A Brave New World with Wolves a Howlin’

 Sometimes a company will say something important and even surprising.  In a corporate world often characterized by press releases devoted to trivial self promotion, when a company says something meaningful, well, we tend to notice.

Toyota, the world’s biggest automaker, said something this past week that truly shocked me and got me thinking. It said it expects global production to return to normal by, get this, December.

It is no secret that the world’s biggest carmaker has been struggling, wounded with supply-chain disruptions caused by Japan’s March 11 record earthquake and tsunami. But December?

That underscores two things for me, which I am sure is not lost on manufacturing executives in this country and worldwide, particularly in the automotive industry.

1) The fragility and susceptibility of supply chains. Suddenly, companies are re-examining their long, tenuous supply lines, and giving serious consideration to bringing back certain production to the United States in order to better serve customers. In this sense, the earthquake in Japan has served as a wake up call. (See April 17 Barberbiz blog: “Why Bringing It Back Home Makes Sense.”)

2) Toyota and other Japanese automakers are hurt and possibly vulnerable to losing some market share.

The Wolves a Howlin’

We will speak on the second point first. I have to believe that Toyota became the largest carmaker in the world by being the smartest carmaker in the world. So it would be a safe bet that is a company that will recover from the injuries it received because of the devastating earthquake.

But I also have to believe, because of recent events, that the wolves are circling. The wolves are a howlin’.

“No one knows how long production will remain at about 30 to 40 percent of the usual level,” said Koji Endo, an analyst at Advanced Research Japan in Tokyo. “Customers who are not willing to wait for Japanese vehicles may switch to buying American, Korean and European cars instead.”

That notion of consumers looking at “instead” options must have Japanese automakers concerned.

The very nature of business has always been opportunistic, very wolf-like. If a competitor stumbles or shows weakness, you jump in to fill the void. Judging from what Toyota is saying and doing, there is no doubt some stumbling, bumbling and grumbling going on in Japan. And it is not just with Toyota that is feeling the pain. Honda Motor Co. and Nissan Motor Co. are struggling to restore full plant operations in Japan and at factories abroad that are running short of parts.

Nissan has had to stop production at factories inTennessee, because of uncertain availability of parts from Japan. Honda’s North American production is running at half the normal rate through May 6 due to the earthquake inJapan.

And while domestic automakers have also been adversely affected with shutdowns and slowdowns caused by shortages of Japanese-made parts, I would have to suspect that Detroit is carefully watching to see if U.S. consumers are not willing to wait to buy a certain Japanese model that may now not be so readily available.

An Industry Rebound

This all comes at a time when the auto industry has been rebounding. Consumer confidence, albeit shaky with the pain at the pump that we are all suffering, appears to be on the upswing. The jobless rate fell for a fourth straight month to a two-year low of 8.8 percent. There is a general belief that things are getting better.

Press reports from Michigan indicate that GM is considering investing up to $450 million in its technical center and powertrain plant in Warren, Michigan.

And you know that things must be getting better when Mercedes Benz and BMW are spending a combined $280 million on two Manhattan showrooms. No, that’s not a typo — $280 million on two showrooms in New York. Now that deserves a howl.

In Chattanooga, Tenn., another German automaker, Volkswagen, had a soft launch of its new $1 billion plant, which is to be officially opened on May 24. But this past Monday, a Tennessee production worker drove the first 2012 Passat off the assembly line. The new plant is expected to employ between 2,000 and 2,500 workers and make 150,000 vehicles a year.

Farther south in LaGrange, Ga., Kia has begun expanding its new $1 billion plant. Kia reported record March sales of more than 44,000 units, a 44.7-percent increase from March 2010. The company said it will hire an additional 1,000 employees at its Georgia plant, adding a third shift to support a third model.

In 2010, Kia produced 150,000 vehicles in LaGrange. This year, it predicts 260,000 vehicles will be built at the Georgia plant.

For Kia’s parent, Hyundai, things are only getting better at its Montgomery, Ala., plant, which set a monthly production record last month, as 31,730 Sonata sedans and Elantra compact sedans rolled off the assembly lines. In March, U.S. sales of the Sonata and the Elantra rose a combined 55 percent over the year-ago period. The Alabama plant is projected to produce more than 330,000 vehicles this year, topping its stated annual capacity of 300,000.

Prediction: Hyundai will build a second plant in North America.

