Dean Barber

Archive for March, 2014|Monthly archive page

Figuring Out This Renaissance

In Site Selection on March 30, 2014 at 6:15 am

So I am fast coming to the conclusion that this notion of a “manufacturing renaissance” in the United States is just a matter of semantics and maybe I should just leave it at that.

But here’s the deal: I keep reading about it and trying to discern what exactly the writers are referring to. What do they know that I am missing?

Now it cannot be denied that the state of manufacturing in this country has improved from what it was only a few years ago in the depth of a Great Recession. But isn’t that by definition what occurs following a recession? There is growth and recovery, although this one has been by historical terms very tepid. (See Feb. 9 blog, A Recovery at Half Speed.)

What makes this recovery so different by saying we are now in the midst of a manufacturing renaissance?

The manufacturing sector grew by 6.8 percent in 2010, the year after the Great Recession technically ended, outpacing the nation’s growth in gross domestic product of 2.5 percent. Increasing consumer demand in the U.S. and abroad propelled factory output. Exports grew 11.5 percent in 2010.

So Where is the Surge?

But a surge in manufacturing — as a share of the U.S. economy — has not happened. Growth in the manufacturing sector trailed the overall economy in 2011 and 2012, according to Commerce Department.

The pace of export growth has fallen since 2010 and net job growth at factories has slowed sharply in the past three years — from 207,000 in 2011, to 154,000 in 2012, to just 77,000 last year, according to the Labor Department.

While many folks are hoping for the domestic energy boom, rising overseas labor costs and stronger domestic demand (all of which I do believe are happening) to revive the long-stagnating manufacturing sector, a group of International Monetary Fund economists wrote a paper published in February that pretty much throws water on this notion of a renaissance.

“We find it unlikely for manufacturing to become a main engine of growth in the U.S.,” they said.

Still, the IMF economists said that the U.S. energy jolt, spurred by hydraulic fracturing technology that allows energy companies to tap massive domestic deposits of natural gas and oil reserves, could provide “non-negligible growth opportunities” for U.S. manufacturing when combined with further dollar depreciation and swelling consumer demand emerging markets such as China and India.

Earlier this month, a U.S. Conference of Mayors Advanced Manufacturing Task Force reported that metro area manufacturing employment has expanded by an average annual rate of 1.7 percent over the last three years, and that energy intensive manufacturing employment will expand by more than 1 percent annually nationwide through 2020.

Where Semantics Come In

Taking a historical perspective, which is what I like to do, manufacturing has posted a net loss of more than 9 million jobs since its peak in the late 1970s. However, it is important to note that labor’s importance in manufacturing has fallen off as automation continues to grow. That fact has resulted in the U.S. realizing substantial gains in output per labor hour in manufacturing from 2002 to 2012.

And here is where the semantics come in. If by “manufacturing renaissance” you are referring to manufacturing once again employing a large chunk of the population, well, don’t hold your breath. But if you see American manufacturing characterized by new products, higher productivity, more automation, well, then your renaissance is here.

A Congressional Research Service noted in a February report that “fewer than 39 percent of current U.S. manufacturing workers are directly engaged in production,” indicating the changing face of manufacturing in America.

A Minor Improvement

President Obama has often touted that in the last few years, 500,000 new manufacturing jobs have been created in the U.S. That is certainly true, and it represents great news for those workers who got those jobs, but in the context of the millions of manufacturing jobs lost, it’s a minor improvement.

But clearly this manufacturing renaissance, if it is happening, has not provided renewal to America’s middle class, because wages continue to stagnate. And it is my belief that our factory job wages have remained flat largely because plants today rely more on machines than people, as they (the machines) produce more for less. I write about this “Second Machine Age” in a blog back in January entitled “Can Manufacturing Spur a Jobs Revival.”

In a 2012 study, Jesse Rothstein, public policy and economics professor at University of California Berkeley, found that hires by manufacturers of durable goods (items lasting three years or more) were paid an average of 0.3 percent less in 2010 and 2011 than workers newly hired in 2007 and 2008.

Lower Labor Costs Here

The Boston Consulting Group surmises the U.S. is steadily becoming one of the least expensive countries in the developed world to manufacture. By 2015, average labor costs will be about 16 percent lower in the U.S. than in the U.K., 18 percent lower than in Japan, 34 percent lower than in Germany, and 35 percent lower than in France and Italy.

