ASIMCO INTERNATIONAL CASTING COMPANY (A)
After a heated debate. Ron Martin, general manager of ASIMCO International Casting Company
(A1CC). returned to his office from a product meeting to review an inviting offer to bid on new
business. Mr. Tadayi. general manager of SAME, a new potential customer, had offered glowing
praise after his three-hour tour of AICC's operations. “I'm a foundry man. and this is one of the best
foundries 1 have visited. In many ways this plant is as good as those in Japan. We are willing to
discuss a long-term supply contract with you”.
AlCC’s sales director had observed. "This is a golden opportunity to dramatically build our sales and
reputation." In response, the operations director quickly countered, "But the product doesn't fit our
process and equipment. SAME’S 4G6 gasoline engine block is very different from our current diesel
engine castings, and I don't think our people are ready for that yet’’.
It was September 1998. and AICC. a Chinese joint venture between ASIMCO and Caterpillar, had
recently finished several major projects designed to upgrade its operations. Martin was now feeling
significant pressure to increase revenue as the Chinese plant was operating far below capacity. But
was SAME the right customer for AICC? This order might also provide the ideal opportunity to
change the molding process to a new. higher quality technology. Or should the plant’s limited
engineering resources be focused on meeting the needs of Caterpillar? Martin expected Caterpillar
to soon authorize test runs of two new products, although the annual production volumes were very
uncertain.
FOUNDRY INDUSTRY IN CHINA
Iron castings, whereby a metal object is obtained from molten metal that solidified in a mold, were
used in a wide array of market applications. In China, the industry was both large and diverse, with
many small operations to service local needs. In 1997. there were approximately 22,000 foundries
producing a total of 12 million tonnes of castings annually. (Comparable figures for the United States
were 3,000 foundries producing about 14.5 million tonnes.) Because of the shortage of investment
capital, many foundries used older technologies that were labor-intensive and delivered marginal
quality.
A major market for the foundry industry was the automotive and transportation sector. For example,
castings represented about 45 per cent of an automobile by weight, with the most technologically
complex castings being the engine block and the engine head. Most of the foundries supplying this
sector were subsidiaries of large automotive groups, termed captive foundries: these foundries
shipped most of their castings to other business units in the same auto group. Transfer prices were
typically at or below cost, w with the parent company subsidizing any foundry' losses.
One such auto group. First Auto Works (FAW), was based in Changchun, in northern China. Its 43
subsidiaries employed more than 100.000 people and produced a wide range of parts, components
and vehicles. In an effort to improve overall efficiency. FAW had started to outsource non-critical
parts. While engine manufacturing was still viewed as critical and had been retained in-house, some
industry analysts expected that even these foundry operations would soon be separated out to
encourage competition on quality and price.
FAW’s five foundries had a total capacity of 208,000 tonnes annually, although current shipments
were estimated to be only 140.000 tonnes (overcapacity was common throughout the industry). The
products of these foundries were generally simpler in design and of lower quality than castings
produced in leading foundries in Japan and the United States. Unfortunately. FAW did not have
either the equipment or technical competence (i.e., the engineering or production worker
capabilities) to produce newer, more complicated block and head castings. To address these
shortcomings, the foundries w ere gradually being upgraded to improve quality.
In contrast to many captive foundries. Komatsu Changzhou Foundry (KCF) was a major foundry in
China that had benefited from foreign investment of RMB250 million.1 In 1998. KCF had the capacity
to produce 24.000 tonnes of castings, although it too was reported to be operating at less than 50
per cent of capacity. Among its many products. KCF produced an engine casting that approached
the complexity and quality demanded for SAME'S 4G6 engine block.
Foundries capable of producing such engine castings required substantial capital investment and
usually took two to three years to build and startup operations, with key equipment for sophisticated
casting operations being imported from Germany and Japan. Operations were also very laborintensive, and worker training was a substantial undertaking, often requiring six or more months.
To protect the industry, the Chinese government historically had imposed high duties on imported
parts. These duties were expected to fall from 30 per cent to 10 per cent by 2005. But cost was not
the only challenge. Evolving environmental standards were forcing domestic manufacturers to
introduce new engine designs that reduced emissions and improved fuel economy. Naturally, these
engines were much more complex to cast than their predecessors. It was clear that if Chinese
foundries were unable to produce new designs quickly, the complex engine castings would continue
to be imported from elsewhere in the world.
