Return of the makers?
The USA has created 520,000 new manufacturing jobs since January 2010 and I was keen to understand if “Re-shoring” – the much talked about trend for moving manufacturing jobs back from developing economies – was driving a manufacturing renaissance. The potential impact of re-shoring could be huge: The Economist magazine recently suggested 85 million jobs might be available for relocation and I was very keen to see for myself. So, Diana Ross songs loaded on my ipod, I recently spent a week meeting with Ernst & Young clients in Detroit and the surrounding area.
Detroit was an eye opener: major industrial companies around every corner. The UK certainly has no comparable industrial base. Racing up and down the freeways, in a series of meetings and multi-client events, we met and debated with around 100 senior executives from 40 different companies. “Cautious optimism” is how I would describe the mood amongst these industrialists. There is no doubt momentum is gradually building in an economy that feels very different to the situation in Europe. So what is happening beneath the bonnet in Motor City?
Changes on the assembly line
The nature and location of manufacturing around the world has undergone dramatic change in the last two decades driven by the search by manufacturers from mature western markets for low cost production locations, based primarily on relatively low local wage rates. The result has been a major shift of production from the United States and Europe to lower cost destinations, such as China. America today has almost 6 million less manufacturing jobs than it did in 2000.
In this period, many developing countries became major exporters and as a result their local economies grew rapidly. At the same time, western economies benefitted from dramatic falls in the cost of goods. However, economies are dynamic entities, and it is clear that a shift is now underway, driven by several factors:
- Wage rises in previously low cost destinations, but especially China, continue to race ahead of those in the West. This is relative, not absolute, but nevertheless significant.
- The emergence of shale gas is having a dramatic effect on US cost competitiveness. The consensus was that US natural gas costs might soon be only one quarter of those of Europe.
- Natural disasters such as the Tsunami and Japanese earthquake exposed supply chains as being less resilient than was previously thought;
However, the most significant changes driving business organisation and location decisions are strategic and reflect new thinking.
- I spent much of the week listening to major US manufacturers explaining that offshoring had reduced their ability to innovate by breaking up value chains across geographies and reducing collaboration and informal interaction. This is classic theory of the firm economics by Coase from more than 50 years ago, but it is now critical as businesses seek to achieve higher levels of productivity than low wages alone can deliver.
- The modern customer in developed or developing markets requires greater choice and responsiveness, hence business needs to manufacture relatively close to demand. Having manufacturing centralised in one low cost location is not always a profit maximising solution, reducing time to market, flexibility, and the ability to maximise price.
Capital and labour on the move …but not into Europe
Some classic vinyl safely packed in my bag, the flight home was a time to reflect. I went to Detroit to understand the “re-shoring” of labour, but what I found is that both capital and labour are on the move in search of the optimal model to satisfy demand, achieve low costs and drive innovation. China is becoming a location to manufacture for China. The rest of Asia and Latin America are increasingly popular locations for manufacturing for nearby markets – part of a collaborative supply chain with the higher value ends of the process like design based in a linked mature market such as the USA or Japan .
The US based Institute for Re-shoring estimates 50,000 of the 520,000 jobs created in the USA since 2010 are “re-shored”. We are clearly at a very early stage, but the potential is there. The return of manufacturing will not replace the jobs lost in the last decade: the new manufacturing model in the USA will be based on enhanced levels of automation. In contrast to the UK, where labour seems to be increasingly being used as a substitute for capital investment (at least temporarily), America is investing to reduce labour costs.
Only a fraction of the jobs leaving China will reach the west. In every meeting in Detroit we discussed Indonesia’s potential both as a market and production location in depth. Columbia, Chile, Peru, Vietnam, Malaysia and Thailand were also top of mind. By contrast, in only one meeting was I asked about the UK, and the discussions about Europe were exclusively on the lines of how to solve a problem, and definitely not how to exploit an opportunity. One executive summed up this recurring theme: “Europe is in danger of becoming a continent where both labour and capital are fixed costs.”
Even the relocation of car manufacturing from Northern Europe to Spain was viewed as the ‘least bad’ option rather than as a positive development reflecting economic reform. Without doubt, US manufacturers are actively reviewing their European portfolios and new investment is not currently on the agenda.
America is on the move but the challenge facing Europe is even greater than I realised. The programme of reform may well fix the macroeconomic challenges Europe faces but in the process there has to be a risk that it may starve the continent of investment and fail a generation unable to find work. External investors see Europe as being characterised by weak demand and uncompetitive supply. This situation is getting worse as labour is underemployed and investment is turning away – my week in Detroit opened by eyes to how urgently action is required in Europe to reform the economy.