Easy like Sunday morning

So after a short-hop north in what must be the thinnest aircraft ever to take to the skies, here I am in a rainy Portland, Oregon. It will take a bit more than persistent precipitation to dampen my mood. The reason is simple. After four years of long-distance (and on my part woefully inadequate) correspondence, I am finally sitting in the same room as one of my very best friends from university and his family, including my godson Jack. In just a few hours I have discovered that Jack is, as they say in these parts, one cool dude (in contrast to his godfather). So today is all about one thing. Chill-axing, catching up, reflecting on the past, outlining plans for the future and making up for lost time.

But its Sunday and Sunday wouldn’t be the same without a quick review of the papers. For this week only, The Sunday Times has been replaced by its New York equivalent. I am curious about how global a view this paper takes. Over the last few days my media exposure has been limited to USA Today and CNBC both of whom had their European gaze fixed firmly on the tragedy of the Costa Concordia and how rich Russians had allegedly bought their way onto lifeboats.
How does the New York Times (NYT) measure up? Well in some senses, not much better. The Eurozone debt crisis is far from headline grabbing, maybe reflecting the somewhat closed nature of the US economy. It is an issue that is wrapped up within a wider treatment of economic conditions rather than taking centre stage itself. And the tone is altogether more positive and optimistic. Indeed the news is focused intently on the encouraging signals emerging from the US economy which one commentator suggests point to an economy waiting to take-off. Labour markets, relatively strong GDP projections and improving productivity from US manufacturers all secure column inches.
It is in relation to the latter that my attention is most closely drawn. The NYT tells the story of when the late Steve Jobs attended a White House function last year. Jobs was asked directly by President Obama what it would take to start manufacturing the modish iPhone within US borders. Jobs’ response was typically forthright. He told the President ‘It’ won’t ever happen’. When pressed on why, Jobs’ was quick to dispel labour costs as the principal driver of his company’s off-shoring of production. For Apple there were broader issues at work – namely the operational flexibility and agility that are often associated with less regulated emerging markets.
What is interesting about this debate is that Apple, in some senses and not unusually, bucks the trend. Since I have been Stateside the on-shoring or in-sourcing of manufacturing has been a growing theme and it would seem not just because there are elections looming. US manufacturers are, in increasing numbers, falling back in the love with the homeland and bringing jobs home. Indeed a survey of US manufacturing companies undertaken just under a year ago by Accenture, found that 61% of respondents were considering moving back some of their manufacturing back to the home market.
It is an issue that is now beyond statistics and stated intent. In recent months General Electric have announced the production of energy efficient water heaters will relocate from China to Kentucky. Sleek Audio, who manufacture high-end ear-phones are similarly leaving China for the warmer climes of Florida, while Peerless Industries is moving production of audio-visual mounting systems again from China to Illinois. Of course three swallows do not make a summer. Far greater volumes of in-sourcing will be required if the effects of a decade of off-shoring are to be negated. But it is clear that a new dynamic is at work in location decision making which will over time bring employment growth to the mainland US market but also to markets closer to the US borders, notably Mexico and Central America.
So as I settle down for another Double Tall Latte here in The Rose City, I ponder on what this morning’s reading might mean for Europe. I think there are five points:
1. The decision on where to produce, or source from, involves a total cost trade-off, and for many products where the market is Europe the cheaper manufacturing costs derived from off-shoring may be offset by higher transportation and inventory costs and the longer lead times, and risks, this involves.2. Manufacturing is becoming increasingly mobile and parts of Europe – and not just those that offer cheap labour – have the opportunity to win through.3. The drivers of this newfound mobility are not just the simple maths around wage rate arbitrage (as labour costs often account for no more than 10 per cent of total costs) but instead a more sophisticated equation which also takes in operational ease, trading conditions, market size and penetration and production quality, amongst others.

4. Changes to production and sourcing strategies will also lead to changes in logistics and supply change management and impact on the demand for logistics facilities.

5. As ever there will be clear winners and losers across Europe and new clusters of industrial activity will emerge.

The key question on this last point of course is where will these new European Manufacturing clusters emerge? Look out for a forthcoming paper on that very issue soon. For now, I am off to shoot some hoops with my dude of a godson.