Monthly Archives: October 2013

Manufacturing is not returning to the West

There’s many claims over the last year or so that “manufacturing is returning to the West” and “China’s days as the world’s factory are numbered”{{1}}. These claims are misguided.

[[1]]Vivek Wadhwa (23 July 2012), The End of Chinese Manufacturing and Rebirth of U.S. Industry, Forbes[[1]]

We’ve just reached a time where manual and skilled labour is no longer a major manufacturing cost, causing final assembly to slowly drifting toward the customer base it serves. This shift reduces the length of the supply chain from assembly to your front door resulting in a reduction in turn-around time which, in turn, reduces working capital requirements and allows manufacturers to push product updates through the supply chain faster.

Manufacturing isn’t leaving China and other low cost manufacturing centres. What has changed is that it now makes good sense to manufacture some high value but low volume and bulky products in other major markets, such as the U.S.

The problem with thinking that manufacturing is returning to the first world is the implicit assumption that this also means that the old manufacturing jobs will return. They won’t. They no longer exist. It also ignores that fact that the huge scale of manufacturing in China will help it to grab the lions share of the world manufacturing market for some time to come.

Manufacturing as a manual process

Consider Henry Ford’s assembly line from 1913: a complex, labour intensive process that created a large number of good, blue collar jobs.

566px-Ford_assembly_line_-_1913Source: Public Domain

When we think of manufacturing this is the image we usually have in head. It’s a bit like those train crossing signs that have a caricature of a steam engine on them. It might not be the current reality, but it’s the image we use to understand what’s going on around us.

As transport costs dropped, work moved to lower cost countries

Back in Henry Ford’s day transportation was expensive. Factories were often located close to the markets they served to minimise transport costs, with management struggling to ensure that enough raw materials arrived at the factory to keep it busy. However, the development of railroads, steam ships, and the shipping container network incrementally cut the cost of transport until it cost roughly the same to move a box across the world as it did to move it across the country.

As Marc Levinson points out in his book, The Box{{2}}:

[[2]]Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. iBooks.[[2]]

As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.

This is the shift we’re thinking of when we consider off-shore manufacturing: China as the source of cheap (and fairly unskilled labour).

Today, manufacturing is not a manual process

Apple released an interesting video the other day{{3}}. It shows the manufacturing process for the new Mac Pro.

[[3]]Greg Koenig (22 October 2013), How Apple makes the Mac ProAtomic Delights[[3]]

SourceApple

What’s interesting about this process is how few people are involved.

Manufacturing has changed a lot in the last few decades. What was once dominated by manual labour is now an automated and highly efficient process. Machines have replaced people. We can see this in many of the factories that are returning to the West: they’re all highly efficient, highly automated, capital intensive operations that require very little manual or skilled labour.

7395855880_053e6daede_cSource: Steve Jurvetson

Machines, however, have yet to replace engineers

While capital has won over manual and skilled labour, that same is not true for engineers: knowledge workers.

As Roger Martin found in his research for a recent HBR article{{4}}:

[[4]]Roger L. Martin (October 2013), Rethinking the Decision Factory, Harvard Business Review[[4]]

I vividly remember working with the CEO of one of North America’s largest bread manufacturers in 1990–1991. He had just replaced a labor-intensive and antiquated plant with the most advanced bread bakery on the continent. He proudly told me that the new computerized ovens and packaging machinery had reduced direct labor costs by 60%. But meanwhile, a throng of new and expensive knowledge workers had been added at both the head office and the plant—engineers, computer technicians, and managers—to take care of the sophisticated computer systems and state-of-the-art equipment. The new plant wasn’t quite the unalloyed good that it appeared at first sight. Variable costs of manual labor fell, but the fixed cost of knowledge workers rose, making it critical to keep capacity utilization high—which was possible in some years but not in others.

While the West has been worried about losing it manufacturing capability, many of the off-shore manufacturing destinations have been investing in education. China, for example, now has a huge engineering workforce that companies can draw own to sort out their manufacturing problems.

It’s this incredible ability to mobilise huge workforces that is keeping many manufactures in China. An article in the New York Times from last year has an Apple anecdote that shows this in action{{5}}.

[[5]]Charles Dugigg & Keith Bradsher (21January2012), How the U.S. Lost Out on iPhone Work, The New York Times[[5]]

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

Moving closer to the customer

The rapid pace of change in today’s market is driving companies to reduce the time between final assembly and when the product drops into the customer’s waiting hands.

