Bringing Manufacturing Back To The U.S.

At the recent IEDC Conference in Charlotte, NC, I had an opportunity to participate in an event sponsored by Atlas Advertising that explored the decision process for selecting a manufacturing location. Ben Wright, CEO of Atlas Advertising, hosted a panel debate between a team representing Brand America, and a team representing Brand International.

I learned a lot about FDI from my fellow panelists, and thought I’d share some of what I found in my research preparing for the debate as well as from my conversations with panelists.

My going-in approach in preparing for the debate was to “following the money”. Doing so makes it easier to understand the dynamics of any site decision. Manufacturing is no exception. And, it is a good way to determine what a compelling value proposition looks like from the business perspective.

With that in mind, I focused my debate preparation on three key business considerations – Low labor cost, low cost of delivery to the consumer/customer, and reliable supply chain to support lean manufacturing processes.

I learned from Douglas van den Berghe, Managing Director of Investment Consulting Associates that the decision is actually far more complex. ICA has identified 12 key considerations in the decision process. Douglas was a panelist on the opposing team, so his extensive knowledge of FDI was a real advantage to Brand International.

Labor Cost

Filip Abraham authored a discussion paper that compared labor costs between Brand America and Brand E.U. over the time period of 1975 – 1998. His analysis found that, among industrialized nations, labor costs are roughly comparable. But, the data also found variances within the E.U.. But, labor costs in Scandinavia, the Benelux, Germany and Switzerland were actually substantially higher than Brand America. This highlights the need for economic development professionals to understand specifically which countries are being considered by a Company as directly competitive with Brand America for a specific manufacturing site decision.

A Report from the U.S. Bureau of Labor Statistics on hourly wages in 2009 confirms Dr. Abraham’s discussion paper findings regarding country specific variances. The Report concluded hourly wages within Brand America were actually lower than 12 countries in Brand E.U. and lower than Australia. It also provided data showing that in 1997, the index range for the 12 countries versus Brand America was -24% to +29% (note a few were lower cost than Brand America in 1997). And, in 2009 the index ranged from +3% to +61%. This suggests the rate of cost increase in the 12 countries is meaningfully greater than Brand America over the same time period.

Delivery Cost

Dr. Anderson author of the book “Build to Order & Mass Customization” wrote a nice piece on off-shoring to save costs. His observation was that most of the time the business objective is not met. In fact, in many cases Companies realized an increase in total delivered cost.

On top of that, crude oil prices are rising, and is increasingly more of a margin reducer than cost of labor. Given the insatiable desire for crude oil as an energy source, this trend doesn’t seem to be changing any time soon.

Supply Chain Reliability

Toyota recently reminded the world about the negative impact a disaster can have on supply chain performance. Robert Handfield [hot link to http://www.businessofgovernment.org/bio/robert-handfield] authored an industry issues paper that suggests supply chain unreliability can reduce shareholder value as much as 8% to 10% or more.

Conclusion

My debate position was simple:

  1. Workers outside the U.S. are getting more expensive.
  2. Shipping costs continue to increase.
  3. Global supply chains have demonstrated they are at risk of both natural and man-made disasters.

Outcome

Team Brand America was voted by the audience as the debate winner. But, I’d be misleading if I left you with the thought that our facts and figures were more compelling. Like any real life capital investment decision the victory was determined based on emotional not rational arguments. In a desperate last minute attempt we included ponies for all executives in our financial incentive package, and the audience voted Team Brand America the winner. Obviously, and luckily, the debate was all in good fun.

Special thanks to Atlas Advertising for engaging the economic development profession in thinking about how to more effectively compete for capital investment in the manufacturing sector. And to my fellow teammates who came up with the pony’s strategy – simply brilliant!

What Are Your Thoughts?

Does re-shoring manufacturing offer your community an opportunity for job growth? If yes, is there anything special you are doing to compete for it? What is your community’s value proposition for a manufacturer? What is your equivalent of our Team’s pony’s offering?

Pay it Forward

If you liked this blog post forward it to a friend. If you have a Facebook account, become a fan of Strengthening Brand America. If you are a LinkedIn user, join the Strengthening Brand America Group. If you like twitter, follow BrandAmerica to keep track of updates on this website.

What do you think of this post?
  • Awesome (0)
  • Interesting (0)
  • Useful (0)
  • Boring (0)
  • Sucks (0)

12 Comments  |   Forward this to a friend Forward this to a friend   |   Number of emails sent: 542

Category FDI

Bookmark and Share

You can follow any responses to this entry through the RSS 2.0 feed.