ENGINE BLOCK MANUFACTURING
Design of Engine Blocks
Medium- and heavy-duty trucks and tractors favored diesel engines, while passenger cars and vans
typically used gasoline engines. Gasoline engine blocks tended to be much smaller, often weighing
less titan 1(X) kilograms, versus 150 kilograms or more for a diesel engine block (see Exhibit 1).
These basic design differences translated into much more demanding technical requirements, in
such areas as metal strength and dimensional tolerances, for gasoline engine blocks.
The tighter specifications were reflected in market prices and manufacturing challenges. The market
price for high-quality diesel engine block castings averaged at RMB8.000 per tonne, with a range of
RMB6.000 to RMB9.000 (industry practice was to quote prices by weight, not pieces). The greater
complexity of the gasoline engine blocks tended to inflate scrap rates, which translated in price
premiums of 40 per cent to 50 per cent. finally. head castings were priced on average about 25 per
cent higher than the comparable engine block.
Basic Foundry Processes
Foundry' operations for engine block production comprised several basic stops (see Exhibit 2).
1. A set of three-dimensional shapes was produced in the core-making operation. These shapes,
termed cores, were largely made of sand with a resin additive, and subsequently formed the inner
surfaces and voids of a casting. Depending on the casting design, basic cores could be assembled
into more complex shapes (e.g., piston cylinders). New core machines could be added or removed
to accommodate changes in demand or to configure new products.
2. In a parallel operation, molds were created that would later form the outer surface of the finished
casting. Molds were formed using one of two technologies: green sand process or cold core capsule
process (see Molding Process Technology). The mold was transferred to a large metal frame, called
a flask, which was used to move the mold through the remainder of the foundry' process. A molding
line was designed to accommodate a particular size of flask, and dozens of flasks were placed on
a molding line. This line was always viewed as the heart of the foundry' operations and required the
largest proportion of capital investment.
To improve efficiency, molds could be designed to create multiple copies of the same casting, with
the number being limited by the molding technology and the relative sizes of the casting and flask.
For example, several castings of a gasoline engine block or a single casting of a diesel engine block
might be produced in the same flask on a molding line.
Suppliers of molding equipment had become quite specialized because of significant product and
process differences between diesel and gasoline engine blocks. DISA, a Japanese firm, was a
frequent supplier of equipment for casting gasoline engine blocks, whereas German suppliers such
as Kunkel Wagner, provided equipment that was better suited for large, heavy diesel engine blocks.
Diesel and gasoline engine blocks were typically produced in separate foundries, or if in the same
foundry', in separate molding lines.
3. Assembled cores were transferred from core-making operations and inserted in molds (see
Exhibit 3). Next, molten metal was poured into the assembled molds. The raw material for iron
castings was prepared by mixing and melting together different grades of raw iron, foundry scrap,
steel scrap, ferroalloys and other metals. Finally, the solidified castings were extracted from the
molds, cleaned, inspected and painted before shipment to customers. Because of the size and
weight of the filled molds, little inventory was possible between the molding line and downstream
operations.
Manufacturing Challenges
Product quality and operational efficiency depended to a significant degree on three major factors:
product complexity, labor skill and process design. As the complexity of the cast¬ing increased,
more cores were needed to create the necessary- product features and voids, which also tended to
increase the likelihood of quality- problems.
The foundry process was very labor-intensive, especially in the core assembly and the cleaning of
the casting surface. In core assembly, workers bolted together a dozen or more cores, and then
placed the assembled cores into molds. While skilled workers could do this with a reasonable degree
of accuracy, new workers used additional tools to check the positioning of the cores. In developed
countries with high labor costs, such as Japan, foundries might use capital-intensive, automatic core
assembly machines to reduce labor costs and lower defects.
During assembly, workers also checked for broken cores. Again, judgment was needed, as some
broken cores could be used successfully for castings, while others, depending on the nature of the
defect, would cause a problem. Changing a broken core required additional rework and slowed
operations. Finally, process technologies could be used to improve the quality of castings and raise
productivity.
Molding Process Technology
Green Sand Technology
Green sand molding was the traditional foundry technology, whereby the mold was formed from a
mixture of silicon sand, bentonite clay and coal. The mixture was packed around a pattern, and then
compressed into the required shape using high pressure. The pattern was then removed, and its
imprint became the mold cavity into which the molten metal was poured. The mold was then
transferred to the flask to be moved through the rest of the foundry operations.
