Monday, September 6, 2010

Can Manufacturing Return to the USA?

The need to move USA manufacturing operations to competitive economic climates, has been essential for a Company's survival.  This exodus to a number of foreign countries, mainly to China and Mexico, has had a negative impact on the USA – its economy, median incomes, standards of living.

Today, New Balance Inc. is a rather unique exception to the migration trend.  For more than twenty years, this successful Boston manufacturer of athletic shoes, annually produces 7 million pairs of its shoes in the USA.
New Balance CEO, Rob Demartini, admits it's a challenge to stay competitive in the world market but says the company's commitment to domestic manufacturing is firm. It's really part of the fabric of the company. we've been manufacturing athletic shoes since 1938," said DeMartini. "We think in an industry where there a lot of shared manufacturing, knowing how to make the product, helps us. It also gets us a lot closer to the consumer."
This piece, titled “New Balance: U.S. Manufacturing Commitment” lists many of the principal reasons for the impressive ability.  New Balance credits a productive employee base and the use of lean manufacturing protocols.  The New Balance story is admirable, especially in relation to the many challenges faced with US Manufacturing.

There were many understandable reasons for the shift to foreign environments, but in my opinion, a great deal of the losses in US Manufacturing could have been avoided with superior, A-level Management - particularly at the Chief Executive Officer level.

Regrettably, poor Executive Leadership, bad decisions, deficient strategy, etc., impelled much of the manufacturing exodus.  Reducing labor costs became an easy convenience.  Admittedly, a number of  relocations were necessary, even critical for survival.

However, if a larger number of the CEO's within the USA had greater experience, better insight, the reality would be different.  With more "A-level" Executives in charge, plant operations would probably not have required this level of relocation.

Regardless, the USA can regain a portion of its manufacturing capacity in the next several years, if we see a number of positive developments.

Here are some important factors for success:
  • Quality management down through the 3rd organization tier;
  • Disciplined strategic focus – with an honest and periodically updated situation analysis;
  • Superior culture with the absence of hubris and politics;
  • Best cost manufacturer – utilizing lean, kanban and kaizen protocols;
  • Productive, lean salaried employee organization – not just lean for manufacturing;
  • Regular Value Analysis of the product lines;
  • Effective application of capital spending – which is essential.
Certainly, a growth in a number of negatives encountered in other environments, within China and Mexico for example, will contribute to the desire to return some foreign based operations to the USA.  However,  relocating manufacturing back to this country will remain a very difficult challenge.

In relation to overseas manufacturing competition, see: 

Neuberger Berman's Recent Outlook

The following is Neuberger Berman’s (NB) 2nd quarter 2010 economic outlook.  It is very thorough and well conceived.  In these challenging economic times, it is worth a review:
Neuberger Berman’s MLG Group’s Current Outlook 
August 18, 2010

Over the last decade, so much has structurally changed on Planet Earth that we believe the only informative perspective from which to view the world is…“upside down.” We first introduced this concept in our third quarter 2009 client letter and, as we think about the investment landscape currently, we believe this “paradigm shift” is underappreciated by investors.

Our team spent much of the second quarter 2010 pursuing an extensive global research effort to determine if this view of the world is still relevant. As you might expect from the title of this letter, our answer is yes!  Our research travels took us to China, Singapore, Indonesia, Mongolia, Australia and Brazil. Below, we share our takeaways from this research, some investable themes we have identified and how we are navigating this volatile and challenging investment environment...

4 Gloomy Scenarios

The US Economy continues to be unhealthy.  A review of various forecasts, suggests either a painfully slow recovery or future declines should be expected. One can never trust various predictions to be accurate, but there were four experienced voices who provided sincere concern.

Here is the first:
"The Hindenburg Omen reared its ugly head late last week, signaling more doom and gloom as stocks plod along amid the dog days of summer."
"The Dow Jones Industrial Average will lose about half of its value over the next couple of years as it follows a Nikkei-like pattern of several sharp rallies in an overall decline, according to Charles Nenner, founder and president of Charles Nenner research."
“Dow Faces Bouncy Ride to 5,000: Strategist” -

The third:

Some have predicted this continued deterioration of the economic climate.  Mr. David Farr, the Chief Executive Officer of the Emerson Electric Co., referenced a number of the circumstances contributing to this poor economy in an opinion piece from 2009.

