Signs of slow but steady recovery in manufacturing are being seen in both the US and Europe, stimulating continued debate about the strength of a global industry turnaround. In the US, sectors such as electrical equipment, appliances and components, and fabricated metals are continuing to grow, while consumer spending and discretionary purchasing remains down, impacting segments such as furniture, food and beverage, and even toy manufacturers. As a whole, it seems the closer a manufacturer’s goods are to the end consumer, the slower the recovery.
Many in the US have bemoaned the fact that the US has “given away” its manufacturing base -- outsourcing this work to lower-cost suppliers in Asia, Latin America and elsewhere; maybe so, but there are two sides to every story. The tough economic environment has driven many companies to turn to outsourcing not just to cut costs, but to survive. Over the past few years, US corporations facing increased competition, ever tougher regulatory environments, and significantly rising health care and benefit costs have had to make tough decisions. The choice to outsource for many wasn’t merely an option, it was an absolute necessity; many would not be here today if they hadn’t. But remaining competitive in manufacturing has been about more than merely shifting around operations.
In 2008, the cost to manufacture in the US was only 17.6% higher than the average in nine other industrial countries, including Canada, Mexico, and China, according to the Manufacturing Institute and the Manufacturers Alliance/MAPI -- down from 31.7% in 2006. While rising labor costs in developing countries was a part of the equation, a key factor in US manufacturers reducing the cost delta was the continued investment in productivity-enhancing technologies. It was clear that with ever increasing global competitiveness, US manufacturers had to reduce costs, or lose their markets forever.
A quick scan of new Epicor manufacturing customers inked over the last quarter shows strong growth in emerging international markets including China, the Middle East, Latin America and Central and Eastern Europe. What we note is that these are not just US or European companies outsourcing -- there is also a strong mix of local companies expanding to meet the needs of local markets, as well as US companies building plants to meet growing demand (locally) in these markets.
This trend seems to align with the industry think tanks reporting that businesses are ramping up operations offshore (albeit slowly) to meet growing global demand. At the same time, while this demand continues to build, manufacturers can’t sit by and expect a return to “normal business” and growth.
For the next few years, the “new normal” is going to be tight markets with relentless, global competition -- emerging markets are developing significant manufacturing competencies seemingly overnight (Vietnam, for instance).
To compete, business needs to be more responsive than ever to its customers and markets. Flexibility and adaptability will be key (along with the givens of best quality, price, and performance). We should not expect any changes in the near term (regardless of administration) that ease regulatory compliance, or that universal healthcare will suddenly make our employees more productive.
As before, we need to look at how technology not only can drive dramatic shifts in productivity and profitability (as well as long term sustainability), but how it can change our fundamental approach to how or where we do business. While some companies may see technology as simply a tool for increasing efficiency, the smart companies see more than that; they see it as way to evolve their business models to focus on what has always been the strength of the US (and European) industrial sectors -- innovation.
Posted by John Hiraoka, Executive Vice President and Chief Marketing Officer, Epicor