Site Selection Group

Reshoring of Manufacturing to the United States

Tue, 08 May 2012 14:14:00 GMT

The recent report by Boston Consulting Group does an incredible job of summarizing the trends Site Selection Group is seeing in the United States. The following transcript from a webcast from the consulting team who worked on the report.

Welcome to the BCG Business Podcast. I’m Simon Targett, editor in chief at The Boston Consulting Group, and with me today is Hal Sirkin, a senior partner based in Chicago and an expert, among other things, on globalization and the operational challenges facing companies. He has written or co-written a number of books, including Globality: Competing with Everyone from Everywhere for Everything, and he writes a regular column for Bloomberg Businessweek. Today we’re going to talk about his new work on global manufacturing and, in particular, what he’s calling the “manufacturing renaissance” in the United States. Hal, what’s the evidence of a manufacturing comeback for the U.S.?

It’s very simple. Things are changing in the world. Back in 2000, it was an easy decision to start moving production to China. Labor was 50 cents an hour, and you could get as much of it as you wanted. The Chinese government was very focused on making sure China got the jobs. And it started doing certain things that created, in essence, a perfect storm—but in reverse. The government was very smart in how it managed everything, creating dozens of clusters by taking companies that were in the same industry and forcing them to go to pretty much the same place along the coastline. It worked very well. The clusters had access to seaports, which helped boost exports, and they also contained their own schools—giving every company the ability to train people and make them more productive. This reverse perfect storm was a very important thing for China.

So what’s changed then?

The laws of supply and demand are taking hold. With labor at 50 cents an hour, lots of companies ran to China and started producing goods there, initiating a spiral of wage inflation—from 50 cents, to 60 cents, to 70 cents, to $1, to hourly wages that are on the order of $3 now along the coastline. That may still seem low, but it’s a sixfold increase over that period of time. And that makes a huge difference.

So which sectors are in the frontline of those returning to the U.S.?

Things like appliances, computers and electronics, transportation goods, plastics, and rubber. Which makes sense, because as wages rise, they are losing the advantage of low labor costs, which are very important to them.

You talk about these as tipping-point industries.

Yes, because we’re not there yet. We believe that sometime around 2015, these industries will start to get to the point where the difference in terms of manufacturing costs—not delivery costs but manufacturing costs—will be less than 10 percent. Then when you start adding in things like delivery and being far away from the customer, having lots of inventory on the water, intellectual property risks, and even country risks, it begins to make sense for companies to start bringing the goods back to America.

Can you quantify what the value of this transition will be to the U.S. economy?

We’ve tried to make some conservative estimates. This is a trend that is just beginning, so we are trying to be very conservative about it. But a fairly conservative estimate is that $100 billion to $120 billion worth of goods could return to the U.S.

Why aren’t all companies returning if the economics make so much sense? What’s the point of staying in China?

For some goods, the labor content is not at 25 percent but more like 50 percent, so in those cases the labor advantage remains. Some good companies will stay in China. For shoes and apparel, for example, labor content is 50 percent or 60 percent. Some manufacturers of those goods will leave China, but they won’t come to the U.S. They’ll go to places like Vietnam or Sri Lanka because the labor pools there are perfectly capable of producing the goods at pretty good quality.

Does this signal the end of China as the world’s manufacturing hub?

Absolutely not. It is clearly going to remain a major manufacturing hub for the world, if only because of its 1.3 billion people. We don’t think plants are going to close in China, which is growing at 8 percent to 12 percent a year. Even the lower estimate of 8 percent is a pretty good growth rate. So if you’re going to try to serve the Chinese market, you’re still going to have to build plants there. But a lot of companies that are planning new plants are going to look carefully at their supply chains. In 2010, the default position was to build them in China, but now a company may consider putting a plant in the U.S. instead. It can then take one of its Chinese plants that was exporting to the U.S. and repurpose it for domestic Chinese, or maybe Asian, consumption. The Chinese plants will remain important, but the one built in the U.S. is now closer to a very important customer base with a population of 300 million and the world’s largest economy.

And does pitching to the Chinese in their domestic market require a dramatic refurbishing of the local factories?

It depends what they’re producing. For many, many goods, it’s not going to require much of a change at all. But the Chinese consumer’s demands are growing very rapidly. Not that long ago, a large percentage of China was worrying about getting the number of calories necessary for survival each day. And now we’re way beyond that—certainly in most of the cities. People have gone from wanting bicycles—which was at one point a luxury good for many—to wanting motor scooters, cars, TVs. And like Americans and everyone else around the world, the Chinese would like to have a better lifestyle. So domestic demand in China will be growing, which means opportunities to repurpose the plants.

This seems like such a great good-news story for the American economy. Are there any negative implications of what you’ve discovered?

I’m not sure there are a lot of negative implications. We’d all like this to happen instantaneously, to have those jobs come back and reduce unemployment. This is something that’s going to happen over the course of this decade. It takes a while to build plants. It takes a while for people to understand that the economics have shifted. We’re seeing more of that taking place, but it will be another eight years to complete the process.

It’s a decision being made by individual companies, then, as they look at their own individual needs. Is that correct?

As was true with outsourcing, as well. Each individual company made a decision based on the economics, which were very powerful in 2001 when China entered the World Trade Organization. The economics are getting less powerful now, and sometime around 2015 or so, those economics for a lot of goods are not going to be very powerful at all—and that’ll make the change. But this is all about individual companies making decisions and not about some broad tariff or regulations that go into effect. This is the law of supply and demand as Adam Smith laid it out.

Is there anything that the U.S. government should be doing to ensure that these individual decisions become a full-time trend?

