China and other countries with low-cost labor are putting enormous pressure on the tool and die industry in Japan, North America, and Western Europe. As one manufacturing executive recently told us, "I can get tooling in China for half the cost and one-third the time; how can I not buy from them?" The result is a growing threat to the survival of toolmakers in the developed world (see Exhibit 1 for this trend’s effect on the German market). Our research shows that although these toolmakers can hold off their low-cost competitors in the short term, to endure and thrive they will have to offer a broader array of services to their large customers.¹

Several factors contribute to the uncertainty ahead. First, in Japan, North America, and Western Europe, toolmakers are typically independent, family-owned enterprises with annual revenues of less than €500 million. Second, their main customers are automobile manufacturers, for which they develop mostly one-of-a-kind products, such as equipment to form doors for specific auto models. Last, the market is quite fragmented: one company might do tooling for structural stampings, say, while another handled surface parts and a third specialized in software for milling complex...