Now you would think such a discrepancy in the numbers would mean a resulting flood of manufacturing capital investment into the U.S., but that has still yet to happen in big way, despite all the re-shoring rhetoric. Certainly, there are examples of companies bringing back production to the U.S., but too often at wage levels that do little to rebuild a hammered middle class. 

In short, this story has yet to play out. Years from now we will know if this so-called manufacturing renaissance was real or a pipe dream.

Consultant Connect in Dallas

So the question was potentially unsettling, but I remained calm. No need to let anyone see me squirm.

“So how do you find your leads and how do you get paid,” an economic developer asked.

My first inner thought, which I kept to myself, was, “What makes you think we have leads and are getting paid?”

The attention was on three of us, three former economic developers who had gone over to the “dark side” by becoming site selection consultants. Consultant Connect was in Dallas last week, and I was one of 16 consultants talking about our craft to attending economic developers from around the country.

At a luncheon on the second day, Alison Benton of Aliquantus Consulting; Ray Watson of U.S. Consults; and yours truly – spoke on how and why we made the transition from economic development to consulting.

My reasoning on that question was supplied to me the night before at a reception where an economic developer told me how her board chairman had been pointedly asking why their community was not in front of Tesla making a pitch for the supposed future $5 billion gigafactory.

I could just imagine this man saying. “You know, we could use one of them gigafactories. You need to get out there and snag us one.”

And that, ladies and gentlemen, is one reason why I no longer practice local economic development. Managing expectations, keeping it real among stakeholders, is a crucial role for economic developers.

It is an area where I do believe that I can be of help to those economic developers who find themselves being asked questions by those who lack a fundamental understanding of what is doable and practical and what is not.

I joked that my career path was on a downward spiral – breaking bad from journalist, to economic developer, to consultant, with the next logical stop as an inmate in a penitentiary. (I assure you that is not my direction due to my deep-seated fear of showering near menacing men with tattoos.)

Indeed, I would recommend to any and all people that they should aspire to help others in need and refrain from criminal behavior unless they work on Wall Street or are elected to Congress. There, I realize such counsel would be pointless.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

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Walmart’s Path To Redemption

In Site Selection on March 23, 2014 at 7:22 am

For reasons that I do not fully understand, my wife will not step foot inside a Walmart. I think its bigness, not just store size but the size of the company, is a primary reason.

And let me tell you, this is one big company with 11,302 stores in 27 countries. With fiscal year 2014 sales of over $473 billion, Walmart employs more than 2 million people worldwide. Each week, more than 245 million people go to a Walmart store. Last week, I was one of them, part of the pack.

I wanted to buy a corded phone. (Yes, they still make them.) I originally went to an office supply store, where an $80 phone caught my eye, but I held off from the making the purchase, thinking Walmart might could do better.

The next day, I went to a nearby Walmart, where I found a corded speakerphone made by or for AT&T for $25. It was exactly what I wanted and for a cheap price, too.

Nowhere on the phone or the box that it came in could I find the country of origin where the product was manufactured. The instruction manual, however, revealed that it was printed in China, so I figure that is most likely where phone was made, too.

Then I started thinking, which can be a dangerous thing. Maybe, just maybe, Walmart didn’t want me to know where this phone was made. I say this, which is pure speculation on my part, because the company has been on a big “Buy America” kick of late. (Nevermind that I probably still would have bought the phone even if “Made in China” were on the box.)

But I do prefer, whenever possible and practical, to buy American. Now I have this Martin guitar, which is an incredible instrument. It’s a Custom Shop model, and I sometimes shudder when I play it because it sounds that good.

A Company with an American Soul

C.F. Martin & Co. has been making guitars in this country for a very long time. The current chairman and CEO, C.F. “Chris” Martin IV, is the great-great-great-grandson of the founder, C.F. Martin, who arrived in New York City from Austria in 1833.

In 1838, Martin moved his manufacturing operations to Nazareth, Pa., where it remains to this day, making what I believe are the finest production guitars in the world.

Now, I also have a Chinese-made guitar. I like to think of it as my beater, spill-beer-on-it-and-I-won’t-flinch guitar. It cost me about one-sixth of what my Martin cost. The Chinese guitar will never sound as good as my Martin, nor will it ever have the collector’s value or the “American soul” of my Martin.