It will happen naturally. The issue is about speeding it up, right? One thing that the government could do would be to implement more aggressive tax credits for the creation of jobs, so that there are some plans in place that would provide faster write-offs. There are blanket programs that probably should be better targeted to have the maximum impact. One of the things we do need to do is make sure that we build training programs. Some people may have worked in plants before, but many will have no experience and will need training. And then I think at some point in time we need to think long-term about what we want our workforce to look like—building on the things that we’ve taught our children, such as going to college. But college doesn’t have to mean getting a white-collar job. We need to think of a system of vocational colleges, where students spend half of their four-year education in a liberal-arts program and the other half in welding or plumbing or other skills that will be important in plants. Those people will be very valuable. Right now, people coming from vocational schools are in far higher demand than people with liberal-arts degrees. And it would be nice to have a balance.

So are you saying that there’s a paucity of plant-trained employees in the U.S.?

It’s locational. In the U.S., even 30 years ago, the North was the manufacturing facility and the South was the agricultural area. And that has shifted pretty dramatically, but we still don’t necessarily have the people in the right place.

What advice are you giving to companies that are making decisions about, first of all, whether to relocate from China back to the U.S. and then where to place their plants?

This goes back to a situation that I found myself in with a set of clients in 2010, and it’s what got us thinking about all of this. I was sitting in a board meeting and was about ready to get approval to put another plant in China. I pointed out that we had 80 percent of our production in China, and now we’re going to have 83 percent. I asked, “Is that really what we want to do?” And they said yes because China was much lower cost. That triggered a discussion around whether it really was lower cost, and what did the long term look like? So they ran the math, and it turned out that in 2010, China was still lower cost. But they also ran the math for 2015, knowing that wages were rising 15 to 20 percent a year in China. They put that in the model, and they entered small deviations for the R&D shifts, and lo and behold, the number became something on the order of less than 10 percent. And they said maybe we need to rethink this—maybe having all our capacity in China isn’t the right thing.

And that’s what companies have to do. The default location for plants making any industrial goods and a lot of nonperishable consumer goods has been China. That was a great answer when labor costs were lower. But that is not going to be the right answer for a lot of companies anymore. They have to go back and do the fundamental math.

How do you advise companies about where to build plants in the U.S., or even in Mexico?

Mexico is going to play an important role in all of this. It has a pretty good labor force, but it does have some drawbacks right now. It is a difficult environment to operate in because of the drug cartels and other issues. I think Mexico would be a very big winner if it weren’t for that. But we still believe that the reshoring will be around 20 percent in Mexico and 80 percent in the U.S. When it comes to siting, it’s necessary to think about your entire supply chain, not just one piece of it, and it’s important not to think of it as an independent decision. If you’re building a supply chain, you’re building a 30-year supply chain. You will adjust it as things change. But don’t think about throwing everything into one location, because that would be too risky. If you put 100 percent or 80 percent of your manufacturing in one place, you lose a lot of flexibility. And if something changes, you can potentially put the company at risk because of that.

Are there any other key decisions that CEOs need to think about?

The key thing is to do the math, do the homework. People have it in their minds that China is the lowest-cost location, and right now that may still be true for a lot of industries. But part of the homework has to include the notion that you’re building something for 30 years. Costs are not the only issue. There are other risk factors that need to be considered. For instance, I think we undervalue the importance of being close to the customer.

Chesapeake Bay Candle is an interesting example. It’s a small company in Glen Burnie, Maryland. It was started by two former Chinese citizens who are now citizens of the United States. They started a candle company, and, of course, they put their manufacturing in China. This caused some problems with retailers who sold their candles in the U.S. because that long supply chain made it difficult for them to be responsive. So the company looked at the cost and the value of being responsive and decided it made sense to put a plant in Maryland. It is now in the process of making candles in Maryland for the U.S. and even exporting some of them back to China.

If you were to leave CEOs with a single message from what you’ve discovered so far, what would it be?

It’s very simple. Do your homework. The world’s changing. You’ve got to be ready for those changes and you’ve got to keep your supply chains balanced, which means you’re not only in one place. You need to understand where the costs are moving and you need to understand what the real costumer needs are. And then you want to design a supply chain that fits the entire network and gives you the flexibility over the next few years. We’re seeing the end of the phase of the entry of China and now we’re starting to see things just beginning to move back. This is a new equilibrium with a playing field that’s less tilted in China’s favor.

That’s great. Hal Sirkin, thanks very much indeed.

You’re welcome.

China's Wage Inflation Hikes Ripple Across Asia

Wed, 14 Mar 2012 14:36:00 GMT

The following article by James Hookway in the Wall Street Journal does an incredible job of summarizes the impact of wage inflation in China and how it is changing corporate site selection strategies in Asia.

China's Wage Hikes Ripple Across Asia

More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies—and the products they sell world-wide.

Asian governments are pushing businesses to increase wages as a way to prevent outbreaks of labor unrest. Pictured, a Jakarta protest over wages in January. In the latest move, Malaysia's cabinet has approved the country's first-ever minimum wage to be imposed soon, according to people familiar with the matter. The decision follows similar moves elsewhere in the region, as officials from Thailand to Indonesia follow efforts by China over the past two years to boost pay after years of widening gaps between rich and poor.

Global companies already have been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the country's economic boom. In recent months, the pressure also has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape China's rising costs, leaving those companies now with fewer places to move.

Over the past year, for example, U.S. menswear retailer Jos. A. Banks Clothiers Inc. has moved some manufacturing from China to cheaper locations in Asia such as Indonesia, as the price of labor and goods increased. CEO Neal Black said that while he hasn't noticed wage inflation in Indonesia yet, he expects it. "The garment business always moves around the developing world," Mr. Black said. "It brings jobs, those people become skilled and then move on to products like electronics."