I think it is safe to assume that part shortages in Japan are not stopping Kia and Hyundai from taking a very aggressive approach to increasing production in the U.S. By my definition, these two Korean companies are among the wolves a howlin,’  looking for any weaknesses to exploit.

A Brave New World

It may sound harsh but it is true — disasters create opportunities. The supply chain disruptions caused by the earthquake has prompted manufacturing executives to take a new, hard look at how things have been and how they could be. As such, the earthquake may have far deeper and lasting effects than Toyota playing catch up to achieve full production by the end of this year. I think it goes far beyond that.

And this is where it gets really important.

Stan Aronow, a research director in the supply chain research group at Gartner, said companies which previously shifted production to low-cost countries may pull 30 percent back to their bases by 2015.

“You’ll probably see a global redistribution of the manufacturing footprint,” said Aronow, who used to work at Intel Corp. (INTC), the world’s largest chipmaker.

Let’s read that again — a global redistribution of the manufacturing footprint. Now that is a brave new world.

Indeed, the repairing and altering of supply chains, prompted by Japan’s earthquake and surging fuel prices, may provide all the ammunition needed to spur additional business investment in the U.S. And in the end, that is a much bigger story, has much more impact to most Americans, than whether Toyota loses some market share.

Joseph Carson, director of global economic research at Alliance Bernstein LP in New York, says companies exploiting new ways to ensure cost-effective delivery of raw materials and their own goods may boost spending in the U.S. alone, beyond the 8 percent he estimates for this year, double the pace of 2010 and more than three times the projected rate of consumer demand.

“Recent events raise questions over the global supply chain and reliance on single-source suppliers,” said Carson. A shift “could add fuel for a prolonged investment cycle that would have been impossible to predict a year ago.”

No doubt this is the stuff of boardrooms worldwide. This will get interesting.

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

Why Bringing It Back Home Makes Sense

There has been much speculation and conversation of late about U.S. manufacturers considering “on-shoring” or “re-shoring,” essentially bringing production operations back home.

When I read articles on this subject, I cannot help but think of a quote from A.G. Lafley, the former CEO of Procter & Gamble, which goes to the heart of this issue.

 “The only strategy that matters is one that touches the consumer.”

This quote, provided to me by a former P&G exec Ed Burghard, is one that I periodically revisit to remind myself of certain fundamentals that should never be lost on anyone in business, but frequently is. The customer really is boss, and if you don’t provide the product or service expected, watch out.

Certain American manufacturers have learned the hard way that they could not best meet the needs of their customers with production facilities offshore, especially if their customers were here in the United States.

What It Is and What It Isn’t

And that is by definition what off-shoring is all about. It is not about moving production to another country simply to meet customer demand in that particular market. If you are making widgets for a Chinese market, which is a very big and growing market, then it might be a very smart and appropriate move to build a plant in China.  But I don’t consider that off-shoring.

Rather, off-shoring is about moving operations offshore only to later import the goods back into the U.S, which still remains the world’s largest market, to fulfill demand.

Mind you, it can work. It has worked, particularly for certain industries such as telecom. But for many U.S. manufacturers, off-shoring has not proved to be the panacea as expected.

Let’s Get Closer

A recent survey conducted by Accenture among 287 manufacturing companies identified that, in order to compete effectively, they needed to rebalance their existing supply footprint to better match with demand location. The majority of 61 percent of the respondents said they are currently considering shifting their manufacturing operations closer to customers to provide better service and to enable accelerated growth.

 “Companies are beginning to realize that having off-shored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers’ expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs,” the Accenture report said

Managing supply operations that are separated far from where demand occurs has weakened some companies’ overall operational planning, forecasting and general flexibility, while driving up costs, particularly when energy prices are soaring. In short, the off-shoring experiment for many has backfired.

It would probably not be accurate to call off-shoring a fad. Again, it does work for certain companies in certain industries. But it is also clear that there is a lot of me-too-ism in business, a lot of follow the leader because they might know something we don’t know. For many companies, these strategic moves were simply not well thought out.

For example, nearly half (49 percent) of respondents in the Accenture survey reported facing issues with cycle or delivery time, and 46 percent have experienced product quality concerns as a result of off-shored manufacturing and supply operations.

Seeking Nirvana

The simple truth is that global competition will always force factory managers to try to replace expensive workers with machines or with low-wage labor overseas. Seeking nirvana through low labor costs has been a prime reason for off-shoring. By the way, it is also been the reason why the U.S.manufacturing is as efficient as it is. Because we cannot compete in terms of labor costs, we have had to develop more efficient, more automated systems for production. The proof is in the numbers.