Mr. Farr's Op-Ed is referenced here:
"An Op-Ed on Federal Spending and Legislation"

And finally the fourth:

Neuberger Berman’s MLB Group's 2nd quarter 2010 Economic Outlook is very thorough and well conceived.  It contributes positively with global investment opportunities as well as a potential Achilles' heel to the recovery. 

In these challenging economic times, it is worth a reading and can be accessed here:
"The World Is Still Upside Down"

Friday, July 2, 2010

China to Surpass USA as World Leader in Manufacturing?

The headline in a June 2010 Financial Times article was bothersome. It chronicled “US Manufacturing Crown Slips”.

In summary, the article reported:

“The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.”

“Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.”

“If the figures are calculated in inflation-adjusted, constant price terms, then….the US will keep its top role in manufacturing…. On an inflation-adjusted basis….China is forecast to take over the number one position in manufacturing….”

In this article, population is a primary factor impacting the prediction. China is four times as large as the USA in terms of population. This size, coupled with a lower wage rate, estimated at one tenth of the average cost in the United States, makes it reasonable to expect China will surpass the USA in manufacturing production.

However, in my opinion, there are sincere problems with this premise. The USA is superior in several manufacturing categories, particularly in the innovative capability to create new products, technologies, and industries. A properly focused, capitalized USA manufacturing industry, can remain the world leader in output.

After having a number of business experiences within China, I now believe the Chinese will not retain the leadership in manufacturing in the world. I predict a pendulum will swing eventually. China will most likely stumble, similar to the historic decline of Japan's edge in business.

Thursday, May 20, 2010

Peter Drucker's Tenets

Peter Drucker, a writer of 39 books and a management consultant, was considered the “father of modern management”. An avid student of managing complex businesses, he was the advisor who helped mold many corporations into industry leaders which forged this country’s ability to become an economic super power.

A Sampling of Mr. Drucker's Tenets:

“In most business failures, the board was the last to realize that things were going wrong.”

“Managers should make a decision no later than you need it, but as late as possible, because you always have more information.”

“Do reported profits exceed the cost of capital? Review and audit capital allocation decisions of the past year.”

(I suggest random sampling of capital expenditures for prior years and reviewing several to determine if the forecasted return on investment was achieved.)

“Above all management is responsible for producing results. Profit is a requirement for a company…profitability is not the purpose but rather the test of their validity.”

“Management is about human beings. Create an atmosphere where people are permitted to make mistakes.”

(His simple advice to clients: “It’s all about the people.” He was concerned with retaining “knowledge workers” which today most companies describe as the “A” level employees.)

“Never promote an employee on the basis of his or her potential, but based only on performance.”

“Picking a leader: would I want my son or daughter to work under that person?”

Source: “The Daily Drucker” by Peter Drucker, 2004

Tuesday, May 4, 2010

General Motors – Has It Lost Its Credibility?

The news is full of criticism of General Motors’ announcement that it has repaid the money it owes the United States government for bailing GM out with TARP money (Troubled Asset Relief Program).

General Motors' April 2010 announcement: “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse.”

The facts:
General Motors' April 2010 repayment totaled $6.7 billion.

The United States government gave General Motors $49.5 billion in 2009 to finance its bankruptcy. Thus only 14% of the total aid GM received from the government has been repaid. Not a full repayment.

Further complicating the issue comes from Mr. Neil Barofsky, the Inspector General overseeing the troubled asset program, when he testified before the Senate Finance Committee on April 20, 2010 that G.M. was using taxpayer money to make the loan repayment – not General Motors’ earnings.

Apparently the $6.7 billion came from the $13.4 billion of the United States government’s TARP money that had been put in a General Motor’s escrow account when GM was in bankruptcy. Thus the company is using US government money--to pay back the US government loan.

Further complicating the issue is the General Accountability Office’s December 2009 report that: "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."

Also coloring GM’s financial condition is that:
It has applied to the Department of Energy for a $10 billion loan to retool its plants.
In 2009 it was unprofitable with deficit gross profits and operating losses.
In the first months of 2010 its market share declined.
Is all of this true? If it is, the real issue is General Motors' loss of trust and credibility. Will consumers figure out that General Motor’s announcement is not true? That it was a misleading public relations ploy? If consumers do not trust a manufacturer, will they stop purchasing its product? For this short-term gain, will GM lose in the long run?

New York Times.
Power Line.
Reason Foundation.