The country is preparing to establish its first minimum wage. With this in mind, Jos. A Banks, which also produces in Sri Lanka and Malaysia, is adding capacity in other parts of the world, including Central America and countries such as Haiti and Jordan.

Asian governments, in some cases, are embracing the call for higher salaries, in part to head off the spread of the kind of unrest that has toppled Middle Eastern regimes recently—and to calm rising labor actions in their countries.

They also are hoping the higher wages will help consumers boost spending, providing a new engine of growth at a time when slack demand for exports in the West and higher oil prices are worrying policy makers across the region.

Political leaders say they have little choice but to act, as voters grow savvier about wage gains elsewhere, which they can research on the Internet. Recent protests by low-income workers in places like Indonesia and Thailand have added to pressure on governments to raise wages.

"There is a genuine feeling that the low-wage segments [of Asia's population] haven't made much progress in recent years" as the gap between rich and poor has widened in some areas, said Edward Teather, an economist at UBS in Singapore.

Economists have argued that, in some respects, minimum wage hikes in countries like Thailand are only putting some workers back to where they were a decade ago, once inflation is factored in.

Beijing raised its minimum monthly wage by 8.6% to 1,260 yuan ($199) starting in January, according to the state-run Xinhua news agency. The following month, the southern boomtown of Shenzhen raised its compulsory monthly wage by nearly 14% to 1,500 yuan. The northeastern port city of Tianjin will raise its minimum wage nearly 13% to 1,310 yuan starting in April, Xinhua said.

China's moves, in part, have helped spur other such changes in the region. Indonesian workers in some areas have secured minimum-wage increases of more than 20% in recent months.

Thailand plans to introduce a higher minimum wage beginning in April that will push salaries up about 40% in many parts of the country. Labor advocates in Cambodia, Sri Lanka and Bangladesh also are calling for higher wages.

In Malaysia, people familiar with the situation said officials are working out the details of that country's new minimum wage, which the cabinet recently approved ahead of national elections, expected in the next few months.

The level will vary across the country and fall in the range of 800 Malaysian ringgit to 900 ringgit ($264 to $297) a month, these people said.

Some Malaysian business leaders say they are willing to accept some wage increase—just not as much as the government is proposing.

"If we want our country to become a high-income nation we need to introduce a minimum wage," said Michael Kang, vice president of the Small and Medium-Size Industries Association of Malaysia. "But the minimum wage should not suddenly jump" from current wage rates of 500 ringgit to 600 ringgit a month at many smaller companies.

The Malaysian Employers Federation says Malaysia's move could eventually cost a substantial loss of jobs, forcing companies to close, or find cheaper labor elsewhere, if they can't adapt to higher payrolls.

The spread of higher wages is likely to present challenges for the companies that have long relied on Asian manufacturing operations to keep their costs low, potentially including multinationals, such as Nike Inc., Adidas AG, Dell Inc. or their suppliers.

Women's specialty retailer New York & Co. Inc. began moving production out of China in 2009 and 2010 as wages rose, shifting much of it to Vietnam.

"The cost of labor in China has definitely gone up over the last year and a half, causing us to look at other countries," said Greg Scott, CEO of the company, which makes suiting, jackets, pants and skirts in Vietnam.

On a percentage basis, Mr. Scott added, Vietnam's wage increases have been on par with that of China's but the wages are still lower. "Right now, it's still a very good place for us to produce," Mr. Scott said.

Anthony Romano, CEO of Charming Shoppes Inc., moved production to Indonesia and Vietnam to diversify production away from China, where Mr. Romano said "labor costs are a significant challenge."

While China is still a significant part of Charming's manufacturing base, the booming economy there is presenting some issues. Following Lunar New Year, for example, around 60% of workers at a plant used by Charming decided not to return to the factory and instead found jobs closer to their homes, he says.

But the company, which operates nearly 2,000 stores under the Lane Bryant, Fashion Bug and Catherines names, also has seen wages creep up between 10% and 12% in Indonesia and Vietnam over the past year.

"A lot of folks are looking to these countries to produce, so it increases the prices," he said.

Despite the rising wages, Charming aims to make 25% to 30% of its products in Vietnam and Indonesia, he added. The company also is looking to countries such as Egypt and Jordan to benefit from their duty-free programs.

Boosting minimum wages risks setting off more inflation at a time when central bankers are worried about increased oil prices. Such a scenario could put the price of ordinary goods out of reach of the people the higher wages are intended to help.

In Thailand, central bank governor Prasarn Trairatvorakul said in a recent interview that he will closely monitor the impact of Thailand's higher minimum wage when it takes effect on April 1. The rate will rise to 300 baht ($9.78) a day—up about 40% in many parts of the country.

Still, governments and companies are being forced to address worsening labor demands and income gaps, which are growing wider in many parts of the region and causing labor unrest.

"Malaysia will without doubt get a greater degree of social justice in terms of giving people a minimum living wage," economist Nurhisham Hussein at the Malaysian Rating Corp. wrote this week.

He estimates setting a minimum wage at about 800 ringgit a month could increase the incomes of Malaysia's poorest people by 15% or more. But, he added, "the benefits won't be as much as people might think."

Meanwhile, thousands of workers last month blocked traffic for hours in a Jakarta suburb, demanding their minimum wage be raised. There, local authorities have the power to set minimum wages, so some areas can boost wages while others have opted not to.

Political parties in charge of the suburban cities where hundreds of foreign companies have factories responded to pressure recently by lifting the local minimum wage by more than 20%.

