Susan Christopherson smc23@cornell

1. The Regional Advantage:What the New Manufacturing Location Calculus Implies for the Economy of the Northeast Susan Christopherson smc23@cornell.edu

2. Why the Northeast’s Regional Manufacturing Assets Are Central to National Export Strategy • What is happening in manufacturing location? Why is it happening? • What is the regional advantage in this new location calculus? • National support for regional industrial strengths • Assets trump averages

3. A Manufacturing Rebound? Why is manufacturing returning? What does a manufacturing location reassessment mean for the UK ? How can a regional economy –the Northeast - build on its natural geographic and industrial advantages to attract manufacturing?

4. What is the Explanation in the UK?How Does it Differ in the US? The UK explanation for modest but better performance in manufacturing focuses strongly on ability to reduce labor costs. “ (In the UK) The recession provided most companies with an opportunity to carry out radical restructuring, implement cost reduction strategies, improve supply chain agility and renegotiate previous contractual commitments. These strategies allowed margins to be protected and have provided a strong base for growth.” PWC, 2012 The US explanation focuses on total cost calculations with labor cost of minimal significance.

5. What Evidence Do We Have? • Exports are up • Manufacturing employment has bucked recessionary trend • Analyses by major consulting firms assess comparative costs

6. Exports Have Led Out of Recession

7. The Northeast is Central to UK Export Potential

8. Some US Evidence/Indicators

9. The US Case: Capital Goods and Industrial Supply Exports are Moving Up

10. Manufacturing has Led US Out of the Recession

12. The US Explanation for Why This is Happening Now • Gradual and anticipated increases in transport costs • Lower wages in the US; higher wages in China • Appreciation of Chinese currency • Labor is a smaller portion of total production cost • Recognition of potential supply chain disruption risks • Problems with quality control and intellectual property in China • Lower energy costs in US from natural gas development

13. Supplier Price and Terms A New Focus on Total Cost Adapted from Archstone Consulting Delivery Costs Operations & Quality Costs Other Costs • Unit Price • Labor • Direct materials • Management • Overhead • Capital Amortization • Local taxes • Manufacturing • Local regulatory compliance • Logistics • In-country transport • Ocean/air freight • Destination transport • Packaging • In-plant Material • Inventory • Intra-plant demand • Safety stock • Handling • Overhead • Warehousing & O/H • Standard • Risk • Qualification • Local tax incentives • Situational • Procurement staff • Broker fees • Infrastructure • Exchange rates • Training • Tooling/molds • Region Specific • Duty • VAT • Supply Chain • Inventory maintained within • Satellite warehousing & O/H • Terms • Net payment • Volume Discounts • Free Goods • Customer Specific • Unique services • Unique capabilities • Quality • Quality validation • Quality management • Failure costs

14. Sample Total Cost ComparisonPotential US Cost/Productivity Advantages

15. Estimates that Total Cost Comparisons Could Bring Back 25% Off-shored Manufacturing Percent of re-shoring initiative cases where US has a price advantage: 5% Percent of re-shoring initiative cases where US has total cost advantage: 53%

16. Where are US Cost Advantages Over China?Similar in the UK • In serving domestic markets (both niche and mass): Example: Food Note the role of health and safety regulation • In export markets: Examples: Aerospace Chemicals Machinery Medical Equipment

17. U.S. Manufacturing Competitiveness in Domestic Markets 300% Circle size = U.S. consumption 200% Nonmetallic Mineral Product Global Leaders Petro/Coal 90% Regional Powers 80% Sectors on the Edge 70% Wood Product Niche Players Food 60% 50% Bev. & Tobacco 40% Fabricated Metal U.S. Mfg. Cost Advantage over China for Products Consumed in the US(1) 30% Primary Metal Paper Textile Product Mills 20% Chemicals Apparel 10% Textile Mills Plastics Other Transp. Eqpmt. 0% * -10% Auto Final Assm. Machinery -20% Aerospace Printing Furniture Pharma. Electronics Medical Eqpmt. -30% Leather Electrical Eqpmt. Semiconductors -40% Appliances Computer Eqpmt. -50% -60% -70% Low High U.S. Manufacturing Positional Advantage for U.S. Demand 1) The U.S. cost advantage represents the labor and logistics costs compared with those of Chinese manufacturers, for products consumed by people in the United States. Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization, IRS Statistics, Tauber Institute for Global Operations, Booz & Company

