Editor's Note: CR4 would like to thank Bruce Martin of GEA Consulting for contributing this blog entry.

For residential non-ducted split units, PTACS and similar HVAC products, imports have significantly replaced made-in-U.S. products sold in the U.S. market. In the case of residential non-ducted split units, there was not even much of a market in the U.S. (perhaps in Puerto Rico) before the imported products were available. For other HVAC products, there has been little substitution. So then made-in-China products may have replaced your made-in-U.S. exports (to China) or other markets, but haven't dented your sales in the U.S.

(Whether your U.S. competitors' sourcing components from China has affected your sales in the U.S. is a topic for another blog!)

Initially, if your company opened a factory in China the output from that China factory was sold domestically. My experience is that increased sales to the non-import local market serve to increase a company's imports, not decrease them.

New, small companies or developing countries have typically been accused of competing unfairly against older, larger companies or developed countries. Hey, what did the British think about the low-priced textiles from the American colonies who paid no attention to OSHA or environmental damage, paid little or no (local) tax, had no pensions, had no holidays off and even used slave labor? How could the Manchester spinning mills compete? The answer is history.

Disruptive events in ostensibly free markets require new strategies and tactics from players in those markets - not complaints. Complaints, retaliation, even war may delay effects but seldom, if ever, reverse the disruptive events.

Beyond such historical inevitabilities, what are the reasons a made-in-China product would replace your own sales in markets outside of the U.S.?

Lower price due to cheap labor in China is the usual or perhaps unanimous answer to the question.

Price is never the only consideration. It is always weighed against other product benefits (or lack of). Customers or salespersons or anyone else who states that "it is only price" should then just be invited to provide a bag of air for a price somewhat lower than competitors' price for the desired product.

A general observation, until now, is that middle to high end customers will pay 15-20% more for a made-in-U.S. product compared to a made-in-China (or some other developing countries) product. Stated another way; for customers to prefer made-in-China products, they require a 20% or greater price discount. Even within China this is true. Interestingly, the discount demanded increases as the level of the country's development decreases.

Note that U.S. producers should be concerned that if China's production reputation improves over time (ala Taiwan, Korea, Japan) then the price discount demanded will decrease. This is a moving target!!

We can usually assume that (so far) product features, quality, service, application information, installation references and performance data are not reasons why customers have switched from your made-in-U.S. products to made-in-China products!

Then the only reason remaining for customers to prefer China-made products is those products' low price, which you assume is due to low wages leading to low costs. Right? And those low wages are just an unfair, disruptive event in history that must be accepted. Right?

Are you sure your product has a cost disadvantage? Or are you overlooking some non-product cost issues which can affect your product's selling price much more?

Stay tuned for a discussion on the non-product cost issues that may have far more importance to the final product then the labor side.