But I have to tell you that the Chinese guitar still sounds pretty good, and from my standpoint, it was an excellent purchase for what I wanted it for — playing music in rough and rowdy Texas road houses where The Lone Star String Band might encounter stumbling drunks and showers of beer. (No place for my beloved Martin or the faint of heart.)

Like that AT&T phone, I got a lot of bang for my buck with my purchase of that Chinese-made guitar. As a consumer, I hope that I will always have that luxury of choice, knowing full well that finding American-made products on store shelves is not always so easy.

It Just Goes to Reason

But whenever it is practical to do so (and not too painful to my wallet), I am willing to pay a little more to buy American. If we did more of that, I would have to believe that could make positive difference for manufacturing in this country, although I have seen no convincing numbers to substantiate that. It just goes to reason.

Now let’s go back to Walmart, so that you might have an earthly clue why I am writing this blog. By all outward appearances, it would seem that Walmart, cognizant of the fact that many people do not like it, want more of us to like it.

So they have embarked on this campaign to boost U.S. manufacturing by committing to purchase an additional $50 billion in American products over a 10-year span.

A Significant Pledge

The company estimates that its $50 billion pledge, by the 10th year, will result in it buying an additional $250 billion cumulatively over that period. And Walmart wants you to know that the Boston Consulting Group estimates this commitment will create 1 million jobs.

Now I’m not so convinced of the Boston Consulting Group’s numbers, but I am convinced that Walmart is attempting to rehabilitate itself to some degree in the eyes of consumers. The company tells us that it has 40 different departments in discussions with suppliers to have them manufacture in the U.S.

And Walmart  reports that 72 percent of its suppliers have now seen the light and believe that  they can make manufacturing here in the U.S. work in a cost effective manner within four years or less.

Earlier this month, Walmart U.S. President and CEO Bill Simon spoke of the importance of U.S. manufacturing at the company’s Year Beginning Meeting in Orlando. He named three Walmart suppliers who he said have recently committed to manufacturing in this country.

And the Suppliers Respond

They were Element Electronics, which opened a plant in Winnsboro, S.C., which will assemble and package flat screen TVs and which is expected to  employ 500 people.

Simon also named 1888 Mills, which will expand its production facility in Griffin, Ga., by 500,000 square feet because of increased demand for its products in Walmart stores. No mention of job creation. Simon also cited American Home Manufacturing, which will create 200 new jobs with a new plant in South Carolina that will make comforters.

Walmart, along with the Walmart Foundation and the U.S. Conference of Mayors, also announced earlier this month the launch of a $10 million fund designed to help support and spur innovation in U.S. manufacturing. 

The fund will provide grants of $100,000 or more to universities and think tanks with innovative ideas for the production of textiles and “common manufacturing processes that apply to a broad range of consumer goods, including small motor manufacturing and tooling for injection molding.” Applications for the grants are due April 22, 2014.

“If we want to grow manufacturing and help rebuild America’s middle class, we need the brightest minds in our universities, in our think tanks, and in our towns to tackle obstacles to U.S. manufacturing,” Simon said in a statement. 

Now I know what you are thinking and I thought the same thing — that $10 million is mere chump change for a company with $466 billion dollars in sales worldwide and operating income of over $30 billion. And you would be correct, but also understand that it is a start and good things may happen, probably will happen, as a result.

Repairing a Tarnished Image

Clearly Walmart, which has had image problems in recent years primarily centered on perceptions of how it treats its employees, wants us to reconsider the company. By reinventing itself, it hopes to show that it is something other an uncaring goliath, especially in comparison to its employee-loving competitor, Costco. In short, Walmart wants to be loved by you, if that is possible, and pushing American manufacturing is seen as a path to redemption.

The company is even showing its green side by partnering with the Environmental Defense Fund to cut its emissions. And now it’s banking on boosting U.S. manufacturing, which seems to be striking a chord even among the cynical like me.

Naturally, some are not buying it. Mike Rowe, host of Discovery Channel’s “Dirty Jobs” said he received death threats over his involvement in a Walmart commercial that ran during the Winter Olympics.

“Three days of press, five hours of sleep, four bottles of wine, a speech, a job offer, 5,000 form letters, and a couple of good-natured death threats,” Rowe wrote in a Facebook post. “All because of a commercial that I narrated about American manufacturing paid for by Walmart. Press tours are fun!”

