June 26, 2012

Experts predict U.S. manufacturing surge—how might this impact your business, and are you ready?  

by Karol Aure-Flynn, Entira

After decades of a diminishing manufacturing base in the United States—manufacturing jobs dropping from a peak of nearly 20 million in 1979 to 12 million currently—headlines and reports predicting a "renaissance" of U.S. manufacturing have attracted a lot of attention over the past year. Premised on the diminishing gap between Chinese and U.S. wage levels, driven by double-digit annual growth of average Chinese wages in addition to currency values, the forecast suggests that conditions will become favorable for companies to reverse the trend of manufacturing in China and return production to the United States in specific sectors and geographies over the next several years.

As always, it is the details that matter. Some reports are indicating that in the final quarter of 2011, sectors with relatively lower levels of labor-intensive production processes and modest volumes (such as household appliances, construction equipment, and furniture) will begin to see manufacturing benefits in the United States, especially those combined with higher inventory and shipping costs. In addition, certain states in the Southeast and Central Plains are aggressively positioning themselves as favorable targets for re-location with incentives and attractive business environments. Savvy players in U.S. agriculture will be paying attention.
Globalization is nothing new to U.S. agriculture and food producers. International economic factors have played an important role in companies' strategies for decades, however the primary focus has been all about staking advantageous positions in growing international markets with exports. Change in consumer preferences (within the U.S. markets as well as overseas) has resulted in a growth of products and brand proliferation within food categories. Currency valuations and trade issues can quickly turn from tailwind to headwind for international sales. It is not unimaginable, therefore, that diminishing benefits of Chinese manufacturing will create a pendulum effect to other regions. Regional contacts suggest that Southeast Asia is likely to absorb at least part of a manufacturing exodus, but there is also a strong case that specific U.S. regions—particularly the Southeast and Central Plains states— are viable candidates for becoming manufacturing hubs.

The development or return of manufacturing opportunities is absolutely good news for the U.S. economy and job creation. At the same time, the areas where manufacturing opportunities are expected to increase are also areas where agriculture is an important–and sometimes dominant–player in the economy. A rapid influx or increase in manufacturing will impact the equilibrium of a region, with far-reaching impacts on resources, infrastructure and the labor market. Agricultural businesses and their farmer-customers with ties to these regions must be prepared.

Here’s some food for thought as you consider the potential impacts to your business:

  • Resources: In geographies where manufacturing grows, current businesses will see increased competition for such basic resources as open land, water, air and labor. In areas of the country where land prices are already soaring, the additional competition of potential manufacturing sites and related service industries will be significant.
  • Labor: Creation of U.S. manufacturing centers in southeast and central states could create a shortage of labor in areas where finding skilled laborers is already a challenge. Entira has talked at length with agribusinesses and growers in these regions about the shortage of skilled labor—we know this is a critical concern for you.

    In addition to a general increase in demand for labor, increased manufacturing will also lift demand for qualified candidates for managerial positions. While some of these managerial candidates could relocate to new manufacturing areas, it would also target existing managers in wholesale and retail crop distribution, equipment, farm management and other ag businesses. And, all of this will have an impact on wage levels.
  • Infrastructure: Infrastructure will also play a key role in decision making—infrastructure is notorious for a supply delay in responding to changes in demand. Shifting more manufacturing to the U.S. would put greater demand on our roads and transportation systems domestically, meaning tighter supply of equipment and drivers. In addition, along with the sustained higher value of basic commodities, capital and credit requirements change.

For U.S. food and agricultural companies, these developments elevate the urgency in understanding the regional production dynamics related to midterm strategic decisions. Whether on the demand or supply side of the strategy, the players who proactively design processes to track these details and model potential impacts will be poised to win.

Each company and industry sector is unique, and each needs to conduct its own intensive review of the drivers that lift or restrict business opportunities. Operations must also be in step to capture these opportunities. The potential manufacturing renaissance is only one of likely hundreds of factors that could impact business planning for Entira's food and ag business clients. Entira has completed several intensive strategic assessments and marketing studies for clients that have highlighted the importance of the south central and southeastern regions for the U.S. supply chains. Please contact Entira at info@entira.net for more information.

This article appeared in the December 2011 issue of Strategic Agribusiness Review.