Dean Barber

Supply Chain Vulnerabilities May Prompt U.S. Investment

In Uncategorized on March 18, 2011 at 4:14 pm

They are called “supply chains” for a reason.

 When a link is broken in a supply chain, people, companies and commerce are affected downstream.

 Time will tell if the disastrous events in Japan, also linked to one another, will have a deleterious effect on the economic recovery now taking place in the United States.

There have been dire predictions, but leave it to say that when the third largest economy in the world takes a hit of this magnitude, there will be ramications elsewhere. And for the United States, it will be more than a run on potassium iodide pills on the West Coast.

Most of Japan’s automakers and parts suppliers halted domestic production after the earthquake and tsunami, as they grappled with supply shortages, damaged facilities and power outages.

As a result of the disrupted supply, General Motors announced that it would shut down its Shreveport, Louisiana truck plant for at least one week, because it is unable to get certain critical parts sourced in Japan.

A spokesman for General Motors Co.’s European subsidiary Opel says a shortage of electronic parts from Japan will force the company to halt car production at plants in Germany and Spain next week.

Apple Inc. says it may face shortages of key components for its newly-released iPad 2 as a result of the earthquake in Japan.

A Vulnerable Three-Tiered System

Most global IT companies have a three-tiered supply network. Japan supplies the materials and core components, Taiwanese and Korean companies import them and turn them into intermediate goods, and manufacturers in China and Korea assemble them into finished products.

So when Japanese parts and materials makers face shutdown, which has happened, the global supply network is disrupted. Companies get hurt. People get hurt.

 The severity of the economic impact of broken supply chains is anyone’s guess right now. I don’t believe this will spark a second phase or a double dip recession. These problems will be worked through, but not without pain. Plant shutdowns are always painful.

 But it does highlight vulnerability. When a supply chain is long and complicated, there are more chances for problems to arise.

It is specifically for that reason of vulnerability that some manufacturing may “re-shore” – that is bring back, re-establish and invest in manufacturing operations in the United States. I believe this is inevitable.

Ultimately, these are decisions are based on risk management and cost. This is especially true at a time when fuel prices are again spiking as the world economy recovers and labor costs in Asia are rising.

Tim Feemster, senior vice president and director of global logistics at Grubb & Ellis Company, says more U.S.-based manufacturers will return operations domestically in a re-shoring trend after weighing all the costs and the risks involved.

 “Many of them would like to be in Mexico were it not for the ongoing violence that is now taking place there,” he said.

 Feemster said the big question is whether a  trend of manufacturing returning to the United States “will be a trickle or a flood, and at this point, we just don’t know.”

Manufacturing Is Not Out for the Count

 What is clear is that manufacturing is far from dead in the United States. Indeed, it is more efficient than ever.

 Which brings me to my next related topic.

 While the world has been rightly focused on a series of disastrous events in Japan, a little noticed report came out last week that confirms a sea change that most of us may have been sensing.

After more than 100 years of dominance, the United States gave away its place as the world’s top manufacturer to China last year, according to data released by IHS Global Insight.

China accounted for 19.8 percent of global manufacturing in 2010, compared with 19.4 percent for the U.S. — $1.995 trillion worth, compared with $1.952 trillion, according to IHS. Japan remained a distant third last year, generating $1.027 trillion by manufacturing, followed by Germany, with $618 billion.

No Hand Wringing Please

Before you start hand wringing, please understand that the U.S. remains a robust manufacturing power, despite what is going on in China. Indeed, American manufacturing remains far ahead of China in terms of productivity.

The IHS report said China required 110 million workers to produce approximately the same amount of goods that 11.5 million American workers could produce.  You may want to read that again.

In 2009, productivity in U.S. manufacturing increased by 7.7 percent, more than any other country followed by the Bureau of Labor Statistics.

Many of us don’t see many of the things made in America because retail has been flooded with consumer goods made abroad in which American labor cannot compete. Stuff like clothing, toys and electronics.

But if you were in the market for planes, machinery and semi-conductors – things that demand a high level of technology — well, you could be very well be buying made in America. Because it is in these areas where in expertise, technology and innovation take a front seat and labor rates take a back seat.

Gobbling Up the Low Hanging Fruit

That China has so far gobbled up the low-hanging fruit of the global manufacturing sector – the low-end, labor-intensive goods – should be expected to some degree.

 Naturally, China hopes to move up the value chain and make the technology complex products, but Chinese manufacturing continues to lag in technology, quality control, managerial and engineering expertise, areas where U.S. manufacturing continues to improve.

And with the acceleration of technological manufacturing processes, the cost of labor – China’s big advantage – becomes increasingly irrelevant. Moreover, the challenge for America, one that will require a partnership between government, education and business, is to keep pace with the changing skills required by manufacturing by having an educated workforce equal to the task. This is paramount if the United States is to remain a global power.

 But the hard if not simple truth is that fewer people will be needed to man future manufacturing plants in the U.S. because of innovation, automation and high-tech investments. Indeed, in the future, robots will be doing much of the work being done by people today.

But those “survivors” who will be left on the island, those people who will be inside the plants to ensure that all the automation and equipment is working according to purpose, will be super skilled and probably making very good money.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com

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  1. I hope you’re correct Dean. It will be nice to see some of the business start coming back to the U.S. instead of headed to other parts of the world. Your points are well taken and well thought out. Keep up the good work Dean.

    Kerry

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