18. U.S. Manufacturing Competitiveness in Export Markets 290% 0% -5% Circle size = U.S. consumption -10% Global Leaders Food -15% Auto Final Assembly Electrical Equipment -20% Primary Metal Appliances Petroleum / Coal -25% Auto Vehicle Parts Computer Equipment Chemicals -30% Paper U.S. Mfg. Cost Advantage over China for Products Consumed in the China(1) Machinery Textile Mills Furniture -35% Textile Product Mills Aerospace Printing -40% Plastics Semiconductors Electronics -45% Leather Apparel Wood Product Medical Equipment -50% Fabricated Metals Pharmaceuticals -55% Beverages & Tobacco Other Transportation Equipment -60% -65% Nonmetallic Mineral Product High -70% U.S. Manufacturing Advantage for Export . Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization, IRS Statistics, Tauber Institute for Global Operations, Booz & Company

19. Is There a Regional Advantage in This New Location Calculus? What is it for the Northeast?

20. Many Older Industrial Regions in US are Doing Well Blue = Metro areas not specialized in manufacturing Green = strongly specialized Yellow = very strongly specialized Red = highly specialized Spurce Sources: The Brookings Institution The Rockefeller Institute

21. Two Visions of the Northeast

22. Some Key Advanced Manufacturing and Enabling Technologies That Have Emerged in the Northeast • Automotive – Low carbon vehicles • Renewable Energy – Off-shore wind • Chemicals and process industries – Bio and specialty chemicals • Engineering services – automotive, aerospace and marine • Oil and gas – subsea technologies • Logistics

23. What are Critical Connections for Regional Economic Development? • Labor force improvement connections are critical to potential re-shoring firms, especially given importance of labor quality to their decision-making. • Logistics connections to intermodal facilities will be critical. Also, Heartland connections to ports. Technological advances in logistics will be increasingly important … not just to the transportation industries, but to the recovery of manufacturing. • Supply chain connections that strengthen regional comparative advantage. • Connections with the next generation of leaders.

24. The Regional AdvantageWhat the New Manufacturing Location Calculus Implies for the Economy of the Northeast Susan Christopherson smc23@cornell.edu

25. Additional slides below not in presentation

26. What is happening in manufacturing location? Why is it happening?

27. The Steel Industry CaseWhat Happens When We Look at Comparative Costs for Labor, Inventory and Transportation Costs for Steel Products Used in US? According to a PWC analysis, between 2006 and 2010 … • Chinese labor costs remain considerably lower, but the gap is decreasing. • The difference in transportation cost -- ocean shipping costs of raw materials and final goods -- increasingly favors the US as fuel prices rise. • Carrying costs – the raw materials inventory needed to maintain production, and the final goods inventory needed to serve customers (factoring time-in-transit and a margin for contingencies), plus the cost of financing those inventories -- significantly favor US steel production.

28. Prominent Examples among Steel Producers and Users • US crude steel production increased more than 7% in 2011, while consumption increased around 11% during the same period. (http://www.worldsteel.org) It is expected that the trend will continue due to the increase in consumption from various industrial sectors. • Caterpillar, is building a plant to make excavating equipment in Texas, tripling its capacity for such equipment in the U.S. • Ford is repatriating 2,000 jobs from China

29. Labor Skills Shortage is Complicated and Differs Among Regions and Industries • “Ready to work” skills may be missing. • A mismatch between general skills taught in technical schools and the specific skills companies are demanding. Technical training on specialized equipment is expensive. • Wages for skilled advanced manufacturing jobs are too low in some regions to induce skilled workers to move. Wages for machinists and tool & die occupations are down across the state.