"Re-shoring"
Sydney M. Williams
In spite of the President’s policies, protectionists in Congress and efforts of organized labor, manufacturing appears to be returning to our shores. At least that is the conclusion of a study performed by the Boston Consulting Group (BCG) that was released last Friday. Scott Paul, executive director of the Alliance for American Manufacturing, says, “It’s a trickle, not a trend – but clearly companies are thinking more about it.”
An article in Friday’s Wall Street Journal, mentioned that Otis Elevator was moving production from Nogales, Mexico to a new plant in Florence, South Carolina. The article also mentioned that Master Lock Co. of Milwaukee is moving some production back to the U.S. from China, as is Ford. Even General Electric, the scourge of the Tea Party for paying no income tax and for moving a few executives in its X-Ray Division to China, is opening an “appliance park” in Lexington, Kentucky where it plans to produce energy-efficient electric water heaters that it used to assemble in China. In 2009, NCR moved its ATM manufacturing facility from China to Columbus, Georgia. The retired CEO of GF AgieCharmilles, Harry Moser, has formed a group named “Re-shoring Initiative” to wean companies from reflexively sending manufacturing operations overseas.
The weekend edition of the Financial Times reported that over the past decade, the United States’ share of global manufacturing declined from 27% to 19%, while that of China rose from 7% to 19.7%. According to the Boston Consulting Group about 5.7 million manufacturing jobs have been lost over the past decade to off-shoring. Their report suggests that approximately 3 million jobs could potentially be created by 2020 because of re-shoring. The BCG report identifies seven industries where rising costs in China, along with the increased competitiveness of the U.S., make it economically rewarding to operate plants in North America: electrical appliances, furniture, car parts, electronics, basic metals, machinery and plastics. One common factor in those seven industries is that labor has become a diminishing percent of total costs.
Over the past two or three decades, significantly lower labor costs in emerging countries caused labor-intensive industries to move manufacturing facilities overseas. As technology proliferated, leading to enhanced productivity, and as labor costs differentials narrowed, a few companies have begun returning home. Factors influencing this trend, according to the BCG report, include a narrowing of the wage gap; a stronger Yuan; delivery responsiveness, which is a reflection of just-in-time delivery requests on the part of wholesalers and retailers, and the proximity to engineering staff making design revisions simpler.
Augmenting this development has been the growing number of states that have implemented “right to work” legislation. There are now twenty-two such states, with Indiana and Ohio now considering such legislation. The legislation is opposed by unions for the obvious reason that it deprives their leadership of dues. In a non right-to-work state, workers may choose not to join a union, but they still can be required to pay union dues, a violation of their civil rights, as much of the money is used to support political candidates friendly to unions.
Free market capitalism does resolve issues, perhaps not always on the timeline preferred by government interventionists, but it works. The movement toward right-to-work legislation is a direct response of the globalization of the workforce. There are those who argue that mercantilist states, such as China or Brazil, have an advantage over their capitalist competitors. Certainly their governments provide financial support and serve up protectionist barriers, but no bureaucratic-ridden business is as efficient as the market place. Businesses in capitalist societies are owned by their equity holders; so they will find a way or they will fail.
Unions, which played a critical role in organizing labor in the dark days of the 1930s and ‘40s by demanding improved wages, benefits and safety provisions, were in part responsible for the off-shoring of manufacturing. Their entreaties, especially for healthcare and retirement benefits became unrealistic in a world in which the workforce was global. They failed to recognize that competition was no longer between the Midwest and the Sunbelt, but was between Mexico, China, India and Brazil and the United States. Their blindness to a changing world, abetted by a federal government equally blind, bankrupted the steel and auto businesses – or nearly so. Many workers, companies and a growing number of right-to-work states are now addressing that self-inflicted wound.
What the BCG report shows is that the world is constantly in motion. Schumpeter’s theory of creative destruction does work, at times against us and at other times to our advantage. The twenty-two right-to-work states have been creating jobs at a far faster pace than those that provide no such rights and have been the principal beneficiaries of re-shoring. According to the Bureau of Economic Analysis (BEA), eight of the ten states that showed the greatest percentage of growth in GDP between 2000 and 2010 were right-to-work states. Conversely, eight of the ten states that showed the smallest percentage of growth in GDP were compulsory union states. But it is beyond just jobs. According to a CNBC survey, when it comes to a quality workforce in 2011, eighteen of the top twenty states were right-to-work states. All twenty-two of right-to-work states were in the top twenty-five. That fact has not gone unnoticed by voters. Indiana has become much more business friendly under Governor Mitch Daniels and looks to become the twenty-third right-to-work state. In two heavily unionized industrial states, Ohio and Michigan, Republicans were elected as governors in 2010. Even Illinois, home of the President, had a close election with the Democrat, Pat Quinn just nosing out Republican Bill Brady by about 8000 votes.
Free trade encourages the relatively free flow of money and goods to those areas where money can earn the highest risk adjusted return and where goods, on a quality-adjusted basis, can be produced most inexpensively. NAFTA greatly increased the export (as well as the import) of goods and services to Canada and Mexico. All three countries have benefited. Trade will be enhanced once Congress passes the three trade bills recently sent them by President Obama. On the other hand, should Senators Schumer and Graham be successful in pushing through their Currency Exchange Rate Oversight Act, the consequences could well be a trade war with China, deleterious to our trade with that nation and to American jobs.
The irony is that this trend toward “re-shoring” is happening despite President Obama’s attempts to shore up unions and funnel more federal money into the economy. Should this re-shoring “trickle become a trend” the President will likely adopt it as his own. We will all benefit, but such an outcome will be despite the President and his policies, not because of them.
