The Canary in Our Mine

I am frequently asked by economic developers and to a lesser extent corporate execs if my firm specializes in serving any particular industry group or sector in site selection projects.

While I can put together a special ops team that can serve the needs for just about any company in any industry, I do have an unashamed bias toward companies that actually make things.

Manufacturers typically are favored, partly because I can usually understand the potential and the implications of something that I can actually see and touch.

Temperamental Beasts

“So these nasal strips for horses, you have found a market for them?”

“Oh yes indeed, Mr. Barber, and now we are expanding our product line for cattle, sheep, goats and llamas. However, we are finding that goats will often try to rub our products off on a tree or fence post.”

“You know, I’ve always found goats as hard to please. Temperamental beasts. So these come in multiple colors?”

Companies will make the darndest things because they found that some people somewhere will buy them, which never ceases to amaze me.

I am also partial to manufacturers because they not only can make products that can change and even save lives, although in fact few probably do, but these companies can truly transform an economy.

I was recently in Costa Rica where the medical device industry employs some 17,200 people, while exports of medical and precision devices reached over $1.5 billion in 2013. Now that is strong.

The Multiplier Effect

Economists, business professors, and pontificating consultants like me will tout the importance of manufacturing because of its multiplier effect in the creation of ancillary jobs. But I think few of us really can fathom how far that really goes.

An Airbus or Boeing jetliner may have 3 million parts, coming from a vast array of suppliers. As a result, a whole host of jobs are created in logistics and transportation, customer service, technical support, regulatory and safety specialists.

National Association of Manufacturers has cited studies stating that the average manufacturing multiplier is 1.58. But in some advanced manufacturing sectors, such as electronic computer manufacturing, the multiplier effect can be as high as 16 to one.

So manufacturing can and does have a mighty ripple effect and its importance to our financial health here in the United States cannot be underestimated. Still, I must tell you that I do not believe U.S. manufacturing is as healthy and robust as some pundits would have you believe.

Look at Trade

Recent Wall Street Journal reports would indicate that U.S. factories continue to lose ground on the global stage, with trade being a key factor. Simply put, many economists cannot foresee how U.S. factories will experience the kind of growth that would warrant terminology like “renaissance” without a strong, sustainable increase in exports.

The U.S. deficit on trade in goods swelled in the first half to $371.59 billion from $354.64 a year earlier. Imports rose 3.3 percent, while exports increased 2.6 percent. But manufactured exports rose a scant 0.8 percent—far below last year’s modest 2.1 percent gain.

During a time when China and other countries are pursuing aggressive export strategies, the U.S. has lost a significant amount of its manufacturing skills after shifting production overseas.

When I am around manufacturers, I almost invariably hear about how difficult it is for them to find the skilled workers that they need. I believe this is true. More importantly, I believe that they believe this is true.

A Problem of Our Own Making

But there are truths, half-truths, lies and statistics, all of which I will use in some form or fashion to make a point. My point? I think much of this skill set deficit that we hear so much about from the U.S. community has been brought on by themselves.

One reason is that many manufacturers are so extremely focused on making a product in an efficient and cost-productive way that other things, like people, often come as an afterthought.

It should come as a shock to no one, especially to senior management at manufacturing companies, that baby boomers are retiring, shop floor automation is increasing the technical skills required, and that young people are by and large disinterested in pursuing a manufacturing career.

Companies deduce, wrongly if I might add, that if they just donate money to local schools for computers, school supplies and scholarships, that the problem will fix itself. But in terms of truly partnering with local education, a minority will actually take that extra step.

They will also do little if any actual in-house training for in-demand skilled positions, all the while thinking that it is someone else’s job (high schools and community colleges) to do that for them.

Make Your Own

Don’t get me wrong, I have seen robust partnerships between industry and education in many towns and cities across this great nation where relevant skills are taught. Still, I cannot help but think that if manufacturers are truly serious about hiring the right people, they should implement their own skills training programs.

“With the shortage of adequate candidates, the best alternative to trying to get lucky is to make your own,” wrote W.Terrence Glover, owner of W.T. Glover & Associates, a Pittsburgh staffing firm.

Over the last three decades, however, in-house training and apprenticeship programs have steadily declined across industry sectors. Many programs were cut for budgetary reasons during the Great Recession and never revived.

High school graduates with STEM backgrounds are now in equal if not higher demand in the job market than college graduates who don’t have STEM skills, according to a new Brookings Institution report, “Still Searching: Job Vacancies and STEM Skills.”

Polish a What?

An article on the Brookings report was published last month in IndustryWeek, which I read online regularly and would recommend. After this particular story, one reader responded with some colorful if not insightful comments.

“How many times and ways do we have to keep polishing this turd?” wrote the person with pen name of “Blueneck.”