A recent report by HIS Global Insight 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.

The simple truth is that manufacturers in the U.S. beat sweat-shop wages in developing countries through innovation employed here at home. It is the only way we can hope to compete. It is our only chance.

But clearly it is a chance, a risk worth taking for many manufacturers who have discovered issues of quality control that is not to their (or their customers’) liking and that total costs of manufacturing off-shore turned out to be not as low as expected.

What Happened to Our Cost Savings?

For one, labor costs are rising in Asia, particularly China, where wealth is building and a middle class is being created. And on the energy front, many analysts are predicting $150 a barrel oil before the end year’s end. Any way you cut it, moving a container load of pink flamingos from a far-off plant in Shandong province in China to the U.S. and to eventually find its way into your local Tacky Wacky store (I just made that up) is going to become more expensive. That is just the way it is.

So the seemingly initial cost savings – the reason why many if not most U.S.manufacturers jumped into a off-shore strategy with both feet are no longer so big. In fact, they are diminishing. And then there are your customers, you remember them. They are those pesky, challenging people requiring better service, agility, speed, and quality.

And now it starts to dawn on you that your plant in Shandong province alone may not cut it. Indeed, if you are going to keep these customers as customers, you are going to have to bring at least some production back home.

And that is what is happening, pure and simple.

The Right Strategy

“Getting closer to the customer allows for improved flexibility to respond to uncertain mand and unknown customer requests in an agile way with fast delivery times while maintaining high quality and optimized costs,” the Accenture study said.

It may not always prove to be the lowest cost strategy, but it is the right strategy for keeping customers happy. So a rebalancing act is taking place to better match supply operations with demand locations. BMW, Nissan, Siemens, Electrolux are recent examples of companies investing hundreds of millions of dollars in this country in pursuit of a strategy that A.G. Lafley spoke about.

Yes, indeed, it’s a brand new world out there. Heck, it’s always a brand new world.

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

Let Us Keep Watch on Gathering Storm Clouds

For weeks now, I have been pointing to clear and convincing evidence that we are slowly but surely coming out of this nightmarish recession, all the while pointing out that all is still not well on Main Street.

 But there have been encouraging signs, as I have detailed in past blogs. Manufacturing is not dead and gone in this country. Far from it, manufacturing, which represents 11 percent of the U.S. economy, has posted gains for 20 months in a row now and has been a bulwark to this recovery.

 Commercial real estate is showing signs of starting to rebound, but most important, there has been job growth. All this bodes well for the future.

And while we applaud and do our best to contribute to a recovery, we nonetheless watch the darkening clouds horizon in preparation to respond to any storm that may come our way. How bad are these storm clouds? Not sure just yet, but let’s not forget they are there, at least for now.

 Thankfully, one of those dark clouds has dissipated. The shutdown of the federal government was averted. A shutdown was unlikely to have caused much damage, unless it would have been protracted over weeks. Then it would have costs billions and then its effects would have been real.

But the jabber mongers in Washington came to an agreement to reduce federal spending by $38 billion. It’s a start. But the bigger problem of deficit reduction remains to be solved.

 Then there is continuing saga of Japan. When the No. 3 economy in the world is knocked to its knees, we here in the United States will also feel the body blow in terms of supply chain disruptions. More on that in just a moment.

 And then there are rising oil prices. This is the spooky storm for me, the one I think that can do some lasting damage. But first, let us turn to our attention to Japan, where one sometimes wonders when the rising sun will rise again.

Pain to Gain?

Toyota said last week that stopping some production in its U.S. car plants would be “inevitable” after Japan’s earthquake and tsunami crippled the supply of parts.

The company also said it continues to assess the situation regarding its Japan supply base in the wake of the March 11 disaster that left the country’s industry with serious power supply problems.

“We have communicated to team members, associates and dealers here that some production interruptions in North America are likely. It’s too early to predict location or duration,” the company said.

General Motors Co., which temporarily shut down its Shreveport, La., plant for lack of parts, has more than 100 people assessing the effects of the earthquakes in Japan on the automaker’s supply chain, chief financial officer Dan Ammann said at a meeting with analysts this past week.

But Japan’s pain could eventually become our gain. I don’t like to put it that way, but it is the truth.

 A new survey released by Accenture found that 61 percent of manufacturing executives — mostly with headquarters in North America — said they are considering shifting their manufacturing footprint to be closer to centers of demand, and 59 percent said they intend to pursue new supply options. Translation: They are looking closer to home for investment opportunities.

