By Jack Healy, Director, Manufacturing Advancement Center, [email protected]
The recent "Lego Sends Work to Mexico" headline in a local paper awakened a host of personal memories as I spent several years of my life organizing and developing the Greenfield facilities that Lego is now closing, 26 years after its start.
Lego’s decision to open that plant all those years ago was actually counter to what was happening within the industry. At that time, US-based toy manufacturers, already driven by the need for low costs because of a price sensitive market, were starting to source production of their products through Taiwan and Hong Kong suppliers. But Lego’s marketing approach was different from the industry; it viewed its product line as construction sets that, with little variation, would be virtually the same from year to year. Therefore, the sets had to be available to consumers on a year-round basis. Other US toy manufacturers were locked into a perpetual cycle of new product introductions. Such manufacturers calculated what their sales would be for each product in the early part of the year; if products sold out in the fourth quarter, when 80% of the toys were sold, such manufacturers were unable to respond to market demand because of limitations of their offshore suppliers.
Anyone who has tried to buy a Cabbage Patch or an Elmo doll in certain years knows what I am talking about. To avoid this and to maximize the fourth quarter market opportunity, Lego employed a new rationale for its US operations, investing millions of dollars in plant and equipment to directly support it’s US Market. Lego went on to successfully establish what is now a very recognizable global brand and they developed a consumer franchise that readily accepts high-end quality products for their play value.
Lego’s franchise continues despite the fact that much of today’s toy markets are dominated by electronics, and children are now involved in so many different activities that they may not be searching for something that will occupy large amounts of time. Last year, Lego’s construction set sales increased 16%, an indication that their market franchise is still very much intact. Despite this, as reported in the press, Lego’s decision to outsource production to a Singapore-based electronics manufacturer "comes on the back of an in-depth analysis of the Company’s total supply chain." This report went on to state that Lego’s sales were being hurt by cheaper versions, from competitors that have lower production costs.
Manufacturing in New England What could be done to lower costs was obviously a question that was raised and answered by Lego’s own supply chain analysis.
The loss of Lego’s U.S. based manufacturing highlights the fact that there are foreign-based companies in New England who, along with domestic manufacturers, are continuing to make their investment decisions based on the belief that moving to a low cost country will provide them with financial advantages to grow their companies in an increasingly competitive marketplace. Such foreign-based involvement includes mobile manufacturing investments that are a significant part of our manufacturing community And they will only remain in New England as long as it makes sense.
Direct Foreign Investment Manufacturing Jobs by State
N.E. State
Number of
Mfg.
Jobs
Subsidiary
% of Mfg. Jobs
Connecticut
34,200
30.3%
Maine
10,200
30.9%
Massachusetts
41,500
21.7%
New Hampshire
16,300
42.4%
Rhode Island
4,200
19.3%
Vermont
3,300
27.5%
The word "foreign" should probably be modified in this context as there usually is a negative connation to the meaning of the word. Instead, we should use something more benign as there is nothing negative about the results of such investments. When you consider the economic multiplier, i.e. the non-manufacturing jobs supported by the above manufacturing jobs, you are looking at approximately 330,000 jobs throughout New England attributable to direct foreign investment, something which you think would be encouraged.
Turning Away Direct Foreign Investment
But all this is now starting to change as a result of the security situation that arose from 9/11. Take the firestorm over the attempted Dubai Ports World takeover which was stopped cold, despite expert opinion that there were no security risks involved. This must give any investor pause. Who wants to make investments that could be viewed as being unfavorable because of some subsequent political event?
And now there are serious concerns over the merger talks between US telecom equipment maker Lucent and the French firm Alcatel. The concern relates to foreign control of Lucent’s Bell Lab unit, which has produced advanced communications innovations for the Pentagon. This is starting to produce an environment that is adding to the growing political protectionist sentiment. We’ll all get a measure of such sentiment with the upcoming $5.4 billion dollar takeover of Westinghouse by the Japanese firm Toshiba.
U.S. Needs a Better Welcome Mat
Any investments, mergers, or acquisitions that raise legitimate security concerns have to be addressed. However, such concerns can be addressed in a manner that hopefully does not remove our historical "Welcome Mat." The fast growing, low cost markets of China and India now offer investors viable investment opportunities. As of 2004, India displaced the United States as the second most attractive Foreign Direct Investment destination among manufacturing investors. Third place is the lowest ranking the US has ever had among investors in this sector. It is time that we should start thinking of putting out a "BETTER WELCOME MAT" by demonstrating that this is the most innovative manufacturing community in the world.
An Emphasis on Innovation & Training
Low cost manufacturing is no longer a structural attribute available for manufacturing in New England — but "Innovation" is.
This has been amply demonstrated by manufacturers working with the Maine and Massachusetts MEP’s over the past three years, who have trained close to 2000 engineers in new processes and methods as they repositioned their companies and product lines and entered new markets. There are very few communities outside of New England that have the Technical Education Resources to support innovation in a manufacturing community as we have here
Companies in Massachusetts who may be interested in learning how to develop their own internal innovation capabilities can do so by contacting Greg King at 508-831-7020 or e-mail [email protected].