“It’s absolutely ridiculous to be discussing labor shortages, skilled, semi- skilled or otherwise during times of persistent un(employment) and underemployment. These assertions never look at the root causes of such “shortages,” like unrealistic expectations from HR departments looking for purple squirrels, companies unwilling to train workers or candidates for industry/job specific skills, companies not willing to pay wages appropriate for the education and experience levels they seek, unwilling to assist with relocation and so forth.”

Now I wouldn’t started my argument with quite the same metaphor (I did not know you could polish one of those things) but I think there is some merit to what Blueneck opines.

The Road to Failure

A survey of Harvard Business School alumni released last week revealed that more than 40 percent of the respondents foresee lower pay and benefits for workers.

Roughly half favor outsourcing work over hiring staffers. A growing share prefer part-time employees, and nearly half would rather invest in new technology than hire or retain workers.

A failure by companies to develop a skilled workforce could not only hurt those companies in the long run but also the competitive standing of the U.S. economy, said Jan Rivkin, one of the survey’s lead authors.

And get this, the survey noted that only 27 percent of respondents said their companies have partnerships with community colleges. There was no indication of levels of in-house training from the survey, but with the reported findings  you have to wonder.

“The bleak picture facing middle and working class Americans are the canary in our coal mine,” said Rivkin, a Harvard business professor, in an interview with the Associated Press. “Eventually, that will come back to haunt business.”

We know that much of the economy, and particularly manufacturing, is driven by consumer spending. But the survey of from 1,947 Harvard Business School graduates, 40 percent of whom are CEOs, indicates they don’t see incomes rising much anytime soon.

Indeed, 41 percent see lower wages and benefits ahead; while only 27 percent expect pay raises. Keep in mind that the median household income in July was $54,045, about 4.6 percent lower than it was when the recession began in late 2007.

So to recap, if companies are not stepping up and training for a skilled workforce and are also being tight-fisted in giving pay increases to employees, you have wonder where that can take us. I’m afraid it’s not such a pretty place. Lord knows I hope I am wrong.

In the meantime, let us hope that nasal strips are developed that goats can tolerate, and that the canary doesn’t die.

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.

If you liked what you saw here, invite me to speak at your next meeting.

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

All’s Fair in Love and War: America’s Energy Advantage

Marcellus, Bakken, Eagle Ford, Permian, Niobrara and Haynesville.

Even to the most casual observer, some of these names do have a certain familiar ring about them. And they should, as they are among the dominant shale plays in the United States. And they have set the world on its head.

Developed technologies made it commercially viable to extract oil and gas from shale rock and largely because of it, the U.S. will become the world’s top energy producer by 2015, according to the International Energy Agency, supplanting both Russia and Saudi Arabia.

To which I will quote that respected industry observer, known for his piercing observations and in-depth analytical thought, Gomer Pyle: “Shazam!”

The IEA also predicts the U.S. will become self-sufficient in its energy needs by 2035. That is still a good ways off, but I never thought that was possible or likely despite of the many years the blowhard rhetoric emanating from Washington that we should seek energy independence. But it would appear that reality is truly within our grasp.

Again, this is all because of what we are sitting on and the fact that we have developed better technologies in this country to unlock the oil and gas from the shale rock.

Breaking Our Addiction

Now I would bet you that our predicted future of independence or even less dependence gives OPEC, the oil cartel founded in Baghdad and made up of Arab countries where the U.S. will never win a popularity contest, a degree of pause. I can only hope.

As someone who remembers the long lines at gas stations during the 1973 oil crisis, I shed no tears for OPEC, as they have shed none for us when they literally had us over a barrel. They still do to some degree, as we remain the world’s biggest oil-consuming nation and the largest importer of crude oil. But the point is that we are breaking our addiction to foreign oil because of what we are doing on the home front.

Indeed, the U.S. produced more crude oil in October than it imported for the first time since early 1995, as domestic shale oil output continued to surge and our consumption (much of it due to conservation and more energy efficient technologies employed) remained relatively flat.

Net crude oil imports in October fell to 7.57 million barrels a day, down from 7.92 million barrels in September and down 8 percent from the year before, according to the Energy Information Administration.

The Million Barrels Club

Meanwhile, the Bakken Shale, is about to reach a milestone: pumping a million barrels of crude a day, according to the U.S. Energy Information Administration.

The EIA says oil companies in the Bakken, which is located primarily in North Dakota, will reach the million-barrel milestone in December, up from an estimated 976,000 barrels in November. Drillers are spending about $16 billion in the Bakken this year, according to research firm Wood Mackenzie.

The Eagle Ford Shale in South Texas, hit the million-barrels-a-day mark back in May of this year, according to the EIA data. The Permian Basin — the massive field in Texas that’s been the foundation for U.S. oil production for decades – got there in May 2011.

The Biggest Turnaround Story

This mega-shift in energy production, spurred on by advances in hydraulic fracturing technologies, happened pretty quickly. Five years ago, U.S. oil production hit a 62-year low. Since then, domestic production has increased by more than 50 percent.

