Impediments to Manufacturing in America: Shifting Global Middle Class Consumption

23/10/2011

As we discussed earlier, the logistics cost (both inbound and outbound) plays a significant role in deciding where to locate a manufacturing plant. All else being equal, closer a plant is to the sources of both raw material and the customer the lower the total logistics cost. It may not always be possible to get both raw material and customers in same location. A trade-off between various supply chain costs gets into play.

A second issue related to servicing the customer is the level of service a manufacturer can provide. Think of delivery lead time, product availability (on shelf or warehouse), servicing the product and returns among others. If they can accomplish this with low inventory and personnel cost the better.

It would make sense that US manufacturers would be inclined to locate the plants closer to their customers. This is especially true if they can not leverage the natural competitive advantages of locating a plant in US.

So, has the global demand pattern changed in last few decades? If so, how? Is the demand more global today or less? How is it expected to change going forward?

These are some really hard questions. Depending upon how you look at the question the answers may be even more difficult. Predicting a global consumer base is somewhat easier than predicting the demand for cars say in Peru or Botswana. I came across a study by OECD on Emerging Middle Class in Developing Countries. Look at the growth of middle class consumption levels globally.

oecd-global-middle-class-consumption

As you can see from this graph, Asia is expected to grow significantly in middle class consumption. Hence, a natural next marketplace for US manufacturers. The same report also, predicts the spending level by various geographies.

spending-by-geographies

Once again, Asia Pacific region is expected to more than double in demand over coming two decades. A strong incentive for manufacturers to be in Asia Pacific region to effectively compete. Further more, India and China stand out as two countries with most growth in customer base.

Impact of Geographies

From a manufacturing company CEOs perspective Asia Pacific region is the next frontier. If they can manufacture the products in that region and serve the customer base effectively they have a winning strategy at hand. But can they? Do other supply chain factors support this strategy? The short answer is yes!

Many countries in Asia Pacific region boost low labor costs, low regulations, availability of raw material and components, reasonably trained work force, favorable currency exchange rates and business friendly government among other things. We can go through a detailed supply chain analysis but you can see that many of the factors are stacked in favor of locating the plant in Asia.

So, are we doomed when it comes to locating the plants in America? Not really. On a product-by-product basis it may still be profitable to manufacture in America and export to Asian countries. Technologically complex products that require highly skilled labor is a good example of such a situation. Can you imagine, swiss made mechanical watches, that sell for thousands of dollars, manufactured in China? Unlikely! However, supplying cotton shirts to India from US may not be such a good idea.

Then there are other regions of the world like South and Central America. Our own backyard, may be a ripe market for export of US made products in decades ahead.

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