Industry Today: The World of Manufacturing

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 Date:1/14/2008

 

It's Your Call
The World Beckons
Dr. Chris Kuehl explains why what happens in Europe, Asia, Latin America and elsewhere matters to U.S. manufacturers.

The conduct of international business is often subject to cliché. One either hears that doing business outside the borders of the U.S. will be a panacea to all that ails a company confronting restricted domestic markets or one gets an earful warning of dire consequences ranging from rampant piracy to never getting paid. The truth, as always, is somewhere in-between.

The fact is that nearly every company is global insofar as international business affects them – sometimes positively and sometimes negatively. For companies that have discovered there is a market for their products in other nations, the idea of global business is highly motivating and it doesn’t take much to convince them that actions in these other markets will have an impact. For those that face intense foreign competition, it is just as obvious that events overseas matter.

The Good News
The most obvious benefit from an international business position is expanded market opportunities. The surge of global business over the last few years has been provoked by several factors. The most important has been the drop in value of the dollar. While this has been a disadvantage for those that need to import, the exporter has been treated with an opportunity to sell its products more competitively in nearly all global markets. Lately the dollar has been gaining in strength as the euro has been drooping, but most analysts are convinced that the dollar will resume its slide at some point in the middle of 2009.

The second benefit comes from an expanded supply chain. The availability of raw materials from overseas has always been an important factor in domestic growth, but there is now much more available in terms of products – and even services. The sourcing choices now are as good as they have ever been and the technology that has revolutionized the business has improved accessibility. The improvements in communication and transportation have made many locations active that had once been considered remote and inaccessible. The rise of the dollar’s value has made this part of the global equation more relevant in the last few months. As the dollar starts to shrink again these advantages will fade a little, but given the different costs of production in many parts of the world there will remain some significant advantages.

The third positive is a relatively recent development. For many years the vast majority of technology transfer has been from the U.S. to other nations, but that trend is now showing some signs of reversal as economies in Europe, Asia and Latin America reach levels of sophistication that will allow U.S. companies to gain from them as these nations have gained from the U.S. in the past. The innovation and progress in Asia have been a boon for many U.S. companies and European technology has been finding a place in the U.S. for a long time.

The Bad News
The most immediate challenge from global business comes from the increased competitive pressure that has developed. Twenty years ago the majority of manufacturers in the world were mostly worried about the competition they had in their own countries, but those days are long gone. The emerging markets have emerged and they are becoming major rivals to U.S. manufacturers as well as potential allies. The global market place has developed rapidly, which has meant that nations as diverse as China, India, Brazil and Russia have become rivals to the traditional manufacturing nations like the U.S. and those in Europe.

The other negative factor presented by competition is rivalry for the materials and inputs needed. The price of oil crested in 2008 as China and India emerged as major consumers. The U.S. remains the dominant oil consumer in the world but the new rivalry has meant higher prices, and it hasn’t been oil alone. The price of other commodities has risen as well, and it has been this demand for steel, copper and other inputs that drove the costs of production up to record levels earlier in 2008.

The last factor is the most interesting and for many companies the most difficult. Given that what happens in all these distant markets now matters to their business, it has become important to know what is happening in these countries to some extent. This complicates business decision making to a considerable degree. The political situations in these nations matter as much as the economic ones, and social considerations may have the greatest impact – especially if there is a reaction that affects demand or the ability to expand the supply chain.

Overseas Trends
There isn’t the space to discuss all the developments in other markets that will impact U.S. business, but a few can be called out as most relevant in the immediate future. These are developments that will dramatically affect the factors that have been described above.

Asia
The rapid pace of growth in Asia is slowing and that is not good news for these nations. It may appear that slipping from 10 percent to 8 percent annual growth in China is a problem many would love to have – considering that the U.S. and Europe have both slipped into negative growth territory. The fact is that China has developed a solid middle class of 400 million people, but still must contend with a billion people living in poverty. To keep the country from social chaos there has to be growth to accommodate the demands of this population for jobs and progress and at 8 percent that growth is not forthcoming. This will mean that China will pursue whatever policy it deems necessary to drive that growth, which will include everything from export subsidies to efforts directed at stimulating internal demand.

Similar attempts to drive export demand are being developed by all the other Asian states – especially South Korea, Japan and Taiwan. These countries will become more aggressive in promoting their export sectors and they are likely to become more protective of their own economies – especially if the U.S. starts to engage in protectionist policies of its own. Countries that have been major consumers of raw materials and commodities will slow down a little and that could reduce the prices of raw materials such as steel, aluminum, copper and the like, but too much reduction in demand will push the producers into a position of shutdown that could compromise their recovery in the future when demand starts up again.

Politically the region is fragile and further economic stress will accelerate some of the social breakdowns taking place already. The violence in Thailand threatens to bring back a civil war, corruption is out of control in Indonesia, and governments in nations like Taiwan and Korea are unstable.

Europe
The recession in Europe is already official. The German economy has been in recession for two consecutive quarters, and the Eurozone as a whole has joined them. France is holding its head above water but it is the only major nation that is. The politics of Europe are in flux as economic pressure may be enough to unseat Germany’s Angela Merkel and Britain’s Gordon Brown. The reaction by the European Union has been to circle the wagons and find ways to protect the domestic economies of the region.

The faltering export economy has meant that most of the growth in Europe has ended, which is creating pressure from the left-wing parties in the region to spend more government money. This leads to inflation issues later and tends to make many companies ultimately less competitive. If the trend toward more extensive government activity accelerates, it may be harder for some of those companies that once exported aggressively to resume their activity as the world economic situation improves.

Latin America
This region may be facing the most change of all. For the last several years these nations have grown as the appetite for their commodities has grown. Venezuela and Ecuador have seen demand for oil spike as the price accelerated to unheard of levels. Bolivia sold its gas to the Brazilians at record rates as Brazil needed the energy to keep pace with demand for its own output – everything from soybeans to aircraft. Argentina had been benefiting from its agricultural output and Chile from its copper. Now, all this largesse seems ready to come to an end and the adjustment is likely to be uncomfortable.

Venezuela is already feeling the pinch, which is creating social unrest that could challenge the Chavez government at some point. There is a major financial disaster shaping up in Argentina as the government's battle to control prices has provoked the farmers into boycotts that threaten to slam the door on farm exports. Brazil is also beginning to worry about the slip in export revenue as demand for ethanol has decreased at the same time that manufactured goods are in less demand The majority of the governments in the region are led by center-left politicians and their instincts will run toward more rather than less intervention. In extreme cases there will be expropriation and nationalization and in more subdued situations the reaction may include higher export fees and more protectionist policies.

In the months ahead export markets will be constrained and competition will be ferocious as every nation angles to get an edge. There will be more efforts to promote protectionist policies around the world, even in the U.S.
Manufacturers will see declining demand from some of the formerly high growth regions in Asia, but there will be new opportunities in countries like Vietnam and Singapore. Europe will become more cautious and protective but the countries in the East will be more aggressive in their desire to keep growth rates up and will be looking to improve the quality of their output. The dollar is going to be strong for a while longer, but will likely weaken again mid-year 2009. As in other years it will be a matter of what markets a company has penetrated and what business sector one sells into.

By Dr. Chris Kuehl is economic analyst, Fabricators & Manufacturers Association, International. Visit www.fmanet.org.