As a former business journalist, I view this as the biggest business turnaround story in my life. And it bodes quite well for the long-term growth prospects for the U.S.

Today, as a site selection/economic development consultant, I am constantly reading and talking to business people about new investments and resources dedicated to energy production and not just in the oil patch.

Clean Coal in Mississippi?

I was very much surprised to learn last week of a coal-fired power plant now under construction by the Southern Co. in Kemper County, Miss. Frankly, I wasn’t so sure that we would ever see any new coal-powered plants to be built again because of stringent EPA standards now in place. But this new plant being built may prove that there actually is such a thing as clean-coal technology.

The not-so-good news is the 582-megawatt plant 30 miles north of Meridian is considerably over budget, to the tune of about $1 billion according to some reports. I have read conflicting numbers on what the total cost might be. The Southern Co. says $4 billion, but Bloomberg Businessweek is pegging the number closer to $5 billion.

Whatever number is correct, the Department of Energy estimated back in April that a utility buying a plant with the new technology would pay double the price of a conventional plant. The price of new pioneering technology often does not come cheap.

When finished by the fourth quarter of 2014, the plant, to be operated by Southern Co. subsidiary Mississippi Power, will use a process known as coal gasification, where it burns gas extracted from pulverized coal. That in itself is not a new technology, but the Kemper plant — which literally sits atop of a lignite coal seam that will serve as its source of fuel for an estimated 40 years — will be the first to remove carbon dioxide. The gas will be sold to Texas-based Denbury Resources, which plans to inject it down into wellheads to unlock gas and oil from the shale rock.

Worse Storms to Come

It is not surprising that some environmentalists consider the carbon capture and sequestration (CCS) technology to be used at Kemper as not good enough. There are some critics who believe we should nevermore touch coal as a source of fuel because of greenhouse emissions.

Certainly, the environmentalists are right to be concerned as the body of scientific evidence does show that climate change is a real thing, that the planet and its oceans are indeed warming, at least partly due to greenhouse emissions created by nations worldwide.

Last week, Typhoon Haiyan in the Philippines, with sustained winds between 190 and 195 miles per hour, killed thousands.  Many scientists are looking at climate models that suggest that intensity limits will keep rising with the potential for more devastating storms due to global warming.

So what do we do? Well, the truth is that we cannot and will not abandon fossil fuels any time soon and nor should we. But if we can burn cleaner and more efficiently through applied technologies, and supplement our energy needs with renewables (solar and wind), then we stand a good chance of reducing emissions all the while reaching that energy independence that we seek. I submit that those are not conflicting goals.

Billion Dollar Projects on the Horizon

The various industries of energy will play a huge role in the future of local economies throughout this country. Economic development organizations should take a long and hard look at this as there will be likely job creation and in some places it will be considerable.

Billion-dollar energy projects are now being announced with some frequency in Texas and Louisiana in support of this burgeoning natural gas boom. Just one example is Houston-based Cheniere Energy. The company, which is now in the process of building a liquefied natural gas export facility in Louisiana, also hopes to build a similar facility in Corpus Christi, Texas, at a cost of about $12 billion.

Cheniere’s Sabine Pass facility in Louisiana was the first to receive approval from the U.S. Department of Energy to ship natural gas to countries with which the U.S. doesn’t have free trade agreements. The company is seeking permits to export gas from additional facilities planned at Sabine Pass, and from Corpus Christi.

There is debate as to whether it is a good idea for the U.S. to be exporting natural gas abroad, rather than hording and using it as a resource solely here at home. The chemicals and steel industries, which uses a tremendous amount of gas in the manufacturing process, questions whether the cost of natural gas might significantly rise if exports take place.

Not surprisingly, the oil and gas industry says that will not happen. Proponents of gas exports contend that increased gas production here in the states could fuel a response to rising international demand and keep worldwide prices relatively low. As a former skeptical newspaperman, I am not sure I buy that.

When You Got an Edge

However this plays out and wherever the truth lies, the good news is that U.S. manufacturers do now have a significant advantage in terms of energy costs in comparison to their counterparts in Europe and Asia.

And that in itself should drive at least some foreign direct investment to the U.S., especially so if a company intends to sell a majority of its goods or services in this market.

European companies, facing low demand for their products and rigid labor markets, are paying three times more natural gas and their electricity costs are double of that in the U.S. Prices for U.S. natural gas are currently around $3.70 per 1 million BTU, compared with just over $16 per in Europe and Asia.

In business as in life, when you got an edge, you take it. All is fair in love and war.

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.

 

The China of the West: Why Mexico is in the Driver’s Seat

As a consultant, my business is solving other people’s problems, so when the call comes in, I listen.

Sometimes I immediately know if I can help. Sometimes I immediately know that I can’t. And sometimes I have to ponder on it for awhile.

