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From the Desk of Jack Healy, MassMEP Lean Expert

As Economics Change– Manufacturing Now Counts

Economics shift along with financial power, and their changes will always affect our world.  The flood of news reports heralding the strikes and labor problems in several Chinese manufacturing plants, highlights the challenge facing the Chinese Government in maintaining their economy based on cheap labor and exports.  While such an economy is not sustainable in the long run, the long run is not here now.  The Chinese manufacturing base has been going through an evolution since the government enacted a complete revision of their labor laws. With these labor law changes, along with the currency appreciation of the Yuan and stricter environmental enforcement, have caused the Chinese to signal that they are no longer interested in low value production.  The recent reported strikes and labor unrest will certainly contribute to this move, but they by themselves are not the cause of it.

Toy companies, such as K’NEX Brands LP and Whamo Inc., can no longer adequately source their products in China and are returning their production to the U.S.   Compal Electronics, the world’s second largest contract P.C. maker, is planning to move half of its total production to Vietnam by 2013.  Very much like the shoe and textile industries left the New England states in the 1950’s and 1960’s for low cost locations – many of the Chinese manufacturers are now moving to low cost venues in western China or declining the business outright such as they have done in toys.

These economic changes and how they are affecting our manufacturing base is best summed up by David Metzemaekers, Director of Operations for Scott Electronics, “That the laws in China are shifting for many political reasons, as people are not allowed to work unlimited overtime.  People are now starting to leave jobs for not much more money and this is creating increased overheads and training problems that companies are having to deal with.  The landed cost is being more accurately tracked and we found that when China needs to copy exact material specifications that Mexico can beat them, and the U.S. in some instances is better as well, when comparing landed cost.  We are now making a number of assemblies that are shipped to China.”

Along these lines Massachusetts electronic exports to China, which account for 38% of our total exports, have seen recent changes that confirm David’s observations that there has been a 61% increase in Electrical Machine and Equipment components for the January to April 2010 period as compared to the same period the year before. While this is good news conversely the loss of China as the mainstay of disinflation will affect many U.S. manufactures that have depended on a stagnant China price for purchased parts in their own product offerings.  There will be considerable re-engineering or price increases to compensate for this loss.

General Electric, the god father of outsourcing, has reacted to all of this by promoting the need for a vibrant U.S. manufacturing base and reshoring (a new word) production to the U.S.   This change is not just for production but for technology as well.   John Rice, Vice Chairman and CEO of GE’s Technology infrastructure recently announced that GE is opening an advanced Tech software center in Michigan with 1,100 jobs right outside of Detroit.  Mr. Rice amended the original announcement to state that GE is “expanding that by another 200 jobs, because we found so many great people.  Most of the jobs at this point are software engineers, but it’s the kind of stuff that eight to ten years ago would have automatically gone to India.”   Obviously economics have changed blind outsourcing to be something of the past.  In responding to this change in economics three manufacturing groups, the National Tooling and Machining Association, the Precision Metalforming Association, and the Association for Metal Forming Technology have now hosted a supplier fair to demonstrate, thanks to the changing economics, the competitiveness of the Domestic suppliers. 

Today’s economics were best described in a Wall Street Journal article announcing Caterpillar’s plans to consolidate and triple their domestic excavator production by moving their world-wide production in to a single U.S. based plant.  The article stated that “after a decade of rapid globalization, economists say companies are seeing disadvantages of off shore production, including shipping costs, complicated logistics, and quality issues.  Political unrest and theft of intellectual property pose additional risks.”
All of this happened prior to the Chinese Government’s recent announcement relative to the elimination of their currency’s peg to the dollar. While this is a hopeful signal that we will be seeing a more balanced world economy, it will probably not mean significant changes in the short run. Any increases in the value of the yuan might mean higher prices, but it will also enhance the Chinese purchasing power for raw materials purchased outside of China. Hopefully we may see more manufacturing continuing to return onshore as the new economics require that we produce more than we consume.  Maybe that was the old economics but it is new now that our financial power has diminished and that we have a clearer understanding of the importance of manufacturing.

The Manufacturers community on the other hand must realize that waiting for some demise of Chinese manufacturing capability will do nothing to shape the future in their respective firms.  We have all been here before. The people who sat on the sidelines waiting for the Japanese manufacturers to go away are for the most part no longer with us.  Manufacturers who do not wish to sit on the sidelines can join the Next Generation Manufacturer movement and position their firms to effectively compete and deal with the new economics.  See how you stack up and take the Next Generation Manufacturing Survey.

Find out how your organization compares with other manufacturers in the following six areas which include :             

Customer-focused innovation
Advanced talent management   
Systematic continuous improvement
Extended enterprise management  
Sustainable product and process development
Global engagement Export

If you don’t want to know where you stand or do not think that your organization can measure up, stay on the sidelines – others can take the survey and get an idea of where they stand and what gaps with respect to competition that their organizations may have.

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