Garment, footwear and electronics manufacturers operating in Indonesia from South Korea, Taiwan and Japan say they are now thinking of taking their factories elsewhere. Some said they fear more wage increases as local politicians try to win votes in elections scheduled over the next two years.

"The government is forcing us to accept this" higher minimum wage, said Sofjan Wanandi, chairman of the Employers' Association of Indonesia, which is one of Indonesia's largest business associations and has been involved with the wage negotiations. "Some [foreign] companies are telling me they will leave now."

But with wages now rising in so many places at once, unhappy companies may have few places to escape.

What is the Real Unemployment Rate?

Mon, 27 Feb 2012 18:10:00 GMT

When evaluating labor markets, the first comment from our clients is about the unemployment rate. The unemployment rate is a relatively reliable variable to review; however, it shouldn't be used to make a location decision. How many employees do you really think you are going to hire that actually come off of uemployment? In most situations, we have found that our clients are hiring less than 1% of their new hires from people technically in the unemployment category due to their lack of the basic skills required. Economist Brian Wesbury explains unemployment for you, including some interesting historical perspective, in the following link to an 8-minute video on the topic. This information will really help you to think more strategically the next time you review unemployment statistics.

http://www.ftportfolios.com/Commentary/EconomicResearch/2012/2/22/whats-the-real-unemployment-rate

The Factory Floor Has a Ceiling on Job Creation

Thu, 12 Jan 2012 14:20:00 GMT

A recent article by David Wessel of the Wall Street Journal did a great job of summarizing where job creation is headed for the manufacturing sector in the US. I was in a meeting with a group of 15 CEO's yesterday when this exact topic came up. Everyone was all excited about the headlines across the media inferring that it seems like there is a rebirth of the manufacturing sector in the US. The following exert from the article provides a great summary of job creation in the manufacturing sector:

Manufacturing alone isn't going to put America back to work.

Recent news from the nation's factories has been good. In the past two years, manufacturing employment has grown by 334,000, a welcome upturn in a nation short of jobs.

This has kicked off a mini-euphoria. Every time a big global manufacturer opens or expands a plant in the U.S., someone casts it as a sign of a manufacturing renaissance. A sampling of headlines in the past few days captures the joy: "Rust Belt sees job gains on a revival of manufacturing, " says one. "Manufacturing and construction lift outlook on U.S. economy," says another.

The headlines are accurate, but, please, a little perspective.

Manufacturing is up lately in part because it was pushed down so far during the recession. That 334,000 increase in factory payrolls follows a decline of 2.3 million in the two years before that. Only two million jobs to go before manufacturing employs as many as it did four years ago.

Manufacturing, as of the government's December tally, employed 11.8 million from loading dock to executive suite. If that doubled, which it won't, that still wouldn't be enough jobs to put the 13.1 million currently unemployed to work. Manufacturing accounts for less than 9% of all the jobs in the U.S. today.

Manufacturing employment, as the chart accompanying this column shows, has been declining steadily for three decades in absolute numbers, and as a share of total employment for six decades. "These long-term trends related to technological change, productivity improvements and globalization are likely to continue," says Lawrence Katz, a Harvard University labor economist. He expects American factories to hire more as the economy improves, but adds, "We don't expect to restore agriculture as our primary source of employment growth. The same is true for manufacturing."

That's not to say American manufacturing is withering. As the charts illustrate, factories have been producing more with fewer workers.

Factory output, adjusted to remove the effects of changing prices, is still below the 2007 peak, but 4% higher than it was a decade ago. Payrolls are down 25% over that time. Output for each hour of work, or productivity, is up an extraordinary 40% as factories have adopted new technologies and production processes and demanded more skilled, better-trained workers.

Still, there's no doubt that manufacturing productivity is up—a lot. That is damping short-term demand for workers. But productivity, in the long run, is good. It's the reason we have more and better goods and services than our grandparents even though we don't work more hours.

It is why manufacturers can boost wages while enjoying rising profits at the same time. Lately, the combination of a huge number of unemployed workers competing for jobs in some places, weaker unions and intensified competition from abroad has kept manufacturing wages, on average, from climbing.

U.S. manufacturing may do OK in the decade ahead, particularly as the cost advantage of making things in China instead of the U.S. narrows. Executives who plan to produce more overseas to supply rapidly growing markets say they will maintain production in highly efficient U.S. plants to meet domestic demand.

There are good reasons to cheer for domestic manufacturing. Expanding factories have beneficial side effects. "If you get an auto-assembly plant, Al-Mart follows," says Ron Bloom, until recently President Barack Obama's manufacturing czar. "If you get a Wal-Mart, an auto-assembly plant doesn't follow."

Modern factory jobs, many of which require more brainpower and computer know-how than muscle, often pay well and are secure. Research and development—the key to maintaining the U.S. edge in innovation—sometimes migrate abroad when production does, a good reason to strive to keep production at home.

But manufacturing employment isn't going to grow nearly enough to return the U.S. to full employment. It isn't going to be the chief source of jobs for the next quarter-century. And, given the demands of the modern factory, it isn't going to be the ticket to the middle class for unskilled workers who haven't gone beyond high school. Pretending otherwise is foolish.

Myanmar - The Next Emerging Market in Asia

Fri, 02 Dec 2011 20:32:00 GMT

The following article is from a recent WSJ article that provides great insight into Myanmar which is potentially the next emerging hotspot in Asia that could work for a variety of industries:

Foreign businesses are ramping up interest in the long-isolated but potentially lucrative market of Myanmar, as signs of a thaw between its government and Western leaders raise hopes of a possible end to Western sanctions.