So I got this call this past week from a company that wants to expand into Mexico. For reasons of confidentiality, a sacred oath in corporate site selection, I cannot say more.

But as some of my past blogs have indicated, I have a great interest in Mexico, and not only because I live in neighboring Texas, where I am exposed (and attracted to) a strong Hispanic culture. Here I frequent Tex-Mex restaurants, where I will invariably practice my rudimentary Spanish, usually to the embarrassment of my wife.

(There was a time when I could ask for a beer and the restroom in seven different languages. I think I’m now down to four.)

Winning as a Habit

But aside from my miserable attempts at speaking pigeon Spanish, I continue to find Mexico an intriguing place for corporate investment. The reason is quite simple — it continues to win. And that becomes habit forming.

Coincidentally this past week, I added a tagline to my email signature, which reinforces that point. It comes from Aristotle, a pretty smart fellow even if he did prescribe goat urine as a cure for baldness.

“We are what we repeatedly do. Excellence, therefore, is not an act – but a habit.”

Bear Bryant summed it up similarly: “When you get in the end zone, act like you’ve been there before.”

Well, Mexico has been getting into the end zone a lot lately, and, and could very well be among the world’s 10 biggest economies by the end of this decade as its manufacturing sector is competing very well against the likes of China, India and Brazil. Heck, it’s competing very well against the automotive industry in the southeastern U.S., which should raise some concerns there.

Billions in the Pipeline

Earlier this month, Chrysler CEO Sergio Marchionne said his company will invest $1.249 billion in two Saltillo facilities creating 1,570 jobs.  About $1.085 billion will go toward the construction of a new assembly plant to produce the Ram ProMaster commercial vehicle. An additional $164 million will be invested in a new production line to assemble Tigershark engines at an existing engine plant.

Nissan, which built 683, 520 cars in Mexico last year making it the largest vehicle manufacturer in the country, will open its third plant next month, the $2-billion Aguascalientes No.2. The new factory will turn out an additional 250,000 vehicles.

The No. 2 automaker in the country, General Motors, said in June it would invest $691 million to expand its Mexican operations. The plans include a new factory in Silao in central Mexico to build 8-speed transmissions and an upgrade to an existing factory in San Luis Potosi that will make next-generation transmissions.

Watch for BMW, Hyundai, Toyota and Mercedes-Benz to announce at least $2 billion of deals in the next year or two, in addition to $6 billion in announced plants by Nissan, Honda, Mazda and Volkswagen.

The China of the West

Joseph Langley, a senior analyst with the Michigan-based research firm IHS Automotive, told Reuters that Mexico is fast becoming “the China of the West.” By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.

Last year, Mexico attracted $3.7 billion in announced automotive investments, matching the U.S. total, according to the Center for Automotive Research in Ann Arbor, Michigan.

Since 2000, overall auto industry employment in North America has fallen from 2 million to 1.5 million — partly because of robotics and automation. The march of technology, creating greater productivity, is an overriding reason why our manufacturing sector in the U.S. will not grow by millions of jobs, despite what some so-called experts continue to say. Don’t get me started on that.

But Mexico has actually been adding automotive jobs. And now about 40 percent of all auto industry jobs on the continent are in this nation of 115 million, the second largest economy in Latin America.

Being on the doorstep of the U.S., where most of the product will go, certainly provides for a key advantage, as does lower wages, a strong supply base and a global web of free-trade agreements that actually surpass that of the U.S.

Free Trade Agreements Helped

Indeed, it was Mexico’s free trade agreements that were central to Audi choosing it over certain Southeastern states for a new $1.3 billion assembly plant that will produce 150,000 Q5 sport-utility vehicles a year starting in 2016.

Mexico has 12 free trade agreements with 44 countries, while U.S. has 14 trade deals covering only 20 countries. For the European Union, it means a 10 percent tariff on U.S.-built vehicles, which would cost Audi more than $3,000 per Q5. Europe does not apply a tariff on Mexico-built vehicles.

Audi’s choice of Mexico should have been a wakeup call. Suddenly, the South’s dominant position in offering the auto industry lower wages, less of a tax bite and a more favorable (less-active) union environment, is no longer the slam dunk it once was.

Mexico has proved itself to be an attractive alternative in North America. And at around $2.50 an hour, manufacturing wages in Mexico are about 20 percent cheaper than in China, according to a Bank of America study.

Rumors of More

So it is no surprise of reports, you can rightly call them rumors at this point, that BMW, which operates an assembly plant in upstate South Carolina, and Hyundai, which produces vehicles in Alabama, are snooping around Mexico looking for their next assembly plant. I believe the same could be true for Toyota. (Of course, if these companies were really smart, they would hire Barber Business Advisors to help them find that most optimal location in Mexico.)

Just two days before Audi held its groundbreaking ceremony on May 4 at San Jose Chiapa, Honda announced that it would build a $470 million transmission plant in the central state of Guanajuato, near an $800 million assembly plant that is expected to begin production this coming February.