This method required highly skilled production workers, particularly when the cores were set and
assembled into the molds prior to adding the molten metal. Any deviation from specifications in the
placement of the cores resulted in dimensional defects, which could not be detected until final
inspection. Dimension defects varied dramatically, ranging from as high as 20 per cent to 50 per
cent in new' foundries, to as low as five per cent or less for basic castings at foundries in developed
countries with highly skilled workers and mature processes, such as that at Mitsubishi Japan. In
China, variable costs for materials, labor and utilities collectively amounted to about half the market
price.
Cold Core Capsule Technology
Instead of using green sand to form the exterior surface of the casting, a resin capsule could be
employed. Capsules were very similar to cores—formed of sand and resin, and produced on core
machines. However, the capsules were cured using sulfur dioxide to create a strong smooth surface.
Green sand was then used around the edges of the mold only to position the capsules. Because
both sand and capsules were now required, fewer castings were possible in molds that produced
multiple copies (sec Exhibit 4).
Given the greater strength of the capsules relative to green sand molds, cold core capsule
AICC JOINT VENTURE
The government had built a military manufacturing base in the 1970s in the central mountainous
area of Shanxi Province. Eight scattered factories, collectively1 managed by CTTTC Machining and
Manufacturing Inc. (CMMI), were built to produce tanks and military trucks. One of the factories.
Factory 5419. was a foundry designed to produce medium to large iron and steel castings for tanks
and diesel engines. Unfortunately, the factory now operated at very' low volumes with a workforce
of 2,800 people. Worker skills were limited: however, much less training was needed than for a new
workforce. The foundry also had a shortage of skilled engineers capable of directing a new product
introduction and ramp-up. While engineers were being actively recruited, it had proven difficult to
attract and retain qualified people to work and live in this remote mountainous area.
ASIMCO Technologies
Headquartered in Beijing. China. ASIMCO Technologies was formed in 1994 with total investment
of US$300 million to create a leading components manufacturer in China. The strategy was to
acquire majority positions in existing suppliers and then add capital, management and technology
to bring the acquired companies up to global standards for quality and service. By 1998. ASIMCO
was China’s third largest auto parts supplier, with 17 plants and 36 sales offices throughout China.
Management was first introduced to Factory 5419 in 1996 and spent six months evaluating the
facility and its potential. However. ASIMCO had little specific experience with foundry operations.
and the facility clearly needed investment in both advanced technology and better management
techniques. The project was presented to Caterpillar, who had been searching for an opportunity to
enter a Chinese joint venture.
Caterpillar
A U.S. Fortune 500 company. Caterpillar was recognized for the advanced design of diesel engines
and components, including castings. Engine sales generated about a quarter of the firm’s total
revenue, second only to earth-moving machinery. A company-owned foundry in the United States
produced most of the castings for the critical components in Caterpillar's diesel engines.
As one of the major engine producers in the world, management wanted to establish a presence in
China to improve access and gain market information, as well as to develop experience with local
operations. This market was expected to grow dramatically over the coming years. A joint venture
foundry was seen by Caterpillar as a test before any further expansion into Chi mu and could serve
as a backup source of supply for critical castings.
Ron Martin, who led the Caterpillar team in their search for a foundry joint venture partner in China,
explained the rationale behind the investment decision:
Caterpillar did not seek to establish a wholly- owned foundry primarily because local partners could
bring access to the market and knowledge of operating in the unique Chinese environment. An
established manufacturing operation also was expected to shorten the start-up time because a
skilled work force was already in place, which is very critical for a foundry. We visited several
potential partners with manufacturing bases in larger cities such as Beijing, Dalian and Guangzhou.
However, concerns about possible environmental regulations for foundries in larger cities forced us
to search for other sites.
What attracted these investors most was the German molding line. Purchased in the late 1970s. it
had seldom been used since. Unfortunately, despite its almost new condition, significant investment
was needed to enable the production of higher quality castings. To encourage investment. CMM1
significantly discounted the value of the molding line, other equipment, buildings and land.
Based on these factors. ASIMCO. Caterpillar and CMM1 established a joint venture, with the
agreement signed in February 1997. ASIMCO was the largest contributor of capital, and this foundry
represented one of its largest investments. Initially called the Shanxi International Casting Company,
the name was later changed to ASIMCO International Casting Company (AICC). The nature of the
joint venture also dictated that this would not be a captive foundry. In addition to potentially supplying
Caterpillar, the plant would also target the growing market in China for more complex engine
castings.
