Written by Mickey Matthews
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In a recent article, “On Leadership”, we analysed many of the divergent forces influencing the worldwide manufacturing sector and the significant impacts that a progressive and sustainable manufacturing capability plays in the global economy.
The major conclusion was that a healthy manufacturing sector is, quite possibly, the key ingredient for sustained growth on a local or regional basis; whether it serves in the developing world to raise incomes and living standards, or in the developed world to stimulate innovation, competitiveness and productivity growth.
Now, at the start of this new year, it remains clear that the analysis of the impact of manufacturing must be broad and deep as currently almost a full 20 percent of “service industry” jobs have their roots in manufacturing (R&D, customer service, finance, administrative, etc.).
One recent report from global investment firm, T. Rowe Price indicates some very intriguing trends that could very well benefit the manufacturing sector, specifically in the US.
As we know, for the past three decades the practice for American corporations has been to outsource manufacturing to countries where wages, insurance, real estate, and overall costs were significantly lower.
But according to the author, Brian Berghuis, Manager for the T. Rowe Price Mid-Cap Growth Fund, this “cost-benefit” equation is changing. He cites rising wage pressures in Asia and risks (such as the tsunami/nuclear disaster in Japan) that are encouraging many firms to “in-source” factory production back to home.
Other factors contributing to this “re-shoring” include:
- Flexible labor markets with improved wage competitiveness
- Lower energy costs, due to a revolution in new drilling technologies stimulating much higher projected natural gas drilling in the US and Canada
- Greater business predictability accompanied by more stable political and legal environments
- Easier to manage and more reliable transportation and supply chain logistics
- US dollar depreciation (33 percent vs. Euro, 21 percent vs. Chinese yuan)
These factors have resulted in relocations of manufacturing capability from other developed nations, including Japan, Germany, and Canada. This same trend could continue or even escalate, according to Berghuis, if the ongoing labor talent shortage continues and labor costs in China continue to rise at the current 15-20 percent annual rate.
What is intriguing is that the renaissance of the U.S. manufacturing sector doesn’t just depend on labour costs. The US’ sophisticated supply chain and logistics networks are also factored into the cost equation. In short, proximity to markets and customers result in significant savings. China has tried to lower wages by moving many plants further inland, but the “lower wage costs may be offset by higher shipping costs and longer delivery times,” according to Berghuis.
Also of note is that manufacturing growth has a strong employment multiplier effect. Research by the Economic Policy Institute found that while industrial firms typically are the most obvious beneficiaries of a US manufacturing resurgence, this also normally generates demand for utilities, energy producers and the heightened employment will often positively impact the consumer sector – at a magnitude of 2.9 jobs created for every one manufacturing job created.
The confidence of the global financial markets further evidences the criticality and priority of the manufacturing sector worldwide. From venture capital to private equity to strategics to IPOs manufacturing companies have been aggressively pursued as acquisition targets valued as high potential and attractive investment ROI. Interestingly, the “hot targets” have been diversified and range from mechanical valves, industrial components, medical devices, and pharmaceutical companies.
Europe’s lagging economy represents another opportunity for the US manufacturing sector and recently specifically automotive suppliers. Several German, Swiss and other automobile and industrial equipment manufacturers have plans to possibly relocate to North America as a way to stay competitive; something to watch over the coming months.