The Regional Advantage:What the New Manufacturing Location

Calculus Implies for the Economy of the Northeast

 

Susan Christophersonsmc23@cornell.edu

Why the Northeast’s Regional Manufacturing Assets Are Central to National Export Strategy

I. What is happening in manufacturing location? Why is it happening?

I. What is the regional advantage in this new location calculus?

II. National support for regional industrial strengths

I. Assets trump averages

A Manufacturing Rebound? Why is manufacturing returning?

What does a manufacturing location reassessment mean for the UK ?

How can a regional economy –the Northeast - build on its natural geographic and industrial advantages to attract manufacturing?

What is the Explanation in the UK?How Does it Differ in the US?

The UK explanation for modest but better performance in manufacturing focuses strongly on ability to reduce labor costs.

“ (In the UK) The recession provided most companies with an opportunity to carry out radical restructuring, implement cost reduction strategies, improve supply chain agility and renegotiate previous contractual commitments. These strategies allowed margins to be protected and have provided a strong base for growth.” PWC, 2012

The US explanation focuses on total cost calculations with labor cost of minimal significance.

What Evidence Do We Have?

• Exports are up

• Manufacturing employment has bucked recessionary trend

• Analyses by major consulting firms assess comparative costs

Exports Have Led Out of Recession

The Northeast is Central to UK Export Potential

Some US Evidence/Indicators

The US Case: Capital Goods and Industrial Supply Exports are Moving Up

Manufacturing has Led US Out of the Recession

The US Explanation for Why This is Happening Now

Gradual and anticipated increases in transport costs

Lower wages in the US; higher wages in China

Appreciation of Chinese currency

Labor is a smaller portion of total production cost

Recognition of potential supply chain disruption risks

Problems with quality control and intellectual property in China

Lower energy costs in US from natural gas development

A New Focus on Total Cost

Supplier Price and Terms

Other 

Costs

Operations &

Quality Costs

Delivery 

Costs

Unit Price•Labor•Direct materials•Management•Overhead•Capital Amortization•Local taxes•Manufacturing•Local regulatory compliance

Logistics•In-country transport•Ocean/air freight•Destination transport•Packaging

In-plant MaterialInventory•Intra-plant demand•Safety stock•Handling•Overhead•Warehousing & O/H

Standard•Risk•Qualification•Local tax incentives

Terms•Net payment•Volume Discounts•Free Goods

Region Specific•Duty•VAT

Supply Chain•Inventory maintained within•Satellite warehousing & O/H

Quality•Quality validation•Quality management•Failure costs

Situational•Procurement staff•Broker fees•Infrastructure•Exchange rates•Training•Tooling/molds

Customer Specific•Unique services•Unique capabilities

Adapted from Archstone Consulting

Sample Total Cost ComparisonPotential US Cost/Productivity Advantages

Chinese unit price $70

U.S. unit price $100

# units/year 12,000

unit weight, lbs 2

Shipments/year 6

product life, yrs 5

Packaging* 1%

Payment on shipment

Yes

Quality* 2%

Product liability risk* 0.5%

IP risk* 1.9%

Innovation* 0.5%

Trips/yr 2

Carrying cost, rate 22%

Emergency air freight %* 5%

Wage inflation, annual* 8%

Currency appreciation, annual* 5%

Estimates that Total Cost Comparisons Could Bring Back 25% Off-shored Manufacturing

Percent of re-shoring initiative cases where US has a price advantage: 5%

Percent of re-shoring initiative cases where US has total cost advantage: 53%

Where are US Cost Advantages Over China?Similar in the UK

In serving domestic markets (both niche and mass): Example: Food Note the role of health and safety regulation

In export markets: Examples: Aerospace

Chemicals MachineryMedical Equipment

U.S. Manufacturing Competitiveness in Domestic Markets

-60%

-70%

Semiconductors

Textile Product Mills

FurnitureLeather

Printing

Nonmetallic Mineral Product

Textile MillsApparel

Plastics

300%

200%

90%

80%

Paper

Electrical Eqpmt.

Computer Eqpmt.

Fabricated Metal

Pharma.

Appliances

Electronics

Primary Metal

*

Auto Final Assm.

Bev. & Tobacco

Other Transp. Eqpmt.

Wood Product70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

Medical Eqpmt.