You will probably never be able to buy a Martin guitar in a Walmart, which is probably a good thing. Martin stands for a quality that frankly goes well beyond what Walmart is all about.

And the truth is that Martin, known and sought after by guitar players worldwide for its quality, never needed any convincing to continue to make most of its signature products here in U.S. And that’s a good thing, too, because American soul is American manufacturing. Never forget that.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

 

 

 

 

 

 

 

 

Skeptical Me

In Site Selection on March 16, 2014 at 5:17 am

So an old friend from my newspaper days in Columbus, Ga. — we’re talking the early 1980’s – sent me a message via LinkedIn.

He’s now living in Phoenix as a free-lance writer. He didn’t supply me with any information on how he was doing, nor did he ask how I was doing. He must have presumed that we are both hanging in there like old coots do.

He wrote just a single line: “What is your take on this?” And then he added a link to a USA Today story on Tesla.

Unless you have been camping in the wilderness, you probably know that the luxury electric car maker has announced that it will  build a $5 billion, 10-million-square-foot “gigafactory” that will employ 6,500 people to mass produce lithium-ion batteries for its EV vehicles.

So I wrote him back, having done no research or given much thought to the subject at the time.

My Initial Impression

“Sounds way too big of a project in terms of people and capital. Also, I question whether Tesla, which admittedly builds a great product, has the financial means to pull this off.”

That’s what I said then, on March 3 without the benefit of any research, and that’s still pretty much my opinion now that I have looked into the matter. Mind you, I am capable of changing my mind.

There is this mythic quote attributed to British economist John Maynard Keynes who was being chided by a member of parliament for altering his views on an economic question. His reply:

“When I’m wrong, I change my mind. What do you do, sir?”

Keynes also reportedly said: “There is no harm in being sometimes wrong — especially if one is promptly found out.”

Well, let us hope that I will be promptly found out regarding this Tesla project. Again, I do not doubt that a plant could be built in one of four states – Nevada, Arizona, New Mexico or Texas – where the company says it is looking. But I do doubt the published scope of the project.

Might This Sound Odd?

When your specs call for a 10-million-square foot facility costing $5 billion to build and equip and employing 6,500 people, well, that does sound more than a bit ambitious. And all this from a company that has yet to turn an annual profit? Might this sound odd to you?

But reaching for the stars is what Tesla CEO Elon Musk does. He is also, after all, the CEO of SpaceX, which designs, manufactures and launches advanced rockets and spacecraft. 

Certainly, Musk has been a positive disruptive force in the automotive industry. How can you not admire a guy who said this: “Failure is an option here. If things are not failing, you are not innovating enough.” 

Now that is an interesting take on things. I think I will use it on my wife the next time I lose a contract proposal. “Honey, our proposal was just too innovative for them.”

But I do like Tesla, although I have never driven one of their cars. And while I read all these bullish news reports, gushing over the idea of this gigafactory being built, somehow I cannot help but to be Skeptical Me. Again, I think a plant may be built, but my bet is that it will be scaled back in size.

First I am going to tell you why I might be wrong. Then I am going to tell you why I might be right.

Let Us Praise a Good Company

Let us start by praising this American tech-savvy company. This is a wonderful story of underdog making good. I have no doubt that Consumer Reports,  widely considered to be the single most influential magazine among car shoppers, got it right when it called Tesla’s Model S a ‘technological tour de force,’ and awarded the all-electric sedan its top ranking.

While Tesla delivered only about 22,400 electric Model S sedans in 2013, its plans to build the world’s biggest battery plant, expand into China and accelerate production more than 55 percent this year is energizing investors. Tesla shares have raced ahead 56 percent year to date and a mind-blowing 500 percent in the past 12 months.

It is a performance unmatched by any global automaker in at least 20 years. Still, investors are paying a $26.7 billion valuation for a company that’s yet to make money. And because it has yet to turn a profit, there is no price-to-earnings ratio. Tesla shares are trading at 43 times book value and 14 times sales, which is 12 times higher than the valuation on the industry, according to Reuters.

An Overpriced Stock?

Leave it to say that there is murmuring on Wall Street that Tesla stock is “dangerously” expensive based on the current value of its expected future cash flow. (The stock closed Friday at $230.97.) Wait a second, this was supposed to be the good part about Tesla.