This automotive building spree in Mexico is not by accident. Things happen for a reason. Mexico is the low-cost place for manufacturing, and because of its close proximity to the U.S., the cost of shipping product will always be far far less than what China, or India or Brazil could ever offer.

Mexico is back in the game. It has long-standing governance problems to be sure. The drug cartel violence is not something to be ignored, but foreign-based manufacturers believe it to be an issued that can handled and mitigated, no doubt with some additional security costs involved.

But Mexico has proved to be a worthy bet. And you are going to see more growth as result.

Have Laptop, Will Travel

It should come as no surprise that I travel on behalf of business clients — be that a company in regard to a site search project or an economic development organization that needs my help. In other words, somebody is paying the freight for what is by definition business travel.

So I find it somewhat odd when I am invited by economic developers to come visit their respective communities but with no representation or afterthought of compensation.

At such times, there is often a certain awkwardness that I feel in suggesting that compensation would be involved. But the truth is that this consulting business of mine really is a business. And lending time and expertise is the basis for that business. You would think that would be obvious, but apparently it is not.

So unless I am on vacation, to which you would never see me, business dictates my travel. That’s just the way it is, the way it has to be if this enterprise is to remain a viable concern.

So if a company is not paying me to be at a particular place at a particular time in regard to a site search, then the only other scenario is that a community has contracted for my services. It maybe something of a more in-depth nature — a SWOT analysis or site certification – or it could be something more short term, such as giving a speech/presentation to stakeholders.

Providing that Outside Voice

It has been my experience that economic developers often do need an outside voice to say what they have essentially been saying, but to which has been largely ignored. There is a strange psychology at work here, a variation of familiarity breeds contempt. Even Jesus referenced the difficulty of being viewed as a prophet from one’s own village.

So I will come to a community armed with a briefcase and laptop and give talks/presentations on how the site selection process works and how communities can go about to better compete for corporate investment. Through it all, there is a single strand to my message – You got to invest in yourself if you are to expect someone else to invest in you.

I will be going to Joplin, Mo., this coming week to tour the region and pass along that message (and more) on behalf of the local economic development organization there. I will tell my audiences (I’ll be speaking to three different stakeholders groups in three different communities) the truth — that the recruitment of industry is always a tough nut to crack, but especially so in this new digital machine age that requires fewer but higher-skilled people.  Business retention and expansion is usually the best bet for job growth in most communities.

So let us hope that my message takes in the Show Me State. No doubt, many of my audience members will be astute business people and will get it. If for some unforeseen reason, however, my presentations are met with glassy-eyed stares, perplexed looks or outright rebellion, then I will probably not report that you. It hasn’t happened yet, but there is always a first time.

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 Defining Combination in Mexico

Maybe you have heard me say it before, but it bears repeating: I’ve never met a state that I didn’t like.

Of course, I’m playing on a quote by Will Rogers, who said he never met a man that he didn’t like. Well, I wish I could be so generous, but some folks just don’t sit right with me.

I was a northern state not long ago, a fine place indeed, good people. But this one fellow, an economic developer, said the damndest thing that really stuck in my craw. He said that people working in automotive plants in the South were, and this was his words, mostly “barefoot hillbillies.” I swear I am not making this up.

I think my jaw may have actually dropped. And for just a moment, the Scots-Irish rebel in me emerged as I had this sudden urge to slap his jowls, call him a scoundrel and challenge him to a duel.  But this was a dinner party, and Cracker Dean didn’t need make an unpleasant scene.

But I could not let his snide slur about my people go unchallenged, as I consider myself a hybrid son of the South. (My mother was from Chattanooga, Tenn., and my father from Pittsburgh, and I grew up in both the South and the Midwest).

“Well, if what you say is true, and let me assure you that it is most certainly not, then you are essentially asserting that Mercedes-Benz, BMW, Volkswagen, Toyota, Honda, Nissan, Hyundai, and Kia were all wrong for having built assembly plants in the South. Let me get this straight, is that what you are saying?”

He looked at me in a dazed manner as if I had planted a two-by-four between his eyes. I don’t recall him saying much to me the rest of the night, which was fine by me. But despite his ignorance (talk about the pot calling the kettle black), I would never hold that against his state or region in a site selection project. There are people who say dumbass things everywhere.

No doubt, I have written a few in this blog. So I forgive Mr. Yankee Dumbass and will ask for your forgiveness as well.

The Big Fish Swam Away

Earlier this year, I was sitting in the office of an economic developer in the South who spent most of his career in the automotive industry. He had worked in senior management positions for both domestic and foreign automakers. Leave it to say, he has a deep understanding of the industry.

We were talking about Audi’s decision to build a $1.3 billion assembly plant in Mexico.  My host was genuinely perplexed. “I don’t understand that decision,” he said.

