Photo: Tesla Motors
The trend of companies relocating American manufacturing jobs to low-wage China has started to reverse, as shown by recent decisions by Apple Inc., General Electric Co, Caterpillar, DSM, General Motors and even Chinese electronics giant Lenovo to scale up operations here.The bottom line: For the first time in decades, several key economic drivers have created a competitive advantage for the U.S. that will encourage corporate strategic decisions on capital allocation and acquisitions for generations to come.
1. Cheap and abundant natural gas. Shale gas and High Plains oil have delivered a miracle to the U.S. economy. America’s increased energy production creates a significant edge for U.S. based manufacturing. With supplies plentiful in the U.S., natural gas currently trades at $3.25 per thousand cubic feet.
That’s about one third of the $10-to-$11 level in Europe and less than one-fifth of Asia’s $15 level. That translates to affordable electricity for manufacturers, since natural gas drives much of the nation’s power generation. Natural gas is also used as a raw material to make ammonia, hydrogen, methanol and other feed stocks for industry. U.S. producers of petrochemicals and polymers now rank among the lowest-cost operators in the world. That’s why companies such as Royal Dutch Shell and Dow Chemical are moving to expand production in the U.S., with new facilities and jobs on the way throughout the petrochemical sector.
DSM’s oldest U.S. facility, a plant in Augusta, Ga., that celebrates its 50th anniversary this year, makes caprolactum and other raw materials for the nylon-6 and engineering plastics industries. Cost of production at this facility once measured among the highest in the DSM global network. Now the Augusta plant enjoys the lowest cost of production of any such DSM facility in the world, including those in China. One primary reason: low-cost natural gas.
2. Innovation. Despite talk of a brain drain, the U.S. remains the global innovation leader, maintaining a position enjoyed for 50 years. Research and development spending in the U.S. comprises 31% of the total global outlay. That’s more than twice China’s 14% share, and also well ahead of Japan’s 11% share and 17% for the Eurozone.
Companies see the synergies of keeping their R&D operations close to their production facilities. U.S. entities own more than one third of all global patents. Most people don’t realise that intellectual property-intensive industries account for nearly $6 trillion, or 40% of U.S. gross domestic product and directly or indirectly support 40 million, or 30%, or all U.S. jobs. And that number continues to grow. Today, 16 of the world’s top 20 universities are in the U.S. and 70% of all Nobel Prize winners are employed here.
3. Rule of law. Without the means to protect intellectual property, it cannot be exploited for competitive advantage. In the U.S., the enforceability of intellectual property and property rights are sacrosanct. This isn’t the case in many parts of the world. The U.S. offers certainty and safety relative to the world’s second-largest economy, China, which struggles with these issues and often places the interests of government and domestic organisations ahead of the intellectual property and property interests of multinationals doing business there.
4. Human capital. The wage gap between the U.S. and China has been shrinking. In 2000, U.S. wages were nearly 22 times higher than comparable wages in China, but by 2015 the difference will be less than four times. Factor in the U.S.’s faster gains in productivity and lower worker turnover rates, and by 2015 many pundits believe labour cost comparisons may no longer be a factor in determining the location of manufacturing operations. Most people don’t realise the U.S. also enjoys a future demographic advantage over other countries. By 2050, the U.S.is expected to offer the youngest labour force among the major economies, while China and Japan will have the oldest.
5. De-complexity. Western multinationals continue to struggle with management of operations in developing countries. Time zone and cultural differences, inadequate infrastructure, business ethics issues, quality, reliability and traceability concerns, and threats to brand equity all pose challenges. Investing in or acquiring manufacturing operations closer to customers and final markets offers a simpler alternative, also known as de-complexing. The five-fold increase in oil prices since 2000 also makes China less appealing because of higher transportation costs. Supply chain management becomes increasingly complex the greater the geography between manufacturer and market. The longer distances demand greater inventory requirements for ships at sea, as well as safety stocks, which lead to working capital increases and margin compression.
6. Public policy and abundance. The federal government appears to be seizing the opportunity to promote job growth at home. In his State of the Union address, President Barack Obama kept his focus on the strategic importance of energy independence and maintained his commitment to an all-of-the-above energy strategy. This bodes well for new efforts to increase use of non-food raw materials to produce energy and chemicals.
The president’s push for individual technology development centres in Youngstown, Ohio, and elsewhere marks a positive move.The idea was generated by the business community and borrows a page from efforts in China, where the government strategically places manufacturing sites in areas that need to be developed.
These policy initiatives, coupled with American abundance in natural resources such as water, agricultural products, timber,minerals and other materials, sets the U.S. at the epicentre of the next industrial and innovation revolution.
Moving to capitalise on these factors, DSM and ethanol giant Poet LLc formed Poet DSM Advanced Biofuels last year and are now building a facility in Emmetsburg, Iowa, which will have the capacity to produce 25 million gallons of cellulosic ethanol a year.The fuel will be made from corn stover, the plant matter left over from growing corn, and does not compete with food or feed. Code-named Project Liberty, the facility and the dozens like it to follow will meaningfully contribute to energy independence and will create, in time, thousands of new American jobs that cannot be outsourced. Use of renewable feed stocks promises to deliver a new industrial revolution in America as we learn to live off the land once again and move away from hydrocarbons drilled out of the ground. It takes nature 10,000 years to produce energy from plants; DSM can do it in a week right here in the U.S.
7. Credit, currency and the coming wave of mergers and acquisitions. As the U.S. dollar continues to weaken, the Chinese renminbi, or yuan, has been appreciating at a 4% annual clip. Many believe this will accelerate in the near future. Continued depreciation of the dollar will further bolster U.S. manufacturing and exports.
Though the U.K. and Spain have grabbed headlines with their austerity measures, state and municipal governments in the U.S.have also undertaken significant austerity measures of their own, including slashing their head count and keeping costs in check. On the consumer level, American have cut back on their credit card delinquencies and paid down debt.
The average age of a car in the U.S. is 11 years old, and new home construction remains at historic lows. Corporations have spent the last five years reducing debt and restructuring to be leaner, meaner and more productive than ever. Corporate balance sheets are healthy and interest rates remain at historic lows.
Something has to give. Equity markets, near all-time highs, portend good things go come. Consumers in the U.S., with a return of confidence, will buy new cars, durable goods and homes over the next few years. With cash on hand, lean operations and low borrowing costs in their favour, corporations will aggressively pursue merger and acquisition strategies to find growth. Given the competitive advantages outlined above, the U.S. will find itself at the centre of merger activity.
Under our Chief Executive Officer Feike Sijbesma, Dutch-based Royal DSM has already set the trend for U.S. deal-making with $4 billion spent on more than 13 strategic acquisitions in the areas of nutrition, biomedical materials, resins and industrial biotechnology. We’ve doubled our U.S. operations in terms of sales, sites and employees. The U.S. now ranks as DSM’s biggest country by sales and may soon be our largest by employees as we look to grow beyond our current level of 5,000 staff in North America. Ahead of the curve, we’re happy with the investments we’ve made and each of them has been profitable.
The new era of manufacturing in the U.S. to serve U.S. markets is at hand, along with the growing export market for specialised, high-margin finished goods.
The world has changed. The U.S. has changed, and the pace of this change accelerates every year. The multinational corporations that recognise these seven healthy virtues and adapt quickly, will continue to grow and prosper. To quote our 40th president in a manufacturing context, I believe it’s morning in America…again.
Hugh C. Welsh currently works as president of DSM North America, a unit of Royal DSM N.V.
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