Tesla’s share price run-up has given Musk an opening to sell $2 billion of convertible notes, up from an initial plan to offer at least $1.6 billion, to fund his new battery plant. But Musk will still likely need a partner or partners to build this future plant.

Supposedly Panasonic, which currently supplies the batteries to Tesla, is considering investing $1 billion in the venture. Even if Panasonic is in, that may leave a shortfall of a billion or two, which is not chump change.

This all begs the question for me as to whether Mr. Musk might be attempting to bite off more than he can chew. But surely that cannot happen. Titans of industry never make such mistakes.

Running with the Big Boys

But the truth is that if Tesla’s planned gigfactory is to work, the company will have to find ways to cut the cost of its vehicles, now priced from about $71,000, to draw more mainstream buyers, all the while turning back potential challenges from larger, established automakers. You know, companies like Ford and Toyota.

By Tesla’s own estimate, it will produce about 500,000 cars per year by 2020, or roughly 14 times the amount it made last year. (Estimates are that it will sell 35,000 units this year.)

But to reach that 500,000 cars-per-year mark, you can bet that Tesla can’t continue delivering cars on flatbeds and battling every state’s franchise laws. Ironically, two of the Tesla’s supposed finalist states for the gigafactory, Arizona and Texas, do not permit the Tesla business model of selling direct to the consumer. Under those states’ laws, and now New Jersey, too, only approved dealerships can sell cars.

What is clear is that Tesla is a cutting edge, tech savvy, luxury manufacturer that has done surprising well by offering a superior product and marching to a different beat. But it has yet to prove itself as a credible player for the mass market, which is my fundamental qualm about this announced $5 billion manufacturing facility.

(Of course, Tesla could always hire me on their site selection project and if I am wrong, I am capable of changing my mind.)

Better Batteries Cheaper

For Tesla to get to the promised land — for its $35,000 “Gen III”  yet-to-be-named EV to become a reality and to sell en masse at that 500,000 mark– the company needs batteries to be produced at a fraction of their current cost.

Of course, that’s the main purpose for gigafactory. Tesla said it would surpass any current lithium-ion cell factory in the world and reduce battery costs by at least 30 percent. I hear you. And I hope you are right. But I still have to wonder.

Batteries are heavy, which likely means that the product will likely be moved by rail from the gigafactory site to the Tesla’s assembly plant in Fremont, Calif., which is served by the Union Pacific Railroad. So a rail served site by the UP is probably a requirement.

Tesla also wants his future gigafactory to make batteries for homes that could store power from solar panels. I’m sure that is a potentially growing market, but it’s not yet a big market. Still, what Teslsa proposes is humongously big – 10 million square feet big.

The fact that Americans are keeping older cars longer than ever and that even electric cars that are being sold for less $30,000 are not exactly flying off shelves would indicate to me that this project may be more inflated with aspirations than analysis.

But sometimes visionary billionaires can pull off building their dreams in a big way and prove us skeptics all wrong. I wouldn’t mind that happening. I’ve always liked stories of an underdog taking on an industry and winning.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

 

 

Why Mexico Works for Automotive

In Site Selection on March 9, 2014 at 8:06 am

With a multi-billion dollar wave of new assembly plants, Mexico will soon become the United State’s No. 1 source of imported cars, overtaking Japan and Canada in the process. And that’s a pretty big thing.

To provide you some context, when the North American Free Trade Agreement was signed two decades ago, Mexico produced 6 percent of the cars built in North America. It now provides 19 percent.

Total Mexican car production has risen 39 percent from 2007, to nearly 3 million cars a year. And the total value of Mexico’s car exports surged from $40 billion to $70.6 billion during that period.

Now you don’t have to be a Nobel prize winning economist to figure out why this is happening.

No. 1, labor rates are much lower. Mexico’s 580,000 auto workers are paid about $16 a day, more than $4 less than what the average U.S. autoworker is paid every hour. More than half of all Mexican workers earn less than $15 a day, according to Mexico’s census agency.

That’s comparable if not better than China, where wages have been rapidly growing. Not so in Mexico where wages have been flat.

No. 2, they’re here, meaning that Mexico sits on the doorstep of the U.S. Unlike China, there are no long and vulnerable supply lines and many of the vehicles being built in Mexico are assembled with parts made in the U.S. and Canada. Keep in mind, those parts cross the border without tariffs under NAFTA.