For now, the push is confined mainly to Asian companies that aren't covered by tough sanctions imposed by the U.S. and Europe since the late 1990s to punish Myanmar for its poor human-rights record. Some investors held back because of concerns about risks to their reputations, while others doubted the opportunities were worth pursuing and now are changing their minds.

Meanwhile, Western companies are looking for ways to get back in, though few are willing to discuss plans in public or in depth because of a possible backlash from customers who remain skeptical about recent reforms in the country. U.S. officials say they don't intend to lift sanctions until they see more changes in Myanmar, including more transparency in the country's dealings with North Korea.

A visit by U.S. Secretary of State Hillary Clinton this week, the first by a U.S. secretary of state in more than 50 years, has buoyed hopes a rapprochement is in store, and some European diplomats are pressing for looser sanctions at an annual review of their laws in April 2012.

Mrs. Clinton plans to arrive in the capital Naypyitaw on Wednesday and meet former military commander and President Thein Sein on Thursday. She travels to the commercial capital Yangon, formerly known as Rangoon, on Friday, where she will visit dissident Aung San Suu Kyi and leaders of ethnic minorities.

Myanmar's potential is too great for some investors to ignore. One of the last, large frontier markets in Asia, it is rich in oil, gas, timber and gems and has the potential to be a major rice and seafood exporter. Its tourism industry can rely on 900-year-old temple complexes and beaches to rival nearby Thailand, which attracts 15 million or more visitors a year. Myanmar also has low manufacturing wages, and Myanmar's intellectual class speaks English, with a legal system rooted in British common law.

The obstacles, however, are large. Electricity is spotty, roads and ports are crumbling and the financial system is immature.

Precise data on Myanmar are hard to come by and government statistics are treated with skepticism inside and outside the country. The United Nations estimates Myanmar has a population of 50 million, around the size of South Korea. The International Monetary Fund says Myanmar has the second-lowest per capita gross domestic product in Asia adjusted for local purchasing power, after Afghanistan.

Among the Western brands making early inroads: consumer products giant Unilever, which quietly began to sell goods through a distributor in Myanmar late last year. The company's products were being smuggled in by third parties anyway, according to a spokesman, who said the company sells "soup and soap" in Myanmar via its Thailand operation and doesn't maintain an office in Myanmar.

Western sanctions mostly bar importing goods from Myanmar, dealing with top leaders and tycoons, and making certain financial transactions. Sales into the country, with the exception of arms, generally aren't prevented.

Another Western company with business in Myanmar is U.S.-based Caterpillar Inc. According to the state newspaper New Light of Myanmar, government officials met in August with businessmen affiliated with Caterpillar to discuss sales of engines and other heavy machinery. A company spokesman didn't confirm the report but said, "Caterpillar and some foreign subsidiaries may, under some circumstances, sell products to independent dealers that resell to users in this country." He said the company "has no facilities in Myanmar," and is "in full compliance with all applicable laws."

Business delegations, meanwhile, are streaming through Yangon, including ones from Austria and Germany, while the city's main hotels—which suffered years of dismal occupancy rates—are now largely full with tourists and businesspeople. Asian companies from Taiwan, Thailand and elsewhere are eyeing investments in a roughly 100-square mile, or 250-square-kilometer, multibillion-dollar Dawei Special Economic Zone under development in southern Myanmar that will include roads, railways and a deep-sea port.

Myanmar was one of the richest countries in Southeast Asia in the 1950s. But a military dictatorship took over in 1962, nationalized industries and systematically impoverished the country as neighboring countries powered ahead.

The regime changed to a capitalist system in the 1990s. But its reforms failed to alter Myanmar's underlying economic structure, which reserved most of its wealth for the ruling generals and their allies. The U.S. imposed sanctions in stages that prohibited new investments by Americans, blocked Myanmar exports into the U.S. and restricted financial transactions in Myanmar.
A handful of big Western companies, including France's Total SA, stayed, thanks to exceptions in the sanctions, including provisions allowing companies with pre-existing operations to remain. China's Cnooc Ltd., Thailand's PTT oil-and-gas firm and other Asian companies also expanded there.

Many other investors, Asian and Western, steered clear.

The country started to change last year, as the regime held Myanmar's first election in two decades. Although the U.S. and the European Union condemned the vote as a sham, Myanmar's nominally civilian government, which is stacked with former generals, has loosened press restrictions, freed some political prisoners and engaged in talks with Ms. Suu Kyi.

The government also passed a labor law, lowered taxes on foreign trade and consulted with the IMF to fix a currency system that deters investment. Last week, several local banks were given the right to trade Myanmar's kyat for dollars, euros and Singapore dollars and a new automatic teller machine appeared in Yangon for the first time in several years.

Outside investors are watching government plans to pass a foreign-investment law that would make it easier for foreigners to control local companies and land.

"Events are unfolding faster than anybody predicted," said Douglas Clayton, who runs Southeast Asia private-equity firm Leopard Capital LP and has been watching Myanmar for over 20 years.
Encouraged by last year's elections, closely held Singapore-based industrial-trading and services company Jebsen & Jessen set up a joint venture in the country in July.

"It's such a positive vibe," said Philipp Hoffmann, general manager of the venture, which is based in the commercial capital of Yangon. The company sells industrial chemicals, pumps and irrigation equipment to golf courses, a legacy of British colonial rule. "If Myanmar does it right, we could see it develop even faster than Vietnam," he said.

Luc de Waegh, who runs Myanmar-focused consulting firm West Indochina, based in Singapore, said he has received a flood of calls from multinational corporations looking to reestablish ties with old local partners.

