After decades of watching American companies move jobs overseas, manufacturing is beginning to make a comeback of sorts here in the U.S. -- and sooner than some expected.
"There is no shortage of areas that were crippled by the financial crisis, and United States manufacturing ranks high on that list," noted a new report issued by Chat Reynders and Patrick McVeigh, the principals of Boston-based investment management firm Reynders, McVeigh Capital Management. "Production jobs were already fleeing overseas in favor of inexpensive labor in the mid-2000s, and the combination of the domestic consumer recession and a burst of Chinese market dominance only amplified the situation.
"Signs indicate, however, that U.S. companies are feeling pressure based on high unemployment, historically high profit margins, and historically low labor costs. It is simply becoming harder for companies to justify moving jobs offshore," Reynders and McVeigh noted.
In their report Workforce Rising: Why U.S. Manufacturing Is Poised for a Comeback, the two identified economics and innovation as each having a hand in resurrecting American manufacturing.
Advances in production technology are creating new opportunities; fracking, for example - the process of fracturing underground shale to reach natural gas and oil deposits - is demonstrating the dramatic impact that innovation can have.
Royal Dutch Shell plc is planning to bring thousands of jobs and more than $1 billion in investment to the Appalachian region for a chemical plant, fed by natural gas. Ohio, Pennsylvania and West Virginia are vying for the project.
In the auto industry, a renewed emphasis on domestic production has taken center stage in some labor negotiations. GM pledged to invest $2.5 billion in U.S. factories and to retain domestic work that was slated for outsourcing to Mexico. Similarly, Ford signed a new labor contract in October that calls for 12,000 new jobs and a total of investment of $16 billion in U.S. jobs and plants by 2015. Meanwhile, Mercedes' total new investment in its Tuscaloosa, AL, plant is expected to hit $2.4 billion by 2014, and work in the facility will create 1,400 jobs.
"As the momentum gains in different industries, three drivers are breathing life back into manufacturing, and each of them points to important near term investment opportunities in companies that stand to benefit," Reynders and McVeigh noted.
Globalization is gradually coming full circle as companies explore insourcing or homeshoring - bringing their manufacturing workforces back to America. Cost advantages of outsourcing production are becoming less significant, and despite (or perhaps because of) the difficult economic climate, the U.S. is in a better position to compete for such jobs.
As the wage gap between the U.S. and China shrinks, the days of cheap labor in China are waning, the two noted. The cost of wages in China is on the rise at a predicted 15% to 20% annually, while U.S wage rates are increasing at a much slower 2% clip.
The cost of manufacturing in the U.S. is improving in relation to other countries as U.S. workers have become even more efficient, partly again as aresult of the recent recession as companies 'did more with less.' In the first quarter of 2009 alone, productivity rose nearly 13%, according to White House statistics. Between 2002 and 2010, only one of 19 other industrialized countries managed to improve its unit labor cost position in manufacturing more than the United States.
A particularly bright spot for U.S.-based manufacturers has been a boom in domestic energy production. The country has seen a surge in American natural gas production, which has lowered energy costs for manufacturers, reduced pollution, and driven investment in the industries that supply equipment to the natural gas sector and those that use natural gas to fuel production-all of which have helped firms make the decision to keep jobs in the U.S. American service firms are taking advantage of new global markets.
As economies in other nations grow, there's more demand for U.S. engineers, software developers, researchers, and consultants. At the same time, a range of barriers that once made it hard to market those services across borders have come down. As a result, the United States is poised to expand its trade surplus in services to $146 billion in 2010. Since 2003, that surplus has nearly tripled.
Also, for most of 2011, Federal Reserve Board surveys of business conditions reported manufacturing activity expanding in most districts across the country -- reversing a slowdown in prior periods.
The strongest reports came from subsectors such as heavy equipment manufacturing and steel, for which demand has been boosted by robust growth in the energy, agricultural, and auto manufacturing sectors.
By contrast, demand remained somewhat weak for firms in housing-related subsectors, such as a door and furniture manufacturers and the makers of lumber and wood products. Export sales of assorted manufactured products generally performed well although slower economic growth in China and Europe held back sales for some manufacturers.
Other momentum changers, Reynders and McVeigh said are rising transportation costs and a shift among manufacturers to a more holistic view of production.
Transportation costs have drastically increased in the past few years due to the high price of oil. By reallocating resources to the U.S., companies can reduce the distance to the point of sale and eventually benefit from more accessible, cheaper fuel in domestic natural gas.
"Less obvious but just as significant is a fundamental shift to a more holistic view of production. Industries are taking a closer look at the full cycle of product delivery as reflected by the Total Cost of Ownership (TCO). TCO evaluates the entire cost incurred by companies when purchasing a manufacturing part, including the burden of controlling quality and delivery, transportation, oil consumption, inspection of labor, inventory carrying, and freight and packaging," Reynders and McVeigh said. "If the buyer performs a cost-benefit analysis of the TCO, they would find it is cheaper and more predictable to keep manufacturing close to home."
Grubb & Ellis in its 2012 market forecasts says trends such as homesourcing could begin to have real benefits this year but certainly by 2013.
Demand will accelerate in 2012, but given the sluggish domestic and overseas economies, only by about 15% to 130 million square feet. Large blocks of space will continue to outperform, Grubb & Ellis reported.
Third-party logistics providers are becoming an integral part of supply chains of an increasing number of companies, a trend that will continue to drive the Class A distribution sector.
For the recovery to accelerate more significantly, the market needs the return of business and consumer confidence so that smaller, local businesses will commit to more space at longer terms. However, the requisite level of confidence is unlikely to emerge until the second half of the year, and the November elections could delay it until the end of 2012.
"Near and on-shoring has the potential to accelerate demand for general industrial space. Caterpillar's decision to shift some production from Japan to North America could prove to be an exception," Grubb & Ellis reported. "However, given the supply chain disruptions following the earthquake in Japan, the flooding in Thailand and rising labor costs in China, more U.S. manufacturers are likely to follow.
The more meaningful acceleration will be in new supply, which will double to 40 million square feet. Assuming a stronger economic recovery in 2013 and 2014, new deliveries will easily double again in 2013 and potentially in 2014, matching the 155 million square feet that was completed in 2008. While selective speculative building commenced in 2011, 16 or more markets across the county will see new construction begin this year without a lease already in place.
Source: Costar - Mark Heschmeyer
No comments:
Post a Comment
Type your comment here.