They’re All There

Just about every major carmaker in the world has production facilities in Mexico, where they continue to invest. Automakers have committed $9.6 billion to Mexico since the start of 2011, with investments by General Motors Co., Ford Motor Co. and Volkswagen AG as well as Japanese automakers, according to the Center for Automotive Research.

Nissan, Mexico’s largest automaker by production and domestic sales, opened a $2 billion factory in November in the central state of Aguascalientes, where it is expected to turn out 175,000 vehicles annually. And just last month, both Honda and Mazda opened new assembly plants in the nearby Mexican state of Guanajuato.

Honda’s new $800 million assembly plant in Celayato will build the 2015 Fit subcompact hatchback and crossover variant. The Celaya plant will turn out about 200,000 units annually, and will boost Honda’s annual North American production capacity to 1.92 million units.

The Honda Fit assembly plant will be mated to a $470 million continuously variable transmission plant, which will open in late 2015 on the same grounds, with initial capacity of 350,000 units, rising to 700,000 at its peak. About 80 percent of the 200,000-unit annual production will be for the United States and Canada, with the remaining 20 percent for Mexico.

With Celaya’s startup, Honda has invested $21 billion in North American manufacturing facilities, including eight automotive assembly plants. The Celaya facility is Honda de Mexico’s second auto plant. The first plant, located near Guadalajara, opened in 1995.

Only 25 miles to the west of Honda’s new plant, Mazda is staking its U.S. future on a new $770 million factory in Salamanca that will be its first wholly owned plant in North America. The new plant will build the Mazda 3 and Mazda 2. Nearly 56,000 models of output are anticipated this year, but production will ramp up shortly thereafter as 175,000 units are expected to be built in 2016.

Mazda’s U.S. sales of more than 280,000 vehicles ranked fifth among Japanese automakers in 2013, according to Bloomberg. A venture that made Mazda 6 sedans in Flat Rock, Michigan, with Ford Motor Co. ended in 2012.

The Best Passport

Like all the foreign auto makers based in Mexico, Mazda will be able to cut shipping costs to the U.S. and benefit from Mexico’s web of trade deals covering more than 40 countries.

“Mexico has the best passport in the world for auto manufacturing,” said Joe Langley at IHS Automotive in an interview with CNBC. “It has free trade agreements with all the key countries around the world, and it’s in the backyard of the second-largest auto market in the world.”

It was precisely those trade agreements (Mexico has 12 free trade agreements with 44 countries, while the U.S. has 14 trade deals covering only 20 countries) that was cited by Audi Chairman Rupert Stadler last year when the company announced it would build a $1.3 billion near San Jose Chiapa. Mexico, said Stadler, represented “an ideal export base.”

The Audi plant, not far from parent company Volkswagen’s plant in the state of Puebla, is slated to open in 2016. The announcement by Audi that it would choose Mexico was deflating to economic developers in the Southeast. See my blog from July 2013, A Defining Combination in Mexico.

And like state and local governments in the Southeast, state and local governments in Mexico have been  have been offering tax exemptions, employee training and improved highways, in Mexico’s case to the  U.S. border and Mexican ports.

The U.S. Remains in the Running

But despite our much higher wages in comparison to Mexico, the U.S., the second largest automotive market in the world behind China, will remain in the running for future automotive investment.

I think it is interesting to note that Ford announced plans last week to move production of its commercial F-650 and F-750 medium-duty pickups from a plant in Escobedo, Mexico, to Avon Lake, Ohio.

Ford had operated a Mexican-based joint-venture with Navistar International Corp. known as the Blue Diamond Trucking Co. The automaker is cutting those ties to take full control of production, design and engineering of its top-selling F-series pickups, according to company officials.

My gut tells me the decision is based more on Navistar than Mexico. In short, by pulling out of the joint venture, Ford will no longer have to share profits with Navistar. The Escobedo plant will become a Navistar-only facility where the company will continue to build its own medium-duty and heavy-duty trucks.

Moving the work from Mexico will preserve the jobs of 1,600 workers at the Avon Lake factory, which Ford has operated since 1974, and honors an agreement the company made to the UAW in 2011 contract negotiations. No new jobs will be created by the move.

According to a survey of 143 senior executives conducted in January and February by consultant AlixPartners, the U.S. has surpassed Mexico as the preferred place to relocate manufacturing that had been moved offshore,. It was the first time in the four years of the study’s existence that the U.S. was chosen over Mexico. Forty-two percent of manufacturing executives identified the U.S. as their preferred location, up from 37 percent a year earlier, while Mexico fell to 28 percent from 37 percent.