"That Secretary Clinton is going, is a huge step. It will help to rectify the misperception that Myanmar is the same as North Korea," said Mr. de Waegh, who formerly ran British American Tobacco PLC's operation in Myanmar before the company left in 2003 under pressure from dissident groups and the U.K. government

The High Cost of Manufacturing in the United States

Thu, 01 Dec 2011 14:29:00 GMT

The United States continues to be one the highest cost places in the world for manufacturing. The following article provides are very good summary of root causes:

The United States is one of the most expensive places on earth to manufacture products. Here's why.

By Stephen Gold, CEO, Manufacturers Alliance/MAPI

U.S. manufacturers were hammered in the recent "Great Recession." While the economy as a whole contracted 5.1% between December 2007 and June 2009, the manufacturing economy fell by more than 20%. And although its sharp rebound during the initial phase of the recovery provided enough steam to keep a struggling U.S. recovery from backsliding, the factory sector -- affected by the myriad challenges that have arisen in 2011 -- will, by the end of this year, likely have clawed only halfway back to its prerecession peak.

The good news is that a growing number of policymakers recognize the significant role the sector plays and have started talking about ways to reinvigorate manufacturing on these shores. But political talk is cheap, and worse, it can serve as a mere smokescreen. While American politicians point to all sorts of challenges facing manufacturing today, they rarely focus on the factors they can most readily influence. The factors they, in fact, have in many ways been responsible for creating. The factors that make the United States one of the most expensive places on earth to make a product.

This fall, MAPI, in conjunction with NAM's Manufacturing Institute, undertook an analysis of production costs in the United States relative to its top nine trading partners. We published an initial groundbreaking report documenting these underlying structural costs in 2003, and again in 2006 and 2008. This latest effort by MAPI economist Jeremy Leonard has found that despite the talk, little has changed over the past decade. In fact, the climate has worsened.

We found that structural costs -- corporate tax rates, employee benefits, tort litigation, regulatory compliance and energy -- are continuing to slowly eat away at the ability of U.S. manufacturers to compete effectively in the global marketplace. While manufacturers face a host of challenges, the data demonstrate that domestically imposed costs -- by commission or omission of government -- further undermine our ability to compete by adding at least 20% to the cost of making stuff in this country.

U.S. policymakers may pay lip service about the need to build a better business climate for manufacturers, but they've allowed these underlying cost pressures to undercut U.S. manufacturing competitiveness. What's especially frustrating in Leonard's findings is that if it weren't for these structural nonproduction costs, American manufacturers would enjoy a cost advantage over virtually all of their industrial competitors -- and would have costs on par with such middle-income trading partners as South Korea.

The single most significant drag on manufacturing competitiveness is the United States' high corporate tax rate -- an average federal-state statutory rate of 40% that has not changed in decades. By "standing in place" while other countries reduce their own tax rates, the United States continues falling behind. On a trade-weighted basis, the U.S. rate is 8.6 percentage points higher than its nine largest trading partners, a substantial deterioration from the 7.8 percentage-point differential in 2008 and the 5.6 percentage-point differential in 2003. This represents the single most important piece of the total structural cost burden on U.S. manufacturers. Only Japanese manufacturers endure a higher corporate rate, while those producing goods in Taiwan, South Korea and China enjoy significantly lower rates than U.S. manufacturers.

The next largest cost burden on U.S. manufacturers comes in the form of employee benefits -- health care costs and pensions, primarily. While fiscal pressures overseas on publicly funded health systems have over the past decade narrowed the gap between the social insurance costs borne by U.S. and overseas manufacturers, Leonard's most recent analysis shows that gap increasing again. Employee-benefit costs in the United States today are 5.7 percentage points higher than those of the nine largest trading partners, compared with 3.6 percentage points in 2008, a reflection of price increases for health care services and insurance premiums well in excess of overall inflation. As a percent of manufacturing compensation, health care costs have risen from 7.2% in 2001 to 9.2% in 2007 to 9.7% this year. All this even before the Affordable Care Act, which promises to increase prices for companies even more, takes full effect.

In addition, the cost disadvantage with our major trading partners in tort costs is 1.6 percentage points, and in pollution-abatement costs is 1.8 percentage points. Only in the area of energy costs did MAPI and NAM find a cost advantage for U.S. manufacturers, of just under one percentage point.

If ever there were a wake-up call for U.S. policymakers about the costs they continue to impose on U.S. manufacturers, this is it.

Stephen Gold is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

India Approves New Manufacturing Policy that Threatens US Manufacturing Growth

Fri, 04 Nov 2011 13:27:00 GMT

India announced a new national manufacturing policy that aims to boost the output of the manufacturing sector from 16% to 22% of gross domestic product and create 100 million new jobs. Under the policy at least seven National Investment and Manufacturing Zones ( NIMZ) are proposed to be set up in the North and West. A survey has been commissioned to set up similar zones in the South. These zones would be greenfield integrated industrial townships and the areas weill be at least 5,000 hectares. These economic development strategies will make India become a threat to other low cost offshore markets and more importantly the United States. The United States needs to get our economic development strategies in order to avoid losing additional market share to offshore locations. For details on the new policy, the following article will provide additional information http://www.globalpost.com/dispatches/globalpost-blogs/the-rice-bowl/india-approves-new-manufacturing-policy.

Improving Import Cargo Volume Will Help Industrial Real Estate Market Recovery

Mon, 03 Oct 2011 17:17:00 GMT

Even amid economic volatility, improving import cargo volume at the largest US ports will hopefully help the industrial real estate market recover and create opportunities for new distribution centers around the US. Global Port Tracker covers the ports of Long Angeles, Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York and New Jersey, Virginia, Charleston and Savannah on the East Coast, and Houston on the Gulf Coast. Their most recent report concluded the following:

- Import cargo volume at the busiest U.S. container ports is beginning to ramp up after a flat summer.

