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Global Economic Report

Global strides

By Meghan Boyer

Pent-up demand is leading to manufacturing growth in many regions around the globe

March 2012- Economic difficulties and reduced capital spending have given way to manufacturing growth not only for the United States but for other parts of the world. While not every country is succeeding on the same level, the general outlook is more positive in terms of global manufacturing, which has been growing and recovering faster than regular economies in many world markets.

Developed countries, especially those in North America and Europe, have seen capital equipment purchases supported by pent-up demand, says Tom Runiewicz, an industrial economist with IHS Inc., Englewood, Colo. “There had been a number of years where you had declines in capital spending,” but companies now are replacing older equipment with upgrades to remain competitive, he says.

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Since the financial collapse in 2009, other countries experienced the same challenges as the United States, says Greg Jones, director, education and training at the American Machine Tool Distributors’ Association, Rockville, Md. “Companies were not investing as robustly so that they could provide a safety net on their balance sheets. All that has changed over the last 18 months or so, and we are seeing more investment here in the U.S. and globally,” he says, noting machine tool orders are growing in many countries.

Despite ongoing economic fears, world manufacturing production increased in the third quarter of 2011, according to a report by the United Nations Industrial Development Organization. Output rose 5.5 percent in 2011 compared to the same period in 2010.

“Consistent growth of manufacturing output in major economies indicates that a further worldwide downturn in industrial production is not imminent,” states the UNIDO report.

ffj0312-globalrep-chart2Growth likely will continue around the globe—but not at the same accelerated rate and it will depend on the region, says Runiewicz. “The analogy I usually give is they’ve been going 65, 70 miles per hour in 2011. This year, we’ll probably see cut-back to 30, 40 miles per hour. In other words, you’re still growing, but your speed is not as fast.”

Growth in U.S. exports
The United States was the principal expansion driver in December, according to the JPMorgan Global Manufacturing PMI compiled by London-based global financial information services firm Markit. The global PMI reached 50.5 in December and 51.2 in January.

“U.S. production growth accelerated sharply to hit an eight-month high, and new orders rose at the quickest pace since April. Outside of the U.S., manufacturing output and new orders declined (on average) for the fourth and fifth successive months respectively,” according to the Global Manufacturing PMI summary. Production in December declined in the Eurozone, China and Japan, though rates of decline in the regions were slower than the previous month.

“When you are looking at the type of products that the U.S. manufactures, especially the capital equipment, the U.S. is probably one of the biggest, strongest competitors in the world market,” says Runiewicz. This isn’t the case with consumer products, in which other countries such as China, Indonesia and Singapore have taken the lead.

Part of what helped the U.S. manufacturing industry in 2011 was the weak dollar, which contributed to increased exports. “We have U.S. companies who are taking advantage of the opportunity to do more exporting because the price of their goods is attractive,” says Brian Papke, president of Mazak Corp., Florence, Ky.

A larger portion of Mazak’s shipments from its U.S. headquarters is being exported, primarily to Asia, says Papke. This trend began several years ago, he notes. “We’re exporting more and even exporting back to Japan [as a Japanese-owned company],” he says.

Exports have grown at an annualized rate of 16.1 percent when compared with 2009, according to a 2012 White House report, “Investing in America: Building an Economy That Lasts,” which cites Department of Commerce data. As of October, American exports of goods and services in the 12 months prior totaled more than $2 trillion, a 31.6 percent increase from 2009, according to the report.

The rise of reshoring
While more products are being exported from the United States, more work is returning. “We see a lot of companies right now bringing work back from different locations offshore,” says Papke. “I think companies are better understanding that it doesn’t make sense to send everything out of this country.”

Multiple factors are driving the shift in reshoring, from natural disasters and rising costs to language, logistical and time-to-market issues, says Doug Woods, president of The Association for Manufacturing Technology, McLean, Va.

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For some companies, natural disasters, such as the earthquake and tsunami in Japan, have decimated supply chains, says Woods. This led to an increased number of companies evaluating the risk involved with outsourcing capacity beyond where they can control it easily, he says.

In addition, increased wages for workers in economies such as China, which sees roughly 15 percent wage inflation per year, is reducing what some companies saw as a strategic advantage, says Woods.

In 2003, China’s hourly compensation cost in manufacturing in U.S. dollars was 62 cents, according to estimates from the Bureau of Labor Statistics, U.S. Department of Labor. In 2008, the cost reached $1.36.

ffj0312-globalrep-chart4Wages in China are almost three times what they were in 2000, says Pat McGibbon, vice president of strategic information and research at AMT. This fact coupled with an increase in productivity among American manufacturing workers is contributing to increased reshoring efforts. American workers are seven times more productive than Chinese workers because of a combination of education and leading-edge equipment, he notes.