FOUNDRY INVESTMENT
A start-up team, including three people from the foundry' operations of Caterpillar (U.S.), three from
ASIMCO and seven from AICC .
started working on redesign and planning, termed technical reform. This began even before the joint
venture contract was approved by the government. Hank Sun. the engineering manager from
AS1MCO, observed:
In many ways, technical reform was more difficult and complicated than building a new facility.
Several foundry experts who worked in the Caterpillar foundry brought unique techniques and
process designs, and we had to incorporate those into the existing equipment and building.
Unfortunately, some equipment, although still functional, had to be scrapped because it did not fit
the redesigned process: some buildings also had to be demolished.
Yet, we could not simply copy Caterpillar's process design. The molding line was more technically
advanced in the U.S., and raw materials like scrap steel were of higher, more consistent quality.
Most importantly, workers and engineers in Caterpillar's foundry were more experienced and
capable. We tried to simplify AlCC’s process to match local engineering and worker skills.
Once the plan was finalized, equipment selection and design of the building renovation was started.
AICC selected major manufacturing equipment from the world’s best suppliers, putting the most
advanced industrial technology into China to date. Approximately 60 per cent of the equipment was
purchased domestically, which helped to limit the capital investment to about RMB275 million.
In addition to capital investment, Caterpillar made a five-year commitment to provide technical and
management assistance. The general manager, director of technical reform, director of operations
and a number of other experts were brought from Caterpillar foundry operations in the United States
to oversee the technical reform project and manage daily operations.
Production Ramp-Up
Production began even as new investment continued. Quality of the incoming raw materials was
particularly critical, and Caterpillar’s specifications were adopted for the supply of metal. An
experienced metallurgist from Caterpillar U.S. was assigned to visit potential suppliers to evaluate
the production process and quality control system.
The molding line was designed for medium sized engine blocks and heads. Each flask, measuring
1.2 m x 1 m x 0.45 m. was designed to carry the mold that supported a total casting weight of 150
to 300 kilograms. The molding line was expected to run at 60 molds per hour during the first year,
with a further ramp-up to 70 molds per hour by 2000.
The line restarted production in June 1998, but unfortunately, was down 70 per cent of the time for
repairs and maintenance. Engineers then predicted that downtime should fall to 25 percent over the
next year. Current workforce availability allowed for either two 10-hour shifts or three 8-hour shifts
over a five-day workweek.
Although technical reform was less than half finished, small production volumes were started in mid1998. Ron Martin explained such a strategy:
We used existing patterns to make the YC6105 engine block, which was an old and relatively simple
casting. This product had been in production for a Chinese engine company prior to upgrading the
foundry operations. While manufacturing during equipment installation and building renovation can
create problems, these conflicts can be minimized through good scheduling. We expected that it
would take at least six months to train our workers, and we wanted them to get ready for more
complex work in the near future.
To convince potential customers to contract with us, we must sell the factory first, and the best
presentation is a running factory. North American customers simply would not sign a long-term
contract until they are convinced that AICC is capable of producing high quality castings.
NEW MARKET Opportunities
AlCC’s primary target markets were domestic and foreign engine manufacturers, who would be likely
to pay a premium for high-quality products yet would benefit from lower labor costs. Early efforts
resulted in several potential Chinese and North American customers requesting a quotation to
produce an existing engine block casting already manufactured in another foundry.
To prepare a bid, the foundry would estimate production costs based on a customer-supplied
product design, which helped to determine the material, process and quality characteristics. Tighter
specifications tended to generate higher scrap rates, which in turn had to be captured in the price
quotation. The foundry also paid all development costs related to any new casting; these costs could
range from RMB75.000 to more than RMB750,000 (see Exhibit 6). By September 1998, AICC had
identified a number of potential customers and products (see Exhibit 7).
In contrast long-term contracts for new high- volume engine block castings were negotiated only
with established foundries that had a strong reputation for quality and delivery. Both the
manufacturer and foundry committed considerable lime, money and energy to develop castings for
new engines. For these reasons, engine manufacturers would initially target one supplier, which
would typically maintain the supply contract throughout the life of the engine, and later possibly add
another foundry as a supplier as the product matured.
Caterpillar's 3306
Engine Block and Head
Caterpillar had been purchasing castings for engine components from its captive foundry- in the
United States, as well as non-captive foundries in Brazil and Mexico. As an investor to AICC,
Caterpillar anticipated purchasing castings equivalent to about 30 per cent of AICC’s capacity.
However, contracts were not assured, as AICC? still had to compete against other potential
suppliers on quality, price and delivery. In 1998. AICC received a request for quotation from
Caterpillar for two castings produced in the United States and Mexico: the 3306-engine block and
the 3306 head. AICCs quotation of RMB2.200 for the engine block and RMB1.100 for the head was
based on the prices charged by the Mexican supplier.