Keep in mind that economic developers in Tennessee, Georgia and Alabama were biting at the bit over the prospect of getting this Audi plant. They knew it was coming, and they knew they were in a very good position to get it.  It all made a great deal of sense.

Any future Audi plant could use many of the same suppliers now in place for parent company Volkswagen, which had completed an assembly plant in Chattanooga and began turning out Passat sedans in 2011. There were also a host of other nearby German tier one and tier two suppliers serving Mercedes-Benz in Tuscaloosa, Ala., and BMW in upstate South Carolina.

In short, economic developers in the South just knew they had another big fish circling their bait. But then the big fish unexpectedly swam away.

To many, Audi went off script by choosing Central Mexico for its first assembly plant in the Americas, although VW has a plant in nearby in Puebla City and an engine plant in Silao. But the more you look at it, the more it makes sense.

A Dream Moment?

Audi Chairman Rupert Stadler said something quite revealing at May 4 ceremony to lay  the foundation stone for the future plant, which will build 150,000 of the Q5 sport-utility vehicle annually starting in 2016,

“Mexico was chosen very deliberately,” Stadler told more than 500 industry and government officials gathered outside the town of San Jose Chiapa. “It is situated between North and South America, making it a linchpin between the two regions.”  Mexico was, according to Stadler, an “ideal export base.”

Audi executives touted Mexico’s good infrastructure, competitive costs and existing free-trade agreements in picking the site, which will cover an area the size of 400 soccer fields. They called the Mexican plant a “dream moment,” a bit uncharacteristic for Germans. But maybe the beer and tequila, not an especially good combination, were flowing by then.

Being on the doorstep of the United States certainly doesn’t hurt. But it’s worth noting that Mexico has 12 free trade agreements with 44 countries, while the U.S. has 14 trade deals covering only 20 countries.

Also, Mexico’s total compensation per worker was $3.94 an hour in 2010, only slightly above that of China, where wages are rising and transportation costs are greater because of the distances involved. Compare that with $34.59 in the United States and $52.60 in Germany.

“Mexican auto factories and Mexican manufacturing offer First World productivity and quality at Third World wages,” said Harley Shaiken, a professor of education and geography at the University of California at Berkeley in an interview with The Washington Post. “That is an unusual combination, and right now it is a defining combination.”

That defining combination is attracting billions of dollars of new automotive investment every year.

But Wait, There’s More

Just this past week, Denso, a tier one Japanese automotive supplier, said it would spend $51.4 million to expand operations at its production facility in Silao. The expansion involves adding a new product line to build alternators beginning in October 2014 for North American customers including Ford and Toyota.

Also last week, Nissan said it had signed a deal with real estate developer firm Vesta for the construction of an industrial park near its assembly plant now being built in the central state of Aguascalientes. Nissan expects that the proximity of the park to its manufacturing facility will allow for certain advantageous production flow processes.

Nissan will begin phase one operations at the $2 billion plant later this year. The Japanese automaker currently exports to 115 countries from Mexico.

Last month, General Motors, which employs 15,000 people in Mexico, said it would invest $691 million to expand its Mexican operations. About $211 million will be spent on expanding its Toluca plant, where GM builds V8 and four-cylinder engines.

The company will spend $349 million for a new transmission plant in Silao that will build 8-speed transmissions, and $131 million to expand the next-generation transmission plant in San Luis Potosi. 

The U.S. automaker, which has operated in Mexico for 78 years, builds the Chevrolet Silverado and GMC Sierra pickup trucks in Silao; Chevy Sonic and Captiva, and Cadillac SRX vehicles in Ramos Arizpe; and the Chevy Aveo, Trax and Tracker vehicles in San Luis Potosi.

Only a few days following the Audi ceremony, Honda announced that it would build a $470 million transmission plant in the central state of Guanajuato, not far from an $800 million assembly plant now under construction and expected to begin operations in early 2014.

Mazda’s new $650 million plant at Salamanca is scheduled to start operations in March 2014. Already the company has announced plans to raise production by 90,000 units to a total of 230,000 units within two years. The plant will eventually employ 4,500 people, and marks the return of Mazda manufacturing to North America after Mazda6 production was moved back to Japan last year.

Mexico’s Gain Not a U.S. Loss

Last year, Mexico attracted $3.7 billion in announced investments by automakers alone, matching the U.S. total, according to the Center for Automotive Research in Ann Arbor, Michigan. IHS Automotive estimated that investments by automakers in Mexico over the next few years could total $3 billion annually.

But Mexico’s gain does not mean a U.S. loss. Automotive jobs will grow on both sides of the border, making the broader North American economy more competitive against Asia and Europe.

“Mexico is not siphoning off jobs from the U.S.,” George Magliano, senior economist at IHS Automotive, an industry research firm, told The Washington Post. “North America is becoming a new hub for export production, and the bulk of it is occurring in Mexico,” he said. “But some of it is happening in the U.S.”