Monday, March 22, 2010

Criticism of GE’s CEO, Jeffrey Immelt

A March Money Watch article on Jeffrey Immelt, titled 'GE Has Been An Investor Disaster Under Jeff Immelt', is strongly critical of his relatively high level of compensation as it relates to GE’s depressed stock price. Mr. Immelt is General Electric Company’s Chief Executive Officer.

An example of the criticism:
"By any measure of shareholder value, GE has been a disaster under Jeffrey Immelt. Investors haven't made a nickel since he took the helm as chairman nine years ago. In fact, they've lost tens of billions of dollars."
There is certainly room to criticize Mr. Immelt’s salary, bonus, common stock grants and retirement plan while GE’s stock price and profit performance are in the doldrums. However the article does not analyze the condition of GE’s operating businesses. Have its divisions deteriorated? Are there market share losses? Are its operating units registering Operating Losses? Or is its poor profit performance related solely to the 2007-2010 financial and economic crisis?

During this crisis most blue-chip, well-run companies have experienced sales and operating profit declines of 20% - 30% with large declines in the price of their common stock. Although slightly improved recently, many prices are still sluggish and down.

This even includes my Alma Mater, Emerson Electric Co., one of the best managed companies in this country. Emerson has registered sales and operating profit declines of 20%-30%. But their operating divisions have continued to perform well.

Chief Executive Officers are responsible for the operating performance of the businesses they manage – this is their primary role. Granted their tenure is also dependent on the stock price. If the performance of GE’s operating businesses has deteriorated, then Mr. Immelt should be criticized and replaced as CEO.

Lenders Change their Treatment of Troubled Loans

An interesting recent Reuters article, titled 'Lenders More Willing To Own Bankrupt Firms', documents a fairly significant change in the distressed and bankrupt marketplace. Lenders, it reports, are no longer selling their delinquent and troubled loans. They are not selling the loans at steep discounts. They are converting loans to equity ownership and managing the companies themselves.

Reportedly lenders are “kicking the proverbial can down the street" by granting waivers. They are no longer forcing companies to default, or marking loans to market. This is quite unusual, as compared to prior practice.

Will this continue? Once the economy improves, will lenders focus on lending money? Or will lenders continue to be owners and manage the operating companies? Or will they return to selling troubled loans?

Tuesday, January 19, 2010

CHINA - Its Past, Present, Future

The following is an op-ed article written by Tony Gleason of Neuberger Berman. In this interesting work, Mr. Gleason studies essential history, reviews present issues, and predicts future trends, regarding business within China. It is very helpful for those of us, who have operational dealings and investments in China. Extremely worthwhile reading:
China Wakes, the World Shakes
by Neuberger Berman’s Tony Gleason - November 17, 2009

As we have all witnessed, the economic system that drove much of world trade buckled in the financial crisis of 2008. It appears that the U.S. will no longer be the insatiable source of demand for the world’s manufacturing countries. Our credit has unfortunately hit its limit with our creditors, namely China and Japan. From an investment point of view, understanding the new financial, economic and political system that is evolving from the 2008 crisis will be a key to making and preserving capital in the decades ahead. China, as I will explain, is re-emerging on the world stage and will likely play the leading role in this evolution. Within this piece I offer my perspective on China today and how I believe it will influence the investment landscape.

I’ve had the extraordinary good fortune of traveling frequently to China. Each time, I’m startled by the progress the country has made since my previous visit. The most recent trips are no exception.

Cities visited in the past few months include:
  • Tier one cities: Beijing, Shanghai, Guangzhou, Hong Kong
  • Second tier cities: Nanjing, Hangzhou and Chongqing
  • Small, but important cities: Li Jiang and Macau
Along the way I met with over 60 companies, various government officials and many interesting people. Since the crisis began almost a year ago it’s become abundantly clear that the Chinese government recognizes they can no longer grow the country’s economy based on exports to the United States and Europe. Recognizing that economic growth is necessary for harmony and its own ability to stay in power, Beijing has shifted gears quite dramatically and so far has managed its way through one of the most significant financial crises in a century. Many will argue with how it got there, but China is on track to leave 2009 growing at a better-than-8% rate. While China has many goals, in our view, the three with the greatest implications for the investment business are to:
  1. Increase domestic consumption;
  2. Accelerate infrastructure; and
  3. Diversify away from the U.S. dollar.
In the investment business, getting the big picture right is key; we believe the ability to appreciate what is going on in China—and act on it— will have a significant impact on investment results. For some perspective on where China is headed, it pays to look back a few years. Therefore I’d like to provide you with some history intertwined with my observations on this most fascinating country...