The engine block and heads would use the same green sand molding technology that was employed
by the U.S. and Mexico foundries. Because of the size of (he castings, only a single piece (i.e., one
block or one head) could be cast in each mold. Preliminary engineering estimates indicated that an
engine block would require about 72 minutes per tonne of production time from a core machine; an
engine head would require about 130 minutes per tonne.
If the bid was accepted. AICC would proceed with detailed process design and start-up. which was
expected to take at least 12 months. AICC would assign the only two senior product engine's to
manage this start-up process because of the importance of this customer; more junior staff simply
did not have sufficient experience. Once production commenced. Caterpillar U.S. would approve
the products and process for mass production. However, annual volumes were very uncertain, as
most production might still remain in North American foundries. While marketing estimates
exceeded 7,000 tonnes annually by 2000. volumes might vary from as little as 1.000 tonnes up to
8,000 tonnes per year.
Mitsubishi’s SAME 4G6 Engine Block
The 4G6 engine was a mature design used in jeeps and light buses. The 4G6 engine block was
relatively light in weight, with tight specifications for both the metal strength and dimensional
accuracy. The engine was currently produced using green sand technology in Japan for the
Japanese market. The Japanese foundry had an excess annual capacity of 50,000 castings. Despite
the excess capacity. Mitsubishi had entered a new joint venture. SAME, to produce this engine in
China for the Chinese market.
Production from SAME’S plant was expected to commence in early 1999, and ultimately, the plant
was to assemble up to 150.000 gasoline engines, all of the 4G6 design. In order to test the new
assembly line, S.AME planned to import key components from Japan to simplify start-up. However,
higher labor and utility costs in Japan, combined with shipping costs and import duties, suggested
that imported engine blocks were likely to be at least twice the price of those potentially supplied by
a Chinese foundry.
A major task for SAME's purchasing department was to source local suppliers. Potential suppliers
for the engine block casting included FAW. KCF and AICC. The volume of engine sales in the
Chinese market varied considerably from month to month, with sales in March to May being the
highest, sometimes amounting to 50 per cent of annual sales. Engine manufacturers typically give
suppliers a three-month rolling forecast for the monthly demand.
As AICC product engineers developed a preliminary process design for the bid. it became clear that
the choice of molding process technology was a major issue. The green sand and cold core capsule
processes required different patterns, and changing the process at a later point would require
significant additional investment. If green sand molding was used, four engine block castings could
be produced in each mold. Producing this large number in one mold was only feasible because the
4G6 engine block was about one-quarter of the size of diesel engine blocks such as the Caterpillar's
3306.
Alternatively, using the cold core capsule technology for the 4G6 would offer definite advantages in
terms of quality. This technology, if adopted, would be its first application in China. However,
because the capsules required additional space in the mold, only two castings could be produced
per mold. The core machines would also have to produce capsules as well as cores, which would
require about 276 minutes per tonne of production (twice that for green sand molding). If necessary,
core machines could be purchased for approximately RMB1.2 million to supplement the six core
machines currently installed .
GOING FORWARD
Martin faced several critical decisions. Should AICC continue to aggressively pursue both the
Caterpillar and Mitsubishi orders? His basic concerns centered on plant capacity, process design
and organizational capabilities. Il was not clear how the two could be managed simultaneously, and
if AICC aggressively pursued only one, which one?
In terms of the capacity. Martin was feeling intense pressure to ramp up both revenue and production
volumes to justify the recently completed capital investments. It was not clear that dropping either
potential order would be well-received by the joint venture partners. Unfortunately, the small
production volumes had generated only- very limited data on which to estimate costs.
Martin was also very concerned about how capable the molding process and people were to quality
demands of any new orders. The inherent quality advantages of the cold core capsule process
technology might smooth start-up and offer other strategic benefits. Producing the Mitsubishi 4G6
casting might provide the perfect opportunity to learn about this new technology.
Organizationally, there was a critical shortage of engineering resources. Only two experienced
senior product engineers were capable of leading new product start-up. Until now. Martin had
planned to assign them to lead the two Caterpillar products. He was not confident that these
engineers could address the needs of SAME too. While the Caterpillar’s U.S. foundry was willing to
provide technical support when needed for any new production, the U.S. foundry did not produce a
small engine block similar to the 4G6. If AICC experienced problems during start-up. how would
they be overcome?