By Michael Fonda - Chicago
I bumped into my friend Mark Goode of Venture One Real Estate at the recent Fall Conference of the Society of Industrial and Office Realtors ("SIOR") that was held in Chicago. Mark showed me an article by Boston Consulting Group (“BCG”) entitled Made in America Again: Why Manufacturing Will Return to the U.S. In this article, BCG has prepared an eye-opening analysis of the future of U.S. manufacturing. The piece (click here to read) predicts that manufacturing will return to the U.S. in a meaningful way, beginning as soon as 2015.
A combination of escalating wage rates in China, higher transportation costs from China to the U.S., supply chain risks and the cost of industrial real estate is improving the competitive position of the U.S. relative to China.
China, with 1.34 billion people, is a market that has to be serviced (and it will be by both Chinese and U.S. manufacturing plants in China). Although some manufacturing will migrate from China to India, Southeast Asia and Mexico, the U.S. (according to BCG) will begin to recapture much of the manufacturing and employment that has been lost since the 1950’s when the U.S. produced 40% of the world’s manufactured goods. If Joseph Sternberg, editorial page writer for the Wall Street Journal, is correct in the assertions he made in the article he wrote for the Journal’s editorial page on Wednesday 10/26/11, “The Phony Success of China’s Stimulus”, U.S. resurgence might even be bigger than even BCG predicts. Couple China’s possible missteps with changes being proposed by Dave Camp (R-Michigan), Chairman of the House Ways and Means Committee, regarding a transition to a “territorial tax system” (which is also being proposed by Governor Rick Perry, who is running for the Republican nomination for President of the U.S.) and there might be a tidal wave of cash returning to American shores to fuel this resurgence in goods manufactured in the United States. (Watch Representative Camp talk about his plan with Andrew Ross Sorkin on Squawk Box here.)
Global manufacturers will think strategically when deciding where to locate. They will consider total landed cost of their products, they will design flexibility into their supply chains and they will locate close to the consumer. All of this bodes well for the future of U.S. manufacturing, as long as the U.S. provides a favorable investment climate (like the proposals for a territorial tax system) and the labor force remains flexible and is well-trained.
In the August edition of Inbound Logistics, Lisa Harrington wrote an interesting piece on manufacturing returning to the United States, Is U.S. Manufacturing Coming Back - read here. In her article, she highlights Stephen Rogers' "Nine Steps to Choosing a Manufacturing Location." Harrington quotes Rogers cautionary statement regarding "reshoring" in which Rogers says, "It's expensive and difficult to bring manufacturing back to the United States, even if you kept the building. Companies underestimate the difficulty of training workers and building self-directed manufacturing teams."
BCG’s analysis focused on states in the southern part of the U.S. – Alabama, Mississippi and South Carolina. States like Illinois, although blessed with great transportation infrastructure, a large population and a world-class city – Chicago, still has work to do with regard to its bloated government and high labor costs relative to its southern neighbors. The good news is that the UAW and the Big Three (now an anachronistic term) automakers have begun to address both labor costs and sclerotic labor work rules. (I blogged about this in at the conclusion of my June 10th post. Read here.) Government reform is next. When that happens, Illinois may not only be the Number 1 climate for business in the Midwest, as Crain’s Chicago Business asserted in last week’s issue (click here to read) but possibly could climb to Top Five in the U.S.
The resurgence of manufacturing in the U.S. and Illinois….talk about hope and change!
My 17 year old daughter came home with an interesting debate assignment last Thursday - to advocate “How Debt Destroyed Capitalism”. Not surprisingly, she was pretty confused by the number of contradictory opinions she had come upon in just a few hours of research on the internet.
Among the opinions she found were some of my personal pet peeves: Sovereign debt doesn’t count because governments can just print their way out of the problem…Bank debt doesn’t count because it’s possible to purchase credit default swaps to insure over those risks…and lastly, personal defaults don’t really matter because everyone is overextended days, lenders are incorporating this into their pricing (like that explains why your credit card company charges 14.5% interest while the government can borrow for around 2%).
I assured her that not everyone is defaulting these days; credit default swaps are not insurance; and sovereign debt counts just the same as other debts regardless of how much money is printed. Since all forms of debt compete for scarce resources, in an era of deleveraging what government elects to do or not to do really matters. We are finding ourselves in a world where increasingly instead of bankers deciding who will and won’t have access to credit it is politicians making those decisions, with a different set of criteria from traditional Capitalist rule-books.
In an interview yesterday on Bloomberg about widening spreads on Morgan Stanley credit default swaps, the interviewer kept talking about the increasing cost “of insuring” these bonds. The person being interviewed pointed out that the daily swap spreads are really more indicative of hedge funds betting on short term political risks the bank might be exposed to than underlying credit strength of the institution relative to its peers. This very technical discussion highlights Problem #1 – poor understanding of the role and array of contemporary credit instruments and Problem #2 - the proliferation of ways to bet on the market, and huge daily movements of capital which affect outcomes.
At a conference last week here in
Much of what is currently being touted as a “debt crisis” is in fact, a political crisis - that is the inability and/or unwillingness to find palatable solutions that involve collective sacrifice to achieve collective outcomes. Because these discussions get instantly polarized into “winners and losers” they strike at the heart of what is undermining confidence that is so essential to smooth functioning of what is increasingly a global marketplace. In today's world we are all interconnected, the fortunes of the least impact us all. Since political risk is the hardest of all to gauge accurately, it’s no wonder markets are touching new lows.
