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 3^rd 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: 

“China to Surpass the USA as World Leader in Manufacturing?”

Neuberger Berman's Recent Outlook

The following is Neuberger Berman’s (NB) 2^nd 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 

THE WORLD IS STILL UPSIDE DOWN

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...

Where Is China Heading?

Mark Leonard's book “What Does China Think?” presents a number of China's modern beliefs and challenges.  Mr. Leonard discusses China's current struggles and the new priorities the Chinese State has determined are essential to address contemporary problems.

It is interesting, for the first time in China’s history, the State's 11th five-year plan does not list economic growth as the top focus. The plan includes mantras, such as: “put people first”…“respecting the natural environment”… and introduces a model which resembles some Scandinavian attempts in Social Welfare to address existing concerns.

The Book suggests China’s most pressing problems are:

1. The rise in protests,
2. The gap between rich and poor,
3. The near bankruptcy of the rural economy,
4. The lack of domestic consumption,
5. The pervasive corruption of the political elite,
6. The environment.

Official records cite 87,000 protest demonstrations in 2005, which is a ten times the amount of such displays since 1993.  It is most likely, the actual number of organized public protestations is much higher.

Mr. Leonard maintains the theory, modern China hopes to develop into an “Asymmetric Superpower”.  This conception believes the USA has an unhealthy obsession with military production, and this is the United States' greatest weakness, blinding policy-makers to the wider picture of military strategy.  Mr. Leonard's offering suggests the current Leadership of China, must include the use of economic, legal, and political tools as well, which is referenced: “non-military warfare”.  This modern version of China's “Economic Warfare” includes investing billions of dollars in “Special Economic Zones” within foreign Nations.

However, today China invests billions to improve it's military might, as Chinese Leaders correctly believe economic power without a strong Military, in context to the rest of the World, will reduce China as an overall power.  They prefer to obtain a Military Force which will become equal to the United States.

“China is attractive to other nations because of its economic power but this attractiveness will not last. It will need to change its political system to become a ‘Hyper-Power’ equal to the USA”.

But for China to achieve this status, the State will need to eliminate its incongruous and obsessive policy on a number of issues, it has mistakenly elevated to threats to its survival: Taiwanese and Tibetan freedom, the relationship with the Dalai Lama, the rise of Falun Gong, and various radical Muslim Enclaves.