overnight on spare parts and tail wheels on mowers.

“We tried to help our customers out as much as we could, but we had to pass along some of that added expense to them,” said Steve.

A second tariff list was issued on Aug. 23. “Luckily, we had no products on this list,” said Steve.

A third tariff list introduced on Sept. 24, 2018, has extracted a 10 percent tax “on virtually everything else” that SD Engineering supplies. Growing concerns about the likelihood of an across-the-board 25 percent tariff by the end of the year has the Duncans, their U.S. customers and their Chinese suppliers all assessing the situation and exploring alternatives.

A sweeping 25 percent tariff would not only impact the operations of small specialty companies like SD Engineering but also retail behemoths like Walmart, driving prices up for everyone, Steve said.

The Duncans acknowledge that unfair global trade practices impede the ability of U.S. companies to compete abroad and should be addressed, but enacting countermeasures can be costly.

“We support President Trump’s efforts to level the playing field for trade and to build up American production capacity,” said Steve, “but those efforts will also increase prices for American consumers because wages and other business expenses will go up too.”

SOURCING  The Duncans strive to find U.S. suppliers that can fill the void, but lower labor costs in China and the government’s ability to provide rebates of 18 percent or more to companies exporting products to the United States are factors that hinder entrepreneurs here from entering the market.

On a recent business trip to China to meet with suppliers, the Duncans had candid conversations with their counterparts who are just as frustrated and perplexed as they are about the changing business landscape.

“There are a lot of political games and no one is sure what’s going on,” Steve said. “It’s a tough time for small shops in China too.”

Steve said about 40 percent of the casting and forging factories in China have closed because of cumbersome environmental standards that are costly to comply with.

“Now that the smaller casting and forging factories are closed, the large factories don’t want to make small orders, and if they do, the price is much higher,” he said.

As entrepreneurs, the Duncans are accustomed to coping with shifting practices inherent in doing business in China, but being unable to secure parts for their customers would be worrisome.

“A lot of our components are used on small equipment purchased by gentlemen farmers,” said Steve. “When the crop price is down, like now, the market dictates that certain items, especially more expensive equipment, won’t sell well, but our spare parts business will be good, keeping things stable. But if we can’t get our customers the parts they need, then that’s bad for business.”

Steve surmised that if a 25 percent tariff gets implemented by the end of the year, then “a lot of Chinese factories will move to Vietnam or Laos or Malaysia not only to avoid the tariff but also the environmental constraints that China’s put in place.”

Although the Duncans said they didn’t base their business plan on continuous growth every year, they’ve achieved it and hope that if another tariff is implemented they can find new products and suppliers to help fill the void.

“At the moment, we’re not seeing anyone wanting to jump in right now,” said Steve. “The reality is that the United States gave away its forging and casting factories to China 30 years ago because the Environmental Protection Agency rules were so strict. It took us 30 years to lose everything and it may take another 30 years and major investment to get it back.”

DOMESTIC OPPORTUNITIES Steve said that “more casting capacity at a reasonable cost” is imperative for the OEM industry and expressed hope that the United States would be able to develop the infrastructure to support domestic production of nuts, bolts, gears and steel products in the future.

“Down the road we believe that some products will be manufactured here and will make U.S.-made products more competitive globally, but it probably depends on which industry you’re in,” he said.

“We’re not sure how the tariff situation will be resolved, but we haven’t seen any slow down in the number of business orders we’ve received,” said Jann}ey. “In some cases, we’ve even seen customers place larger orders because they wanted us to ship as much product as possible before the deadline.”

A MULTI-CULTURAL ENTREPRENEUR’S PERSPECTIVE ON CHINESE TRADE Janney Duncan, a Chinese national and U.S. citizen, has worked as an engineer in China and as a banking executive in Dodge City.

In China, she said it is not unusual for the country to assess a tariff of 200 percent or more in an attempt to protect its own industries. Decades ago China aggressively courted companies like General Motors and Volkswagen for joint ventures with 20/80 splits that have evolved into more equal partnerships in 2018.

However, Janney said new regimes implement their own policies and “there’s no continuity on previous promises” made to companies.

Janney drew similarities between the United States and China, noting that in both countries special interest groups compete for power while “the rich get richer and the poor get poorer.” Although housing prices in China are four times higher than those in New York City, Janney said, “The Chinese government can control the economy and manipulate the currency to keep costs down and the bubble from bursting.”

Still, she said many Chinese have discovered it is cheaper to fly to the United States to buys goods and ship them home than to buy them in China.

The counterfeit export industry in China is also booming, and Janney attributed the country’s fast growth through the decades to a nimble ability to copy the craftsmanship of others.

“Over the past 30 years, nothing is constant,” she said. “Every time we go to China, policies and regulations have }changed, and we must adapt to the new rules.”

The story behind the business... Husband and wife team, Steve and Janney Duncan, decided to capitalize on their combined skills and international connections to fill a niche in the engineering/manufacturing environment. However, their story actually began years earlier, on another continent.

As part of his job with ITG, Steve worked with production facilities in China to manufacture industrial equipment designed by engineers in Dodge City. Steve travelled to China two or three times a year to oversee the production of various products and maintain connections with facility personnel. On one such trip in 1999, Steve was enjoying breakfast at a hotel in Tai’an, when a young lady sitting at a table next to him caught his eye. Steve, who doesn’t know a stranger, struck up a conversation and was intrigued to learn that she was also an engineer. They exchanged business cards and went their separate ways.

A year went by. Then one day, out of the blue, Janney received a call from Steve. He was back in China and wanted to meet up for dinner. Thus, began a long-distance romance that found the couple saying their wedding vows a few years later.

In a whirlwind, Janney found herself transplanted from Beijing to Dodge City, Kansas—a bit of a culture shock to say the least. With an engineering degree that she couldn’t use in America, and a bit of a language barrier, Janney was at a loss of what to do.

Steve encouraged her to find something she was passionate about. Money and finances fascinated her, so she went back to school and received an MBA degree as well as her CPA and began working for a local credit union.

Janney’s engineering background, coupled with her understanding of the financial aspects required to run a business, sparked her entrepreneurial spirit. She knew that if they could combine what Steve was already doing in the outsourcing of products from China with her understanding of finance and the Chinese culture, they could successfully operate their own business.

“I’m good with strategy and planning,” Janney said, “and Steve can sell anything. So, it just seemed to make sense.”

While still maintaining their existing careers, Steve and Janney opened SD Engineering and began working on sourcing for a company that offered livestock feeding equipment and wanted to reduce the cost of its products.

“Steve designed the product and created a prototype,” Janney said. “And then I used my knowledge of both engineering and the Chinese language to help coordinate the sourcing to manufacture the product in China.”

The combination was indeed successful.

“A lot of business in China is about trust and connections,” Steve said. “Janney’s ability to speak with the factory managers in their own language was critical to our success.”

Slowly the business began to grow as SD Engineering took on additional products. After ITG experienced financial difficulties in 2008, Steve and Janney decided to pour all of their resources into growing SD Engineering. They stepped in to fill the void left behind after ITG went out of business.

“Customers were in desperate need of ways to provide cheaper products,” Steve said. “We knew we could fill that niche.”

They moved the business to Topeka in 2011 and it has seen continued growth. With 10 employees and an expanding base of loyal customers, Steve and Janney look forward to what the future has to bring.

TK