The wage increases “not only in China but in a number of emerging markets are changing the balance of where people really want to manufacture,” says Julie Fraser, principal industry analyst and president, Cambashi Inc., Boston. Political instability in some global regions factors in as well, with companies choosing to be more cautious regarding how they operate in those areas, she notes.

Fuel and transportation costs also have risen, further reducing economic advantages for businesses, says Papke. “Freight rates have gone up tremendously. You add in duties in some countries, and it just makes it more attractive to manufacture here when we work on a just-in-time basis,” he says.

Overall, companies’ decisions to take work overseas were based on a marginal difference in their costs to produce parts, says Jones. “Over time, as wages overseas have increased, and at the same time transportation costs have increased while quality has decreased, those differences disappear, and it makes sense to bring the work back here,” he says.

The Obama administration is encouraging reshoring—which it calls insourcing—through tax, trade, financing, energy and education policies. “While ‘insourcing’ is often used to describe a company bringing activities back in-house, we use the term to refer to bringing activities and jobs back to the U.S. or choosing to invest in the U.S. instead of overseas,” states the White House report.

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In a January speech, President Obama made remarks encouraging the insourcing movement: “Whether you’re a small business ... or a large manufacturing corporation or a technology company, whether you’re a historic brand or a brand-new startup, insourcing jobs is a smart strategy right now,” he said.

Around the globe
Outside of the United States, manufacturing is growing in many different countries, notably the BRIC nations, says Fraser. “For manufacturing overall, everyone thinks of the emerging economies and the BRIC countries. There is a lot going on there,” she says.

The growth in Brazil’s manufacturing sector is phenomenal, in part because the country’s government is very manufacturing-oriented, says Emre Varisli, vice president of sales at Ermak USA Inc., Elk Grove Village, Ill. “They really have good financial support and financial instruments that manufacturers can use,” he says. “Their machinery-building sector is really booming.”

Brazil also is preparing for the 2014 FIFA World Cup Brazil and 2016 Summer Olympics, says Woods. “They have a lot of neat things going on down there, which has made them a fast-growing factor in absorption of manufacturing technologies and equipment,” he says.

ffj0312-globalrep-chart6In Russia, business is going strong, says McGibbon. Commodity prices, which have caused inflation in Western economies and in China, “aren’t as big of a deal in Russia because a lot of commodities we care about, from coal to titanium, are abundantly found in Russia,” he says. The World Trade Organization ministerial conference cleared Russia, and its membership in the organization is complete pending ratification by Russia.

India is a growing market, but it has hurdles, including infrastructure, which the country lacks, and the country’s ability to move necessary changes through its government, says Woods. “Because it’s a democracy, the ability to put an airport or a road from point A to point B is extremely difficult and it’s litigious,” he says. China differs in that the Communist party is able to make unilateral decisions in pursuit of its goals. In India, “are they able to move at the speed necessary to keep a strategic advantage in the global market? So far, they’re making great strides, but it’s going to get harder,” he says.

Developing countries mainly contributed to manufacturing growth in the third quarter of 2011, according to the UNIDO report. China’s manufacturing, which grew by 14.5 percent in the third quarter, accounts for nearly half of all developing countries’ manufacturing output combined.

China continues to be very strong and is a growth leader, says Runiewicz. “Their growth has slowed somewhat, and they prefer that, because if it becomes overheated, you create this bubble effect,” he says, noting the country has invested a lot in its manufacturing processes in terms of infrastructure and buildings.

In addition to the BRIC countries, Turkey is another area making strides in manufacturing, says Varisli. Turkey’s manufacturing output grew by 7.8 percent in the third quarter of 2011, according to the UNIDO report. It grew by 8.3 percent in the second quarter.

“Manufacturing is actually moving from European countries to Turkey because it has cheap labor compared to European countries,” says Varisli. Additionally, the Turkish government has provided incentives for businesses to invest in manufacturing, and the country’s financial system is strong, he says.

Japan lost some of its share of the world market after the earthquake and tsunami interrupted production, says Runiewicz. The country now is working to regain some of what it lost to competing markets, including the United States. The country’s manufacturing performance improved significantly in the third quarter of 2011, growing by 4.3 percent from the second quarter, according to the UNIDO report.

Ultimately, manufacturing has been the star performer of the recovery period, not only for the United States but for most of the world, says Runiewicz. The recovery in the manufacturing sector “has been faster than most overall economic growth for most countries,” he says. Growth in 2010 gave way to stronger growth in 2011, and many countries and companies should see continued growth in 2012. FFJ

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