I suspect there remains and maybe always will be some lingering questions about security and quality in regard to Mexico. Much of the drug cartel violence, which appears to be abating somewhat, has been centered around the border, well away from the automotive cluster that is happening in the central states.

Watch Volkswagen

It will also be interesting to see what Volkswagen does. Thwarted in its plans to have the UAW recognized at its Chattanooga plant so that it could establish its vaunted works council model, which it incorporates in most of its production facilities worldwide, the company may turn to its existing plant in Puebla as the future site of production of a new SUV line, which is expected to be announced soon.

That Chattanooga is competing against Puebla for this future production will be a telling scenario and we will be following that story closely.

Leave it to say, all these companies, the OEMs and suppliers alike, would be making an absolutely brilliant move by hiring Barber Business Advisors as their consulting counsel in making their site selection decisions. If they did that, we know they would make the right choice. (Hey, this is my blog.)

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

A Revolution in the Making

In Site Selection on March 2, 2014 at 7:20 am

Living  in Texas, it would be easy for me to see this shale gas boom that our country is experiencing as something bigger than what it really is.

But the fact is more likely that you and I don’t fully comprehend just how big this thing really is. What is becoming clear is that shale gas is so big that it has global ramifications with the United States almost overnight becoming an energy powerhouse for decades to come.

All this has largely happened because of technologies developed here in Texas. Not only is this transforming the world stage, but it is changing rural communities across the nation in ways that are simply astonishing. 

Ask anyone with more than a cursory knowledge about the Bakken Shale play in North Dakota. I know from personal experience that economic developers in Pennsylvania are excited about the continuing possibilities of job growth as a result of Marcellus Shale play, which reached 13 billion cubic feet a day of natural gas production in 2013, over six times the level of 2010.

Friends in Ohio say the same thing will happen with the Utica Shale play there.

Shale Plays Everywhere

In the past couple of years, I have learned about shale plays where I never knew they existed. They have included the Fayetteville Shale play in Arkansas, and the Tuscaloosa Shale play in Louisiana, where announced billion dollar energy projects are now almost commonplace. The Haynesville Shale play extends from Louisiana into East Texas and is said to have great potential.

Speaking about great potential, Texas has it in spades. Of the nearly 1,800 operating oil and gas wells currently in production in the U.S., referred to by the industry as the “rig count,” nearly half are in the Lone Star State.

There are at least 10 shale plays with production potential in Texas. Right now, only a few of them are being tapped. Even so, Texas oil production is on a tear, producing 2.139 million barrels a day last November. That breaks a 25-year record.

I live not far from the Barnett Shale in North Texas centered around Fort Worth. It was in this general area where Mitchell Energy in the 1990s pioneered much of the directional drilling and hydraulic fracturing technology that subsequently allowed energy companies to capture oil and gas that was previously beyond their reach.To say that technology has proved to be revolutionary is an understatement.

Then there is the Eagle Ford, which had more than a $60 billion dollar impact on the local South Texas economy in 2012 and more than 116,000 jobs were supported in the 20-county area impacted by the play. The Eagle Ford is the most active shale play in the world with over 200 rigs running. 

The Mysterious Cline

But most recently I have been learning about the Cline Shale play, spanning nearly 10,000 square miles in West Texas. There is debate within the industry as to its potential, but some see the largely untapped (and unknown) Cline Shale as the granddaddy of them all, with some estimates putting the total recoverable reserves at 30 billion barrels, bigger than the Bakken and Eagle Ford combined.

If that number is right, and some industry observers say that is a best scenario number, at $100 a barrel, that’s a $3 trillion dollar resource sitting there. You might want to read that again.

A recent economic impact study by the University of Texas San Antonio Institute for Economic Development found that a 16-county region of West Texas impacted by the Cline Shale supported 21,450 full-time jobs in 2012 for workers in oil and gas, drilling, support operations, pipeline construction, refineries and petrochemicals.

Boom/Bust?

Leave it to say, West Texas communities are excited and I think they have good reason to be. But there are questions to be asked and plans to be enacted.

So how does a local economy based on the extraction of a natural resource leverage that reality into lasting job growth? It is a central question that faces economic developers on the front lines of the shale gas revolution all over the country and not just in Texas. 