- The 10 ports the report tracks handled 1.32 million 20-foot-equivalent units in July, up 6 percent from June but down 4 percent from July 2010. August was expected to be flat with last year at an estimated 1.42 million TEUs.

- Year-over-year growth is beginning to resume in September, which the report predicts will rise 11.8 percent to 1.5 million TEUs. October is forecast at 1.48 million TEUs, up 9.5 percent; November, 1.33 million TEUs, up 8 percent; and December at 1.2 million TEUs, up 4.5 percent. January 2012 is forecast at 1.19 million TEUs, down 1 percent from January 2011.

- The total for 2011 is forecast at 15.4 million TEUs, up 4.3 percent from 2010. Last year’s 14.7 million TEUs was a 16 percent increase over the unusually low numbers in the recession year of 2009.

Overall, the growth trends seem to be going the right direction. However, the unstable global economy could easily alter these forecasts.

Union Activity in the Philippines Should be Closely Monitored

Mon, 03 Oct 2011 16:59:00 GMT

The recent news about former President Gloria Macapagal Arroyo and her son, Camarines Sur Rep. Diosdado "Dato" Arroyo, are pushing for a bill that will pave the way for the organization of unions among call center workers should be of great concern to corporations with a presence in the country. The bill proposes a Magna Carta for Call Center Workers. There are a few key provisions mentioned, including the following:

- Rights to safe and healthy working environments;
- One-hour meal breaks;
- Privacy rights;
- Resting areas;
- Security of tenure and a living wage.

This legislation would greatly hamper growth in the Philippines and reduce the offshore savings benefits to US corporations. A prime example is the recent disposition of Sykes' operations in Argentina which were basically closed down after unions caused extreme wage escalation which impacted their profitability in the region.

We interviewed some local business leaders in the Philippines BPO industry who had just found about potential creation of unions. They seemed less than optimistic that the legislation would pass. It is recommended that the progress be closely monitored over the next year.

AT&T, T-Mobile pledge to bring 5,000 wireless call center jobs back to US

Wed, 21 Sep 2011 22:48:00 GMT

The latest move by AT&T to get federal approval for the merger with T-Mobile is clearly becoming a political battleground. It is likely all of the jobs would simply be shifted from their outsourced vendors in offshore locations such as the Philippines to domestic outsourced vendor sites. This strategy would avoid the unions trying to get control of the labor which enables AT&T to ultimately pay a lower labor costs for the employees. It would also give AT&T the flexibility to slowly shift these jobs back offshore. Bottom-line, the ability of the government or an independent third party to validate the long-term movement of these 5,000 jobs would be extremely difficult or impossible. For additional information, please review the following article: http://www.usatoday.com/tech/news/story/2011-08-31/ATampT-T-Mobile-pledge-to-bring-5000-jobs-to-US/50198654/1

Evergreen Solar bankruptcy is a wake-up call for economic development organizations across the United States

Wed, 31 Aug 2011 20:24:00 GMT

The recent bankruptcy of Evergreen Solar exemplifies the risks that community leaders face in a maturing industry that has been heavily subsidized by federal, state and local governments. The Massachusetts-based solar materials manufacturer announced the closure of two manufacturing plants as a result of the company’s failure.

In March, Evergreen shut down its massive manufacturing facility in Devens, Massachusetts, laying off 800 workers. Following the shut down, the state of Massachusetts pulled the $58 million in incentives it gave Evergreen to bring jobs to the area. It was the largest tax incentive package in the state’s history.

In addition, a smaller manufacturing facility in Midland, Michigan was shuttered which employed around 80 people. Evergreen came to Midland in 2008 and completed its $55 million, 31,400-square-foot building. The solar company chose to build in Midland to be close to one of its suppliers, Dow Corning Corp., which provided materials that go into its string ribbon technology, and because of the $5.7 million it received in state and city tax incentives.

The following negative press circulated after the announcement:

Evergreen another example of wasted taxpayers' dollars under ARRA — Michigan Capitol Confidential
Overrun by Chinese rivals, US solar company falters — Wall Street Journal
Evergreen experiment is a failure, but fantasy that state can buy new jobs may live on — Boston Herald
Nevergreen Solar: Another political investment goes bust — Wall Street Journal
Solar power: the sun also sets — Financial Times

The demise of Evergreen Solar should make economic developers to think twice about their targeted industries and how they evaluate corporations seeking to expand in their communities. Industries like the solar and wind sectors may sound appealing today but you really need to evaluate each company’s specific business plan and their financial backing. The concept is really no different than what a bank or a landlord goes through when determining the credit worthiness of companies.

The Beginning or End of India?

Tue, 05 Apr 2011 21:41:00 GMT

Once again, the challenges facing the call center industry in India make the cover of major newspapers.

India has to improve their education system if the country will successfully compete for call center and knowledge-based processing business in the future. With applicant-to-hire ratios of 3 out of 100 for quality English speaking call center representatives and employee attrition rates over 50% per year, it impossible for the labor supply to keep up with demand which has forced most of the India-based outsourcers to expand into other global geographies such as the Philippines, Latin America and, even the United States of America.

US-based outsourcers don’t even mention the word “India” when exploring offshore markets for expansion. With the current education system not generating college graduates with the same level of skills as other advanced countries, corporations are going to have to fill the void through intense training programs in India if they want to have accent neutral English-speaking employees.