Of the more than 15.5 million vehicles estimated to be built in North American auto plants last year, more than 10 million were built in the U.S., while Mexico produced about 3 million and Canada 2.5 million. By 2020, IHS projects the industry will make 11.7 million in the United States, 4.1 million in Mexico and 1.9 million in Canada.

That is what I would call a good deal, both for the U.S. and Mexico. Canada, not so much, which I am sorry to say.

Now I could show my chauvinistic ignorance and lament why all these automotive companies are making such horrific blunders by building new plants in Mexico and employing people who don’t really know much of anything. But then again, I don’t believe that. I don’t think these big investments are blunders at all.

No, I think these companies have found something good down there in Central Mexico, which is removed from the drug cartel violence at the border. Matter of fact, I’m sure of it or they wouldn’t be lining up to spend billions down there.

They’re speaking with their actions and that tells me something. I hope to learn more about it and if I do, well, I’ll be sure to let you know. In the meantime, hasta la vista or … 

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 in Plano, Texas —http://www.barberadvisors.com Telephone: 972-767-9518 Email:dbarber@barberadvisors.com

If your company needs an optimal location for future operations due to expansion or consolidation, we can help. If your community needs to improve its competitive standing by leveraging strengths and addressing weaknesses, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Dean Barber and Barberbiz with specific direction to the original content.

 

 

 

 

 

 

 

 

 

 

 

 

 

The Cost of Salvation

By any accounts, it has been a long haul. We have been through the fire together.

When the history books are written, this Great Recession, which economists say ended in 2009, will be viewed as a much more difficult period than I think we even realize today.

And we are still trying to reclaim lost ground. The typical household has regained less than half its lost wealth, according to a recent analysis by the St. Louis Fed. Household wealth plunged $16 trillion from the third quarter of 2007 through the first quarter of 2009.

By the final three months of 2012, American households as a group had regained $14.7 trillion, but bank researchers say that data is misleading. They argue aggregate household net worth data isn’t adjusted for inflation, population growth or the nature of the wealth. The analysts  contend the average household has recovered only 45 percent of its wealth.

“Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the Fed researchers said.

I can buy that. The wounds are still evident, albeit our economy is healing. Consumer confidence is at a five-year high. Houses and cars are selling again, and the energy sector is booming.

Words of Hope, Signs of Growth

And despite a dysfunctional Washington, I hear words of hope and signs of growth just about everywhere I go, and I have been on the go a lot lately – Alaska, South Dakota, Missouri, Tennessee and Ohio, just in the past few weeks. I’m now in recovery mode at home in Texas, pondering what I have seen and heard from business people.

And I am encouraged, but fully appreciate that we have a long slog ahead. What I sense is that small businesses on Main Street continue to struggle to find customers, while many Fortune 500 companies are seeing record profits. So there is this rather odd dichotomy at work in the U.S. economy.

If there is anything this Great Recession taught business, big and small alike, it is that we can get by, even profit, by doing more with fewer people. This new digital machine age which I think we are just now entering will make it even more so.

(I give a rather sobering if not downright scary presentation called “Machines Rising.” You can see it at my LinkedIn profile.)

And don’t you know that presents quite the pickle for economic developers, who are too often judged solely by job creation, an unreasonable expectation in my view. But that’s whole nuther blog in itself.

Look, even with an unemployment rate that has dropped to 7.6 percent, we have 2.4 million fewer jobs today in this country than we did when the recession began. Adjusting for population growth, it will take more than nine years at the current rate of hiring to return to prerecession employment levels, according the Brookings Institution.

Consumers Rule

Consumers hold the key. They will propel this recovery forward as household purchases account for about 70 percent of the economy. I believe that to be particularly true with the automotive industry, in which vehicle sales for 2013 could reach 15.5 million, the highest in six years. 

Automotive plants today are operating at about 95 percent of capacity, with many running three shifts. As a result, companies are adding floor space and spending millions on new equipment. 

“We’re really bumping up against the edge,” said Michael Robinet, managing director of IHS Automotive in a recent interview with the Associated Press. “So it really is brick-and-mortar time.”

Just this past week, there have been such brick-and-mortar announcements. Nissan on Thursday said it would be adding 900 jobs to start making the Rogue crossover SUV at its Smyrna, Tenn., plant.

The new jobs are in addition to 800 positions added at the Smyrna plant last year, and will bring total employment at the suburban Nashville facility to more than 7,000. Rogue production is scheduled to begin this fall. 

Tennessee’s Megabet

When I was in Tennessee earlier this month, I learned more details about a nearly 4,000-acre megasite located between Memphis and Jackson, Tenn., off Interstate 40. The Memphis Regional Megasite, a certified site owned by the state, has been designed for a future automotive assembly plant, and that is what economic developers in the region are betting on. It could very well happen.