People in Texas and throughout much of the West are well aware of boom/bust cycles and how that can leave its marks on a place. They’ve seen the ghost towns that were once boom towns, and suspect the same thing could happen with shale gas.

We’re in the First Inning

But because of the newer technologies developed and being developed, most operators of the drill rigs are saying most of the shale plays should be productive for decades to come.

“We’re in the first inning of a nine-inning game on the shale revolution in the United States,” said Ryan Lance, chairman and CEO of Houston-based ConocoPhillips at an event recently at Rice University.

“What people are learning is we’ve only scratched the surface on what technology can do to improve that outlook over the years,” Lance said. “This is a layer that is going to last for quite some time.”

That should mean that there are and will be sustained growth opportunities for communities for years to come, and not just solely on the energy side, but also  in ancillary industry groups – be they manufacturing and/or service. For many places, this shale gas revolution will be just that.

The U.S. Energy Information Administration sees no end to skyrocketing natural gas production. The U.S. recently became the world’s largest natural gas producer, and the EIA forecasts a 56 percent increase in American natural gas production over the coming two and a half decades.

A Godsend to Manufacturing

Natural gas is also a feedstock in making a wide range of products, and its use for American manufacturing is expected to rise by 22 percent in the next dozen years.

President Barack Obama picked up on that theme in his State of the Union address in January. “One of the biggest factors in bringing more jobs back is our commitment to American energy,” he said. “Businesses plan to invest almost $100 billion in new factories that use natural gas,” he added, pledging to cut red tape to help get the facilities built.

I don’t know where the president got that number, but that’s beside the point. The fact is that gas in Europe and Asia sells for three and four times than what it sells for here, which should give U.S. manufacturers a big cost advantage.

A Future Role in Site Selection

A friend of mine who is a senior executive with an energy company based near my home in Plano told me how his company was involved in developing gas production wells in the Marcellus shale in Pennsylvania that allowed a longstanding manufacturing plant to become completely self-sufficient in its energy needs.

In short, the plant was sitting atop these gas reserves which were tapped into and made useable through conversion processes. My guess is that we are going to see more of that in the future and that such possibilities of total plant energy independence, being off the grid, may figure in on where certain intensive energy using manufacturing facilities locate. As a site selection consultant, I find this exciting.

As a consultant for industry, I advise companies on their site selection needs with the goal of finding an optimal location for future operations. Energy costs are certainly one important factor, as are many others, but this shale gas revolution provides an added twist to manufacturers looking for a competitive edge.

Communities that Win

As a consultant for economic development groups, I hope to help communities better compete and capture corporate investment that even takes place in an anemic economy. In the long run, we want our community to be desirable as a place to live and work for us, for our children and for their children. That is what sustainability should be all about.

It is those places with good infrastructure, housing, skilled and educated workers, recreational opportunities and a pro-business climate that will grow. Developing a strategic plan and then acting on it will give a community a huge advantage.

And when the day comes, it may be decades from now, when the shale gas energy boom will have played itself out, it is those towns and cities that planned and acted for sustained growth that will survive and even prosper. That can be the future.

The Fury

Now I have been to many a baseball and basketball game in Dallas as the guest of various economic development groups. They’re fun and I enjoy attending.

But Pueblo, Colorado, invited me to a different kind of event Saturday night. I found myself in a suite in AT&T Stadium, home of the Dallas Cowboys, where I watched in fascination and sometimes horror with what comes with an event by Professional Bull Riders. It just so happens that PBR has its world headquarters in Pueblo, where it employs about 200 people.

At one point, Rich Werner, vice president of the Pueblo Economic Development Corporation, took me down to ground level where I could see the fury up close.

I reckon it’s fame and fortune as to why these young men would lash themselves to the back of these seemingly crazed beasts. But the price paid by the riders’ many injuries is considerable. Watching them and the bulls do their thing was watching a train wreck/tango happen every time the chute opened.

Thank you, Pueblo, for inviting me to an event that still has me pondering. And congratulations for your recent win by which pewag, a 400-year old Austrian company that once made the chain mail for armored knights, will soon begin producing in your community traction snow chains for vehicular use.

And thank you Jackson County Economic Development Foundation (Mississippi) and Boise Valley Economic Partnership (Idaho) for visiting with me earlier in the week.

I’ll see you down the road. 

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

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