Machinery

Food

Petro/Coal

Chemicals

Aerospace

1) The U.S. cost advantage represents the labor and logistics costs compared with those of Chinese manufacturers, for products consumed by people in the United States. Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization, IRS Statistics, Tauber Institute for Global Operations, Booz & Company

U.S. Manufacturing Positional Advantage for U.S. Demand

HighLow

U.S.

Mfg

. Cos

t Adv

anta

ge o

ver C

hina

for P

rodu

cts

Cons

umed

in th

e US

(1)

Sectors on the Edge

Niche Players

Regional Powers

Circle size = U.S. consumption

Global Leaders

U.S. Manufacturing Competitiveness in Export Markets

Paper

Electrical Equipment

Computer Equipment

Fabricated MetalsPharmaceuticals

Appliances

Electronics

Primary Metal

Auto Vehicle Parts

Food

Machinery

Medical Equipment

Other Transportation EquipmentBeverages & Tobacco

Aerospace

Chemicals

-10%

-15%

-20%

-25%

-30%

-35%

-40%

-45%

Petroleum / Coal

-55%

-60%

-65%

-70%

Semiconductors

Textile Product MillsFurniture

Leather-50%

Nonmetallic Mineral Product

Wood Product

Textile Mills

Apparel

Plastics

Auto Final Assembly

290%

-5%

Printing

0%

Circle size = U.S. consumption

Global Leaders

U.S. Manufacturing Advantage for ExportHigh

U.S.

Mfg

. Cos

t Adv

anta

ge o

ver C

hina

for P

rodu

cts

Cons

umed

in th

e Ch

ina(1

)

.

Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization, IRS Statistics, Tauber Institute for Global Operations, Booz & Company

Is There a Regional Advantage in This New Location Calculus?

What is it for the Northeast?

Many Older Industrial Regions in US are Doing WellSpurce

Sources: The Brookings InstitutionThe Rockefeller Institute

Blue = Metro areas not specialized in manufacturing Green = strongly specializedYellow = very strongly specializedRed = highly specialized

Two Visions of the Northeast

Some Key Advanced Manufacturing and Enabling Technologies That Have Emerged in

the Northeast

Automotive – Low carbon vehicles Renewable Energy – Off-shore wind Chemicals and process industries – Bio and specialty chemicals Engineering services – automotive, aerospace and marine Oil and gas – subsea technologies Logistics

What are Critical Connections for Regional Economic Development?

Labor force improvement connections are critical to potential re-shoring firms, especially given importance of labor quality to their decision-making.

Logistics connections to intermodal facilities will be critical. Also, Heartland connections to ports. Technological advances in logistics will be increasingly important … not just to the transportation industries, but to the recovery of manufacturing.

Supply chain connections that strengthen regional comparative advantage.

Connections with the next generation of leaders.

The Regional AdvantageWhat the New Manufacturing Location

Calculus Implies for the Economy of the Northeast

 

Susan Christophersonsmc23@cornell.edu

Additional slides below not in presentation

What is happening in manufacturing location? Why is it happening?

The Steel Industry CaseWhat Happens When We Look at Comparative Costs for Labor,

Inventory and Transportation Costs for Steel Products Used in US?

According to a PWC analysis, between 2006 and 2010 …

• Chinese labor costs remain considerably lower, but the gap is decreasing.

• The difference in transportation cost -- ocean shipping costs of raw materials and final goods -- increasingly favors the US as fuel prices rise.

• Carrying costs – the raw materials inventory needed to maintain production, and the final goods inventory needed to serve customers (factoring time-in-transit and a margin for contingencies), plus the cost of financing those inventories -- significantly favor US steel production.

Prominent Examples among Steel Producers and Users

• US crude steel production increased more than 7% in 2011, while consumption increased around 11% during the same period. (http://www.worldsteel.org) It is expected that the trend will continue due to the increase in consumption from various industrial sectors.

• Caterpillar, is building a plant to make excavating equipment in Texas, tripling its capacity for such equipment in the U.S.

• Ford is repatriating 2,000 jobs from China

Labor Skills Shortage is Complicated and Differs Among Regions and Industries

“Ready to work” skills may be missing.

A mismatch between general skills taught in technical schools and the specific skills companies are demanding. Technical training on specialized equipment is expensive.

Wages for skilled advanced manufacturing jobs are too low in some regions to induce skilled workers to move. Wages for machinists and tool & die occupations are down across the state.