In the end, the people that want cheap glasses can get them, and those that want expensive glasses can also get them.
Now I will talk about the Japanese optical industry and how these flatteners are changing the face of the way business is done in this industry. This desire for “price down” (at the expense of quality) has driven a large amount of business to China.
Another interesting effect of this change is that even in Europe, the “origin” of eyeglass manufacturers, manufacturing in Europe is no longer a profitable option. Since the internet and broadband was available cheaply, companies could outsource overseas to cheaper labour pools, have the finished product re-imported and finished for the market.
6) Offshoring – by taking entire factories to countries where the labour was cheap and the number of workers was large, it was possible to achieve “economies of scale” and dramatically decrease costs of production.
4) Open-Sourcing – this movement led to affordable, cheap and free software that could be used on many different platforms over the internet, developing servers for businesses to run intranets and communicate in a more efficient way.
The “broker” system in the optical industry is very popular for several reasons: the Japanese companies have relied on importers/exporters so much that many of the small to mid-size players do not have the capacity or understanding for import/export to perform in-house. Now people were able to communicate freely any time, any place and on a huge variety of portable machinery. Due to the “no nickel” policy in Europe a lot of the “standard metals” are being phased out and titanium, being considered “nickel-free” has become a hot commodity. Look at Dell Computers as a perfect example. They need a price advantage in order to survive. This of course drives up the price because brokers are known to take a high margin in this industry.
3) Work Flow Software – people were now able to send files back and forth to each other via email, work on these files on their own computers and in effect, collaborate over long distances.S.
5) Outsourcing – this movement is the result of companies trying to “cut the fat” by finding cheaper places to get the job done “out-of-house”. They also are notorious for lack of English skill. The poor quality that comes out of Chinese factories, and the way business is conducted is extremely frustrating to companies outsourcing their orders to companies there. There really are very few actual manufacturers of eyeglasses who do the entire process from A to Z. This is very common in this industry. Over the past 5 years those numbers have dramatically decreased from tens of thousands, to thousands and now even to hundreds. I believe that a change in this mentality, a better understanding of the global industry and a better command of international business is imperative for manufacturers in Japan to take full advantage of the low-cost of acceptable Chinese product and combine it with their competitive advantage of maintaining their niche manufacturing in the high-quality market segment. This could be inventory, repairs of computers, and more. These frames are much more expensive than those made in China (on the retail market) due to the markup system of eyewear in Japan.
Briefly, they are as follows:
1) The Collapse of the Berlin Wall (1989/11/09) – this opened up east and west and allowed two cultures to meet. They have had to completely change their strategy to survive and instead of manufacturing their own frames now, use their deep understanding of fashion and design to draw up product and have them made in China, which they order through companies like my associate, who have connections with manufacturers. What he means is the forces that are “levelling the playing field” and allowing the entire world to work together, and compete against one another in ways never before imaginable. The manufacturers in China produce acceptable quality at a dramatically reduced price compared to the rest of the world. This change has most definitely improved the competitive AND comparative position of the Chinese manufacturers. This has been tough for the Japanese companies involved in this business, however it seems that the “Japanese demand higher quality” outside observation does not hold entirely true for this market (or that of other products after looking at the market major shift to “Made in China” goods). Outsourcing to China for the Japanese market has been very difficult because, even though Friedman talks about “high quality manufacturing in China”, I have to disagree for the optical industry. This has polarized the industry and created a very different market segment for the companies to target. Free Internet Telephony (Skype) is one example.
However, doing the entire process in a foreign country was very difficult for this industry.
Changes in the industry structure that may improve a company’s competitive position
Since this process has been going on for the past several years, the structure has slowly been changing such that lower-end product (or “standard” we could now say because quality has definitely improved over the past several years) is manufactured in China through outsourcing to Chinese factories or offshoring by a company’s own factory overseas, while the higher-end product is kept in Japan, manufactured in the traditional way of outsourcing to the specialists that are proficient in the particular aspects. In addition to this, one more factor is their fear of “collecting payment from abroad”.
The companies that have chosen to remain in Japan are finding that as time has progressed, overseas clients as well are coming back to a higher-end product because they find that quality really does make a difference in profit margin.
How those forces affect/influence the industry strategy
This necessity has affected the companies dramatically and forced them to do one of two things:
i) Move deeper into a niche market to maintain manufacturing in Japan at a higher price, but producing a product that is specialized and cannot be copied Optical Fiber Connector or produced on the mass market of Chinese manufacturing.
10) Steroids: Digital, Mobile, Personal, Virtual – these extra little tools acted as a catalyst to make the other nine flatteners extra powerful. Initially when a company wanted to place an order with a Chinese company they could get a great price, but were required to order a ridiculous amount of product, like 10,000 frames! Nobody in Japan could do that so it was extremely difficult. The Japanese system is such that everyone uses smaller companies that specialize in one or several of the 200 steps required to make the frames (brazing, plating, painting, polishing, forming, etc. and from an optical industry perspective (perhaps others as well), America seems only to want “cheaper” products. The total market surplus from this new style of business is positive and outweighs the decrease in producer surplus because the consumer surplus is greater than the loss of producer surplus. My partner/customer in France who used to buy my materials can no longer buy them because all of the manufacturers have stopped making eyeglasses in France. There is a new shift which is rewarding those niche-market players with an increase in orders for higher quality product. Europe did not invest in titanium, or niche manufacturing so when the Chinese learned from Japan how to work the material, Europe could no longer make anything that the Chinese couldn’t make at a fraction of the cost. They adjusted their strategy to purchase offshore through OEMs in China rather than make them in Japan at the higher prices.
China does have a definite comparative advantage in terms of economies of scale.
Many Japanese manufacturers went bankrupt and those that survived either did so because they moved to niche manufacturing for a smaller market, or they OUTSOURCED their manufacturing to companies in China.
In the optical industry offshoring their entire process through developing a new factory in a foreign land in order to compete is a very new way of thinking for the manufacturers / suppliers of eyeglasses to the global market.
In order to overcome this, the companies that could afford to do so have started OFFSHORING their business by either building their own factories in China and managing themselves, or working with an existing Chinese manufacturer but sending Japanese people over to manage the production of their product.
8) Insourcing – logistics was born and transport companies redesigned themselves to look after entire parts of companies that had some relation to moving product from A to B. The market wins. Now China has positioned themselves to take even THAT market.
Japanese manufacturing is very high quality (the rest of the world cannot attain the quality of the manufacturers here for eyeglasses), but also very expensive because in this little industry, we do not use production-line manufacturing. It has become necessary, and essential for survival for the frame manufacturers without a manufacturing competitive advantage.).
ii) Accept a lower quality product at a lower price point to take a larger market share. This requires developing relations with other companies that have connections to such overseas manufacturers (as in France).
Outsourcing is not a new concept in optical manufacturing in Japan.
2) Netscape’s IPO (1995/08/09) – this started the dot boom which led to a huge amount of companies getting funds for crazy projects, laying tons of fiberoptic cable around the world, and basically laying the foundation for extremely cheap broadband connections with the world.
The most important flatteners affecting the optical industry today
The largest market for eyeglasses is the U. Japan had the competitive advantage of being able to work titanium and titanium alloy materials which are in high demand for eyeglasses in the world.
Because of these factors many companies are afraid to do outsourcing directly.