As a site selection consultant, that is music to my ears.

When deciding where to locate manufacturing operations and supply facilities, 67 percent of respondents cited “proximity to customers/markets” as a top factor. That will especially be so with rising fuel prices.

 “There’s an opportunity for companies to be more comprehensive about the way they address risk assessment, and have more flexible supply networks, more diversified supply networks,” said Simon Ellis, practice director for supply chain strategies at IDC Manufacturing Insights, based in Framingham, Mass.

Say It Aint So

Just when companies have finally stepped up hiring, rising oil prices are threatening to halt the U.S. economy’s gains.

Some economists are now scaling back their estimates for growth this year, in part because flat wages have left households struggling to pay higher gasoline prices.

For consumers, more expensive energy siphons away money that would otherwise be used for household purchases, from cars and furniture to clothing and vacations.

Two-thirds of Americans say they expect rising gasoline prices to cause hardship for them or their families in the next six months, according to a new Associated Press-GfK Poll.

Seventy-one percent say they’re cutting back on other expenses to make up for higher pump prices. Sixty-four percent say they’re driving less. And 53 percent say they’re changing vacation plans to stay closer to home.

Energy Secretary Steven Chu said on Thursday high oil prices posed a threat to the global economy.

“The oil producer countries and the oil consuming countries are concerned because it does have an impact on a very fragile economic recovery. There is great concern,” Chu told a news conference.

This comes at a time when other prices also are on the rise. Food prices are expected to rise 3 percent to 4 percent this year, with the steepest hikes in dairy, meat and coffee. Clothing sellers are raising prices to offset soaring costs for labor in China and for raw materials like cotton.

Consumers surveyed in March for the Conference Board’s Consumer Confidence Index voiced concerns about inflation and stagnant incomes. The index fell sharply from a three-year high in February, reversing five straight months of improvement.

With oil prices rising quickly, energy companies are looking to extract more fossil fuels here in the U.S. — a boon for companies that own the rigs needed to reach domestic oil and gas.

Oil surged above $112 per barrel Friday following a drop in the dollar and worries about shipments from the world’s major oil suppliers. Some analysts are predicting prices to rise to $150 per barrel, which rings alarm bells for economists who warn the high oil prices could trigger a recession.

I don’t mean to be an alarmist, but the simple truth of the matter is that our recovery could be jeopardized by high oil prices. Let’s hope for the best on this one.

Grandma is Packing in Montana

RadioShack stores in parts of Idaho and Montana are offering free guns to first-time subscribers of satellite TV services. The guns-for-subscriptions offer is the brainchild of Steve Strand, owner of a RadioShack store in Montana’s Bitterroot Valley.

Strand said the promotional campaign has proved a sure-fire strategy to target satellite subscribers in a region that favors firearms. Subscriptions for Dish Network packages have increased threefold since he began offering freebies on pistols or shotguns.

Strand said women make up the majority of his growing customer base.

“All I can tell you is, grandma is packing a gun in Montana,” he said.

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

We Are in This Boat Together

 The tea leaves are looking better. There is a lot of money out there waiting to be invested. But there also remains a big world of hurt. 

Forgive me for the short sermon that follows, even if it is Sunday, but I will tie this back to our economy, and provide you with reasons to be encouraged, despite the good, the bad, and the ugly which I detailed in my last blog.

 In good economies and bad, and we are probably somewhere in between right now, there are those prospering and those suffering. To those who are doing well, consider those are who are not. You may view them – the jobless, the homeless, the underemployed (poor) – as somehow beneath you, as lazy, stupid, unmotivated, and undeserving. 

Now if you really believe that, there is nothing I can say to change your mind. But, nonetheless, I will submit that we are all in this boat together. You are not insulated from the circumstances of others, even if you choose to look the other way.

 This notion that we are all in this together ties directly to the economy, specifically consumer confidence, which is not what it should be. Many U.S. household continue to operate under duress. But despite the housing crisis, and it is a crisis, despite rising fuel prices, despite supply chain disruptions from Japan, the U.S. economy is clearly on the road to recovery.

In theory and in reality for that matter, a recovering economy should mean fewer people struggling. But this recovery has been tentative, with fits and starts, and consumers remain wary and cautious to say the least.

“Higher prices at the gas pump and at the grocery store have rattled consumers,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, NC.

