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China Diesel Import
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America’s Manufacturing Portfolio At Risk While Japan Rebalances by
As a global investment advisor, my portfolio reviews with clients always stress the need for a balanced and diversified portfolio. The goal is a common sense blend of U.S. and international investments to lower risk and volatility while still capturing growth opportunities around the world. It seems clear that "Corporate America" is in serious need of a "portfolio review" of its base. Outsourcing makes sense only if the proper balance is achieved between domestic and offshore manufacturing. During the last decade, a hot topic in Japan and America has been the "hollowing out" of their respective industrial bases. The share of Japanese-owned productive capacity located abroad has grown from 8% in 1994 to 40% today. The United States currently has about 50% of its base located offshore.For both Japan and America, the large outflows of direct investment, especially to China, have caused an uneasy feeling that both countries had bleak futures as centers. Surprisingly, the pendulum is now moving back to Japan as large Japanese multinationals are busy investing in plants at home. Here are just a few examples of this trend. Canon is building a large digital camera facility and plans to spend 80% of its $7.2 billion capital budget in Japan over the next three years. This is a reversal from the past ten years when 80% of its capital budget was spent overseas. Toshiba is building a $2 billion semiconductor facility. Sharp, Matsushita and Nippon Steel are also building major plants in Japan. Overall, spending on plants and equipment in Japan is rising at a 10% clip. It's not that China is not important to Japan's economic growth. China has passed the U.S. to become Japan's largest export market. In addition, it needs a strong presence in China to tap its rapidly growing consumer market as well as a low cost base to manufacture lower tech products. For certain products like cars it is also likely to keep large bases in countries like America. For example, Toyota produces more than 1 million cars annually at eight plants in America and has two plants under construction in Texas and Tennessee. But for the more advanced capital-intensive products, the investment is clearly coming home.How can we account for this surprising turnaround and what are the lessons for America? First, Japanese firms have learned the drawbacks of outsourcing. Supply bottlenecks, poor infrastructure, power shortages, uneven quality, difficult inventory management and high employee turnover are just some of the problems. Secondly, even though China's wages are about 5% of Japan's, its increasingly sophisticated factory automation has lessened the importance of labor costs. For advanced high tech products it accounts for only 10-15% of total costs. Having closer to home also shortens new product lead times and increases cooperation between R&D and production teams leading to a crucial edge in staying ahead of its nimble competitors. Supply lines of 2,000 miles can be problematic. Lastly, and perhaps most importantly, there is the critical issue of protecting intellectual capital. Having research, development and production closer to headquarters better protects proprietary technologies. In America, the signs that corporate outsourcing is at a tipping point are numerous:· the last time the U.S. recorded even one month of trade surplus was during the Ford Administration · the U.S. imports $1 million of Chinese goods each minute· a baseball has not been made in America for 25 years· if Wal-Mart were a country, it would be China's fifth largest export market.Unfortunately, here in America the outsourcing trend does not appear to be reversing even in capital-intensive products. Many of the new high tech jobs are for managers to manage the outsourcing process. Microsoft, Intel, IBM and Motorola all have large and growing R&D centers in China to take advantage of Beijing's cheaper pool of talent. Given China's total disregard for intellectual property rights, perhaps American executives should pause and reconsider the long-term costs of growing outsourcing programs. Their offshore R&D staff may very well walk off with proprietary knowledge and the company's future.One example of a smart balanced approach to outsourcing is New Balance shoes. While market leaders Nike and Reebok manufacture virtually all of their shoes offshore, New Balance has taken a more sensible approach keeping five domestic factoriesthat are equipped with high tech robotics leading to making a shoe in 25 minutes versus four hours in Asia. New Balance employees earn an average of $12 per hour versus 40 cents an hour in China. But the new technology coupled with cutting production cycles from 8 days to 8 hours and cost savings from shipping directly to U.S. retailers make up the difference.This is not a call for isolationism or rolling back globalization, just a reminder that outsourcing has its risks and downside. How about a little common sense and balancing short term cost savings against the long term strategic risks? Instead of just taking the comparatively easy step of lowering labor costs by outsourcing, let's roll up our sleeves like the Japanese, improve techniques and reap the returns and lower risks of a more balanced "portfolio" approach to outsourcing. Carlton Delfeld is President of ChartwellAdvisor.com, a global investment advisory firm, He is the author of a new book, "The New Global Investor", was a Japanese Government Scholar at Keio University's School of Commerce and also served on the Board of Directors of the Asian Development Bank..
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