12 Comments so far

  1. David Fortune

    September 23, 2011

    I noticed the stats only show up to 1998! I am curious how they look today Say from 2000 to 2011? I strongly feel that due to lack of manufacturing in the U.S. Is a direct cause of what is happening in our country today.I wonder daily why our government doesn’t focus more on bringing our manufacturing back to the U.S.. Instead of taking more from the working class,Education & the elderly ! I am truly worried about where our country is going this day ! Its like our government is saying we are going to shoot you in the foot ! Then they ask the question which foot would you like it? There is no choice either way you are going to get hurt so does it really matter? To me it does! I would rather not be shot! Especially by those who supposedly working for me. The last time I checked we pay them right ? Thanks David Fortune

  2. Ed Burghard

    September 23, 2011

    Abraham’s comparative analysis covered 1975 – 1998. The US Bureau of Labor and Statistics gives a comparative glimpse at 2009. Hopefully other readers will provide links to even more current data sets and published analyses. One challenge in doing reliable comparisons is the need to use standardized data bases that tend to be in arrears.

    But, so I at least try and meet your information request I did find a European Report with a table that compares more recent data sets.

    In table I.1.4 of the following Report, Unit Labor Costs for the EU27 declined -0.2 in 2010 versus 2009 compared to a -0.5 for the US over the same time period.

    To read the Report, Google – “Labour Market Developments in Europe, 2011”

  3. Norm Mayall

    September 24, 2011

  4. Sara Dunnigan

    September 25, 2011

    Ed, I think the cost analysis you’ve presented assumes we’re rational consumers and as you I talked, we are not. C-level execs move production into markets for many reasons, but it’s at some level an emotional decision. In some cases, I’ve seen companies go “because everyone else is doing it”, even when they’re not ready and it’s not the right choice for them. So, I feel in time when the facts and the emotions catch up with each other, we’ll see a shift back.

    For now, I’ve got ponies.

  5. Jim Muldoon

    September 25, 2011

    Ed, Great discussion – There is always going to be the emotional part of a decision. The numbers will drive the ultimate decision. Companies again are re-thinking – can we be competitive in the US? They are again looking at the cost throughout the supply chain. I look for the value placed on on transit time and costs attributed to downtime due to unreliable power.
    Re-shoring is gaining momentum for manufacturing. Delay is costly to the bottom line. I have had over a dozen executive conversations this month, so it is on the forefront as they approach 2012 strategic planning season- One group said COGS – year to year – 2010 vs 2011 same product same volume – increased $6 Million from China

  6. Edward Burghard

    September 25, 2011

    @Sarah – I think the facts keep your community in the consideration set and emotion wins the deal. The challenge is that the emotion needs to be established prior to the actual moment of decision. One way is through a sustained, consistent and effective community branding effort. If you don’t invest in branding your community, then you need to make certain your sales process is designed to establish a strong emotional connection with the capital investor. This can be very challenging when the decision maker may be relying on a Team to sort through the options and is not personally engaged with your community. I think important decisions will always be made on emotion and rationalized with facts.

  7. John Erskine

    September 26, 2011

    Excellent piece, Ed!

    Lots of relevance on this side of the pond too for companies and economic development professionals looking at the costs and benefits of re-shoring.

  8. Julie Howard

    September 26, 2011

    Here’s an article about a manufacturer who found it made sense to bring manufacturing back to the U.S. He is finding that there is pent up demand for more items made domestically for a number of reasons.

    http://www.prweb.com/releases/2011/9/prweb8821081.htm

  9. Ed Burghard

    September 27, 2011

  10. Lloyd Conway

    September 27, 2011

    It makes sense because the world is not flat. It’s going to get hilly. Economic contraction often leads to trade wars, and that scenario favors reshoring. Controlling one’s supply chain, whether through de facto or actual vertical integration, will make economic sense. Wartime necessity also favors making things in-house, as imports are subject to enemy interdiction. Finally, rising energy prices over the long term will make shipping goods more expensive, favoring localization of production and consumption. To summarize, a world that is more dangerous, less trusting and more expensive to move across is one ripe for a reshoring revolution.
    (reposted from Linkedin)

  11. Michael V Franchell

    October 3, 2011

    Focus of Economic Development for Upstate NY Needs to Change
    by Michael V. Franchell, Mel E. Ross, Harvey Price

    Upstate economy has been declining since the early 70s and the outmigration of our population continues. Apparently our funding approach has not worked. Why has it failed? It has not included community small businesses and it has been to narrow. In 2006 New York had the second highest amount of grant money in the US. The results of the 4 billion dollars has yet to be seen. Somehow in the past 20 years creativity seemed to have been captured by the Universities and that the billions of dollars pouring in as grant money was to create new concepts and new ideas and possibly new products. The simple fact is a University only has a few great ideas and the rest of the concepts will never crate enough jobs. It is often the case where a brilliant idea lacks the pragmatic experience to implement the concept. We would recommend a two pronged approach of funding both Universities and community small businesses. We have avoided funding the largest segment of society that creates most of our new jobs and that is the community based small business.
    The data from the SBA and the Kaufman Foundation clearly points out that the small firms and startups are the key to reinvigorating our economy.
    Small firms have a very important role in our economic growth:
    • Represent 99.7 percent of all employer firms.
    • Employ just over half of all private sector employees.
    • Pay 44 percent of total U.S. private payroll.
    • Have generated 64 percent of net new jobs over the past 15 years.
    • Create more than half of the nonfarm private gross domestic product (GDP).
    • Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
    • Are 52 percent home-based and 2 percent franchises.
    • Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007. NY ranks 3rd in the value of exports by small businesses, over $58 billion. NY exports increased 16.8% in 2010.
    • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited. NY ranked 3rd in patents awarded.
    • NY’s entrepreneurial income, despite the recession, increased 16% between 2000 and 2009.
    • Two million small businesses in NY, 7% of national total, are located in every region, community and neighborhood contributing to making NY a great place to live and conduct business.
    • Small Businesses employ 51.5% of NY non-farm, private sector workforce in 2008.
    • NYs real gross state product increased 1.6% in 2009 while U.S. GDP grew just 0.7%
    • 537,838 minority-owned businesses and 594,492 women-owned businesses in NY