In a few weeks, I will be in Jackson, Tenn., which is about 100 miles from Toyota’s assembly plant in Blue Springs, Miss. (near Tupelo) and 150 miles from the Nissan plant in Symrna. With a rebounding automotive industry, I would expect some modest employment growth among Jackson’s nine automotive supplier companies. 

Big Announcements in Missouri

Also, this past this week, General Motors announced a $133 million expansion in Wentzville, Mo., about 40 miles west of St. Louis. It is the second expansion in less than two years at the facility, which employs about 2,000 people.

Construction will begin in July on a new 114,000-square-foot stamping press, which is expected to create or retain 55 jobs.

Earlier this year, Ford announced a third production shift for the Ford F-150 at its Claycomo plant, outside of Kansas City, adding another 900 new jobs. 

A couple of weeks ago, I was in Missouri, where I was an invited guest at “Lakeside with the Locators” and then subsequently spoke at the annual meeting of the Missouri Economic Development Council. It was there that I learned just how important the automotive industry was to the state. 

In fact, auto manufacturing contributes $2.6 billion to Missouri’s economy annually and represents its fourth-largest goods-producing sector. 

A Long Tradition in Northwest Ohio

Last week, I was in Northwest Ohio, which has historically been very much tied to the automotive industry and a manufacturing tradition. My host was the Toledo-based Regional Growth Partnership, an economic development representing 17 counties in Ohio, and with having close working ties to three counties in southern Michigan. 

Last year, the RGP worked 12 automotive related projects, representing capital investment of more than $74 million and resulting in more than 2,000 jobs created or retained. In the first quarter of 2013, the RGP has worked three projects, representing more than $40 million in capital expenditures, with more than 1,300 jobs created or retained.

RGP President Dean Monkse attributes the investment to the human resources of his region. 

“This ongoing investment in our regional automotive industry is a testament to an outstanding workforce that prides itself on continuous education and training,” he said. 

Judging from what I learned about Northwest Ohio, I think he is probably right.
 
The Toledo-built Jeep Wrangler set a sales record last year and is well on its way to a record in 2013. Parent company Chrysler is working to fill more than 1,000 new positions that will come to the Toledo assembly plant as it adds a second shift of production for the 2014 Jeep Cherokee.

As you can see, I have been doing a fair amount of traveling lately across this great country of ours. In the last three states where I have been – Tennessee, Missouri, and Ohio – the automotive industry plays a key role in those states’ economies. And the good news is that it is expanding. 

LMC Automotive, a forecasting firm, predicts sales will gradually reach 17 million in 2017. That would be almost equal to the boom years of the late 1990s and early 2000s. And hiring will no doubt follow. In 2005, before huge cuts began, more than 1.1 million people made motor vehicles and parts. Today, 798,000 do, according to the latest government statistics. 

The Center for Automotive Research predicts the industry to add 35,000 over the full year. Chrysler, GM and Ford, as well as Honda in Ohio and Alabama, and Mercedes-Benz in Alabama plan to add more than 13,000 people this year. And many of the Tier One and Tier Two suppliers will follow suit.

Reflecting on What Has Been

But sitting here at home in Plano, not 40 miles away from GM’s assembly plant in Arlington, Texas, I cannot help but reflect on the fact that it was not long ago when GM and Chrysler were in bankruptcy and facing the prospect of being dissolved. Federal intervention prevented that, and I think it was the right call, as not acting posed too many risks for too many people.

But there has been great cost to salvation, cost to this comeback. Thirty years ago, an auto worker made $40 an hour in today’s dollars, and paid zero for their health care. Today’s auto worker makes $17 an hour and must pay $200 a month for health care.

“So we have taken that manufacturing base and transferred it from the middle of the middle class to the working poor,” said Tim Leuliette, president and CEO of Visteon Corp., during the Detroit Regional Chamber’s Mackinac Policy Conference last month. 

“We have repotted the American manufacturing base to be globally competitive, but at a cost. We can’t attract some of the people we used to because the opportunity to make a good living is no longer there.”

Sobering words from Mr. Leuliette, a CEO with a tier one automotive supplier that has shrunk in the U.S. from three dozen plants down to four, from 12,000 employees to 1,200. Visteon now has 110 plants in China and is building more.

Yea, I think about these things. As a consultant, how can I not? I have to be constantly re-educating myself if I am to bring value to any client, be it a company looking for an optimal location for future operations or an economic development organization seeking to improve its competitive position.

But often the span of time illustrates truth. I think that is why I read history. I believe the history books yet to be written will tell us a lot. We have been through the fire, and yet somehow I have to think we are going to come out of this stronger and at least wiser. We can only hope that is so.

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 in Plano, Texas — http://www.barberadvisors.com Telephone: 972-767-9518 Email: dbarber@barberadvisors.com

If your company needs an optimal location for future operations due to expansion or consolidation, we can help. We will take you there. If your community needs to improve its business climate and competitive standing, we can help. All requests for information will be considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Dean Barber and Barberbiz with specific direction to the original content.