Thought of the Day
“Re-shoring”
October 10, 2011In spite of the President’s policies, protectionists in Congress and efforts of organized labor, manufacturing appears to be returning to our shores. At least that is the conclusion of a study performed by the Boston Consulting Group (BCG) that was released last Friday. Scott Paul, executive director of the Alliance for American Manufacturing, says, “It’s a trickle, not a trend – but clearly companies are thinking more about it.”
An article in Friday’s Wall Street Journal, mentioned that Otis Elevator was moving production from Nogales, Mexico to a new plant in Florence, South Carolina. The article also mentioned that Master Lock Co. of Milwaukee is moving some production back to the U.S. from China, as is Ford. Even General Electric, the scourge of the Tea Party for paying no income tax and for moving a few executives in its X-Ray Division to China, is opening an “appliance park” in Lexington, Kentucky where it plans to produce energy-efficient electric water heaters that it used to assemble in China. In 2009, NCR moved its ATM manufacturing facility from China to Columbus, Georgia. The retired CEO of GF AgieCharmilles, Harry Moser, has formed a group named “Re-shoring Initiative” to wean companies from reflexively sending manufacturing operations overseas.
The weekend edition of the Financial Times reported that over the past decade, the United States’ share of global manufacturing declined from 27% to 19%, while that of China rose from 7% to 19.7%. According to the Boston Consulting Group about 5.7 million manufacturing jobs have been lost over the past decade to off-shoring. Their report suggests that approximately 3 million jobs could potentially be created by 2020 because of re-shoring. The BCG report identifies seven industries where rising costs in China, along with the increased competitiveness of the U.S., make it economically rewarding to operate plants in North America: electrical appliances, furniture, car parts, electronics, basic metals, machinery and plastics. One common factor in those seven industries is that labor has become a diminishing percent of total costs.
Over the past two or three decades, significantly lower labor costs in emerging countries caused labor-intensive industries to move manufacturing facilities overseas. As technology proliferated, leading to enhanced productivity, and as labor costs differentials narrowed, a few companies have begun returning home. Factors influencing this trend, according to the BCG report, include a narrowing of the wage gap; a stronger Yuan; delivery responsiveness, which is a reflection of just-in-time delivery requests on the part of wholesalers and retailers, and the proximity to engineering staff making design revisions simpler.
Augmenting this development has been the growing number of states that have implemented “right to work” legislation. There are now twenty-two such states, with Indiana and Ohio now considering such legislation. The legislation is opposed by unions for the obvious reason that it deprives their leadership of dues. In a non right-to-work state, workers may choose not to join a union, but they still can be required to pay union dues, a violation of their civil rights, as much of the money is used to support political candidates friendly to unions.
Free market capitalism does resolve issues, perhaps not always on the timeline preferred by government interventionists, but it works. The movement toward right-to-work legislation is a direct response of the globalization of the workforce. There are those who argue that mercantilist states, such as China or Brazil, have an advantage over their capitalist competitors. Certainly their governments provide financial support and serve up protectionist barriers, but no bureaucratic-ridden business is as efficient as the market place. Businesses in capitalist societies are owned by their equity holders; so they will find a way or they will fail.
Unions, which played a critical role in organizing labor in the dark days of the 1930s and ‘40s by demanding improved wages, benefits and safety provisions, were in part responsible for the off-shoring of manufacturing. Their entreaties, especially for healthcare and retirement benefits became unrealistic in a world in which the workforce was global. They failed to recognize that competition was no longer between the Midwest and the Sunbelt, but was between Mexico, China, India and Brazil and the United States. Their blindness to a changing world, abetted by a federal government equally blind, bankrupted the steel and auto businesses – or nearly so. Many workers, companies and a growing number of right-to-work states are now addressing that self-inflicted wound.
What the BCG report shows is that the world is constantly in motion. Schumpeter’s theory of creative destruction does work, at times against us and at other times to our advantage. The twenty-two right-to-work states have been creating jobs at a far faster pace than those that provide no such rights and have been the principal beneficiaries of re-shoring. According to the Bureau of Economic Analysis (BEA), eight of the ten states that showed the greatest percentage of growth in GDP between 2000 and 2010 were right-to-work states. Conversely, eight of the ten states that showed the smallest percentage of growth in GDP were compulsory union states. But it is beyond just jobs. According to a CNBC survey, when it comes to a quality workforce in 2011, eighteen of the top twenty states were right-to-work states. All twenty-two of right-to-work states were in the top twenty-five. That fact has not gone unnoticed by voters. Indiana has become much more business friendly under Governor Mitch Daniels and looks to become the twenty-third right-to-work state. In two heavily unionized industrial states, Ohio and Michigan, Republicans were elected as governors in 2010. Even Illinois, home of the President, had a close election with the Democrat, Pat Quinn just nosing out Republican Bill Brady by about 8000 votes.
Free trade encourages the relatively free flow of money and goods to those areas where money can earn the highest risk adjusted return and where goods, on a quality-adjusted basis, can be produced most inexpensively. NAFTA greatly increased the export (as well as the import) of goods and services to Canada and Mexico. All three countries have benefited. Trade will be enhanced once Congress passes the three trade bills recently sent them by President Obama. On the other hand, should Senators Schumer and Graham be successful in pushing through their Currency Exchange Rate Oversight Act, the consequences could well be a trade war with China, deleterious to our trade with that nation and to American jobs.
The irony is that this trend toward “re-shoring” is happening despite President Obama’s attempts to shore up unions and funnel more federal money into the economy. Should this re-shoring “trickle become a trend” the President will likely adopt it as his own. We will all benefit, but such an outcome will be despite the President and his policies, not because of them.
Labels: TOTD
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