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"