    A manufacturing renaissance will reverse our economic trends. Manufacturing brings higher job multiples than any other type of industry so we need to focus our energy and intellectual talent on creating more manufacturing jobs that will stimulate additional community jobs.
    Products made in China have an uncertain future. It is historically understandable that as China’s middle class grows so will the social unrest grow and that unrest will disrupt their manufacturing base that has been dependent upon low paid employees. The perfect corollary is Lenin did not want the peasants to own farms because they would then become members of the bourgeois. China is creating many new members of the bourgeois and they in turn will demand more freedom. The issues of social unrest, higher labor and fuel costs combined with mediocre product quality create an opportunity for Upstate NY.
    What Do We Change?
    Recognize the value of small business and fund entrepreneurs with GAP funding just as you would provide grant money for research. Use a not-for-profit such as the Community Based Business Incubator Center, Inc ™Incubator and make it wall-less so it can cover the entire geography of our area.
    Provide mentors who are real entrepreneurs with experience to back them up. Provide our local entrepreneurs with computers and appropriate software that you can communicate to so we can help them overcome the obstacles that are holding them back. Have a team of Entrepreneurial Advocates trained to help them move through the process of starting a company and charge them nothing. Accelerating economic development will happen when this approach is utilized.
    Mayor Michael Bloomberg summarized the concept. “The essence of innovation is you don’t know what you’re going to build, what it’s going to be called , how much it’s going to cost.”
    Summary
    Central NY can become the hub of new manufacturing facilities because it is close to major north American markets. From a transportation perspective our target cities for our locally produced products would be: Albany, Boston, Buffalo, Cleveland, New York City, Montreal, Philadelphia, Pittsburg and Toronto by ground transportation. For international distribution we can ship out of the ports of Albany, New York City or Boston.
    Upstate can be a thriving growing region again because we have the land, the housing and the knowledgeable labor to create new innovative manufacturing facilities that will enhance the wealth of our local communities. What we lack is capital and vision to create the new economy and our next new job. The chart below illustrates how our concept will boost the economic development cycle in Upstate.

    We can rapidly grow our new companies if we commit to the idea. If we continue to use the same ideas with the same people then you will get the same results.

    Sources (see the Office of Advocacy’s Research and Statistics page):
    • U.S. Dept. of Commerce, Bureau of the Census and International Trade Admin.
    • Advocacy-funded research by Kathryn Kobe, 2007
    • CHI Research, 2003
    • U.S. Dept. of Labor, Bureau of Labor Statistics.
    • Slide Presentation by Jim L. King State Director of SBA.
    • Original concept: “The Virtuous Cycle” by McKenzie & Company Modified by George Huang, (http://IDEASolutions.biz
    • Harvard Business Review: Wanted: A First National Bank of Innovations by Edmund S Phelps and Leo M. Tillman

    Michael V Franchell is the Executive Director for the Community Based Business Incubator Center, Inc™. Contact him at mikef@cbbic.org
    Mel E. Ross is the Chief Financial Officer for the Community Based Business Incubator Center, Inc™. Contact him at mross3@rochester.rr.com
    Harvey Price is a Board Member for the Community Based Business Incubator Center, Inc™. Contact him at hprice@nycap.rr.com

  12. Dean Barber

    July 16, 2012

    Lot a hype going on right now about re-shoring, citing examples of GE and Caterpillar, which did not result in capacity being closed in foreign markets but rather was management re-thinking where it wanted to shift production to meet increased demand in North America.

    The fact is that off-shoring continues and re-shoring will probably represent only a net-zero gain in terms of jobs won/lost.

    And while China is getting more expensive for manufacturing, watch production shift to other Asian countries such as Vietnam, Thailand, and the Phillipines, which won’t help American workers.

    Sorry to burst your bubble.

12 Responses to “Bringing Manufacturing Back To The U.S.”




XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

By submitting a comment here you grant Strengthening Brand America a perpetual license to reproduce your words and name/web site in attribution. Inappropriate comments will be removed at admin's discretion.

SBA Blog