Impact of the Japan Quake on the Auto and Electronics Makers

Tue, 05 Apr 2011 22:15:00 GMT

Japanese companies are not only reeling from damage to factories and suppliers in quake-hit northeastern Japan but are also suffering from fuel shortages in the northeast and power outages in the Tokyo area that are affecting production and distribution. Plant shutdowns in Japan threaten supplies to manufacturers across the globe of items from semiconductors to car parts. The following is a roundup of the impact of this month’s devastating earthquake and tsunami on Japanese manufacturers of cars and electronics.

AUTOMAKERS

Toyota Motor Corp halted most operations at 18 factories that assemble Toyota and Lexus vehicles in Japan. It has restarted production of three hybrid models, the Prius, Lexus HS250h and CT200h, from March 28 at two factories but will suspend output for one day this week, on March 30. Toyota is making car parts at plants near its base in Toyota City, central Japan, for overseas assembly facilities and for repair parts. Toyota will delay the launch of the Prius wagon and minivan models in Japan from the original plan for the end of April.
Honda Motor Co extended its production halt in Japan to April 3. Honda said last week a fifth of its Japan-based Tier 1 suppliers affected by the earthquake would take more than a week to recover. Honda made 69,170 cars in January in Japan, accounting for around a quarter of its production. On Thursday the company said it would resume production of motorcycles and power products at its Kumamoto plant in Kyushu, southern Japan.
Nissan Motor Co resumed vehicle production at all assembly plants in Japan from Thursday, March 24, while supplies last. It resumed production of parts for overseas manufacturing and repair parts on March 21. Restoration continues at its damaged Iwaki engine factory in Tochigi prefecture, north of Tokyo. Nissan made 81,851 cars in January in Japan, where it manufactures 23 percent of its vehicles. Goldman Sachs has calculated that one day of lost production costs Nissan about 2 billion yen ($25 million) in profit.
Mazda Motor Corp said on Thursday it would suspend production of vehicle repair parts and parts for overseas production at its Hofu factory in Yamaguchi on March 28, after having resumed limited operations there earlier this week. Its Hiroshima factory will continue limited production until further notice, a spokeswoman said.
Suzuki Motor Corp will continue to assemble commercial trucks and vans at one of its plants through March 31 on a single shift. It will also restart car production at another plant on March 31 and continue production at an engine factory using parts in its inventory. It has not decided on production plans for April 1 and beyond.
Fuji Heavy Industries Co will resume partial production of 660cc minivehicles on March 31 as parts supply and electricity become available, but it said a full resumption would take time. The maker of Subaru cars will keep production of non-mini vehicles suspended at least through March 31. It continues to manufacture vehicle parts for use at overseas assembly plants and vehicle repair parts.

ELECTRONICS MAKERS:

Canon said two camera plants on the southern island of Kyushu would stay closed until the end of the month amid a shortage of parts. Production was halted at a third camera factory, with no date set for re-starting. Production at a lens factory north of Tokyo was suspended on Monday, while staff were inspecting an optical materials plant, also north of Tokyo.
Elpida Memory Inc said on Monday it anticipated no interruptions to product supply following the quake. The world's third largest maker of DRAM chips said it had secured enough supplies to last until July and was in discussions about alternative suppliers from August onwards.
Fujitsu said it would partially re-start a semiconductor factory in the northern prefecture of Iwate on April 3. This will be the last of its 6 quake-hit plants to re-open.
Hitachi Ltd said it had partially re-started production at a factory north of Tokyo that makes lithium ion batteries for environmentally friendly cars. Hitachi counts General Motors among the customers for its batteries.
Panasonic said some plants in northeast Japan remained closed including one making optical pick-ups and another assembling cameras and audio equipment.
Renesas Electronics , the world's largest maker of micro-controllers, said production at three of its 22 factories in Japan is still halted. Two are in areas affected by power blackouts, while a third, the Hitachi-Naka factory, is yet to be fully inspected for damage following the quake. The company hopes to re-open the Hitachi-Naka site in July.
Sony Corp said shortages of parts and raw materials would force it to suspend or reduce production at five plants in central and southern Japan making digital cameras, camera lenses, flat-screen televisions and other goods. Another plant may be affected by rolling power blackouts. Six production sites in northern Japan have been halted since the quake. If shortages continue, Sony may consider temporarily shifting some production overseas.
Toshiba said output was suspended at a factory in Iwate prefecture making system LSI chips for microprocessors and image sensors, with no timeframe yet for a resumption of output. An assembly line at a plant making small liquid crystal displays for smartphones and other devices will be closed for a month to repair damaged machinery. OTHERS
Shin-Etsu Chemical , the world's leading maker of silicon wafers, said its biggest wafer plant remained offline, along with a PVC factory. The firm has not said when it will restart operations. Some of the wafers made in Japan are shipped to chip companies overseas. Shin-Etsu is trying to boost production elsewhere, particularly of 300-mm wafers, to make up the shortfall.

AT&T Merger with T-Mobile – The Impact on Outsourcers and Economic Development Agencies

Tue, 05 Apr 2011 21:46:00 GMT

The recently announced merger of wireless telecom behemoths AT&T and T-Mobile will likely have long term impact on the outsourcing industry and economic development agencies. Just as with any merger, there will be consolidation of their captive call center operations and outsourced vendor locations.

This will result in site closures around the country that will impact economic development agencies ability to maintain jobs in their communities. Here is a summary of which major outsourcing vendors are at risk due to the amount of business they have with AT&T and T-Mobile:

Startek has over 80% ($225 million) of their revenue sourced from AT&T and T-Mobile
Sykes has 12% ($150 million) of their revenue sourced from AT&T
Convergys has 21% ($450 million) of their revenue sourced from AT&T
APAC has less than 5% of their revenue sourced from AT&T or T-Mobile