 The Good News is Job Growth

 The good news, the most important news, is continued job growth. We’ve had it for four months in a row now. The U.S. economy added 216,000 private-sector jobs in March and the unemployment rate declined to a two-year low of 8.8 percent. The Institute for Supply Management said the manufacturing sector grew for the 20th straight month in Februrary.

 Record exports and gains in business and consumer spending are prompting companies like Chrysler to boost staff. The Auburn Hills, Michigan-based company, aiming for its first net profit since emerging from bankruptcy in 2009, plans to hire 1,000 engineers. It is also urging its dealers to hire more salesmen and service workers to help boost sales by 32 percent this year.

Auto sales, after climbing for six consecutive months, reached the highest level in more than a year in February.

In Texas, where I live, factory activity increased in March to its highest level in nearly a year. Twenty percent of Texas manufacturers reported hiring new workers compared with 8 percent reporting layoffs, according to the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey. The share of firms reporting decreases in employee workweeks fell to its lowest level since 2006.

In the latest survey by KPMG International, released last week, 68 percent of U.S. manufacturing executives expect improved business activity, and 41 percent expect employment to increase. These are people on the front lines. They should know as their business is their business. And by and large, corporate America has been sitting on tons of cash reserves, waiting to pull the trigger.

Corporate investment will rise 11 percent this year as sales pick up, following a 15 percent gain in 2010, according to a Feb. 2 report from Bank of America Merrill Lynch. Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases will be powerful spurs for capital spending. It would appear the trigger is being pulled, at least by some.

Cummins, a maker of diesel truck engines and generators, has said it may lift capital spending this year to as much as $650 million, or 79 percent higher than 2010’s $364 million. The Columbus, Indiana-based manufacturer anticipates adding about 2,500 workers, a 15 percent increase to its U.S. workforce of 16,500.

The capital-spending boom should continue this year and into next year, according to Robert Baur, chief global economist at Principal Global Investors, which manages $232.4 billion. “Companies underinvested to such an extent and for so long that there’s a great deal of catch-up to be done,” he said.

Back in the Saddle Means More Projects

So there is this general feeling for companies to get back in the saddle to take advantage of record amounts of cash generated by healthy profits. This bodes well for site selection consultants, like me, and economic development organizations, because it likely translates into increased manufacturing production, increased investment, and improved business activity. This means, for a lack of a better of the word, more “projects.”

More projects mean more companies investing capital in both existing operating facilities and future operations at new future locations. Such investment typically results, although not always, in new jobs. There is also increasing evidence that some U.S. manufacturers are taking a closer look closer to home for making such investments. The reasons are many, but include the increased cost of fuel and supply chain vulnerability.

A World of Hurt Remain

But despite the promising signs, and they are certainly there, paychecks are flat, households are getting squeezed, and 13.5 million Americans remain out of work. The housing market continues to show profound weakness. That world of hurt is all too real.

Rising foreclosures are swelling the number of houses on the market, which may put additional pressure on prices in coming months. At the same time, a further decline in home values (and they keep falling in most markets) may keep potential buyers on the sidelines as they foresee better deals, hurting construction and consumer spending as owners’ equity evaporates.

“Prices will continue to move downward probably for the rest of the year,” said David Semmens, an economist at Standard Chartered Bank in New York. “They won’t turn around until you have consumers feel that housing is genuinely cheap and until they feel a lot more secure in their labor-market position.”

Eighteen of the 20 cities in the index showed a year-over- year decline, led by a 9.1 percent drop in Phoenix. In January, prices in 11 markets dropped to fresh lows from their 2006, 2007 peaks, the same as in December.

Foreclosure filings may climb about 20 percent in 2011, reaching a peak for the housing crisis, according to Irvine, California-based RealtyTrac Inc.  A filing influx could add to the surplus of unsold properties and lead to more declines in home values.

“The housing market recession is not yet over,” David Blitzer, chairman of the index committee at S&P, said in a statement.

A Sign of the Times?

Rutgers University’s Programming Association paid $32,000 in student fees to, brace yourselves, people: Snookie.

Yes, it is true. The pint-sized “Jersey Shore” star was hired to speak before nearly 1,000 undergraduates, where the topics ranged from hair styling to lessons for life.

The reality TV star’s $32,000 fee is $2,000 more than Rutgers’ commencement speaker, Nobel-winning novelist Toni Morrison, will get when she addresses graduates this spring. Go figure.

Snooki’s parting advice to students: “Study hard, but party harder.”

Lord help us.

 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