Zara is the poster child for this shift, with a supply chain can create a new product and then have it in the stores in around two weeks. Zara has used this ability to disrupt the traditional annual, seasonal fashion cycle, resulting Zara becoming one of the largest retailers in the world.

Apple’s recent decision to make the Mac Pro in the U.S. is part of a trend to move the manufacturing of high value but low volume and bulky products closer to the customer. Elon Musk’s Tesla is also part of this trend.

Manufacturing automation technology has reached the point that it makes more sense to locate the manufacturing of these products closer to the customer, allowing transport costs and delivery times to be minimised.

We shouldn’t assume, however, that this trend will end with manufacturing returning to the West.

It’s easy to forget the more people live in Asia than in the entire rest of the world combined. If manufacturing is moving to be closer to the customer, then we need to remember that there are more customers in Asia than in the rest of the world. China’s position as a manufacturing powerhouse appears safe for the time being.

CK6aONG

Source: valeriepieris

What we mean by “export” is changing

So just where will this trend take us? (And, by extension, will our old export industries return, bringing their jobs back with them?)

The future of manufacturing and export seems – like to many industries – connected to the knowledge economy.

Those old manufacturing jobs are never coming back. They no longer exist. Similarly, thinking in terms of operating a factory and then exporting to another country is also looking somewhat antiquated.

Today (or perhaps, tomorrow) a manufacturer is a simply company that is run from one country and, from there, manages the sale of products in another.

Kogan{{6}} is a great example of this. The business is run from South Melbourne, Australia, which is where the products are designed. The products themselves are made in China and (in many cases) shipped directly to the United Kingdom where they are sold via the company’s UK web site (which is also managed from Port Melbourne, but hosted somewhere “in the cloud”).

[[6]]Kogan @ PEG[[6]]

An even more interesting example is another local business which sells safety barriers that are placed around robots in factories to ensure that workers aren’t accidentally injured. They recently started exporting to Europe. They did this by setting up a small, automated factory in Germany to service the European market. The barriers are designed in Australia and the designs are beamed directly to the machines in Germany, machines that consume resources from all over the globe.

So manufacturing – as we’ve traditionally understood it – is not returning to the West. The blue collar jobs that went overseas are not coming home to give our rather lacklustre economies a boost.

We can also expect China to remain an manufacturing powerhouse for the foreseeable future. The huge scale of operations over there, and the ability to rapidly redeploy these resources, will allow China to grab more than it’s fair share of the world manufacturing market.

Manufacturing, like so many industries{{7}}, is changing, and changing rapidly. What’s most interesting though, is how a new generation of companies are emerging that are finding ways to exploit this situation to “export”, and create new, knowledge intensive jobs at home in the process.

[[7]]The destruction of traditional retail @ PEG[[7]]

Source: Steve Jurvetson

Malls are the casinos of middle class suburbia

The department stores are empty but the malls (or at least the malls here in Australia and nearby in China and South-East Asia) are full. Why is there such a difference when department stores and malls seemingly offer shoppers the same thing: Chanel, Yves Saint Laurent, Prada, Vivienne Westwood and Alexander McQueen (and a bunch of lower status retailers) all under one roof?

While department stores have been in decline for at least the last thirty years{{1}} many malls have never seemed busier. The crowds we expect at the mall during Christmas are popping up every other weekend, forcing us to park at the far corner of the back parking lot before running through the rain only to arrive at the mall proper just in time to catch our film.

[[1]]Winners and Losers in Retail @ PEG[[1]]

As I pointed out in The Destruction of Traditional Retail{{2}}:

[[2]]The Destruction of Traditional Retail @ PEG[[2]]

Department stores [bring] together a collection of departments, each selling a different type of product, where a department could be a small to mid-sized store on it’s own.

Department stores traditionally offered the aspirational suburbanite or rural visitor an opulent setting where they could while away the day drifting from shoes to cosmetics with a stop for a light lunch and a visit to the bookstore, florist or hairdresser. They would make the long trip to the centre of town (or to the city even) for that much needed pair of shoes and formal dress, only to find themselves spending the entire day there.

Malls, though (again from The Destruction of Traditional Retail):

… took this model to the logical extreme by collecting together a large number of separate stores to create a shopping destination.

Ironically, many malls were often built around a department store playing the role of anchor tenant. The department store provided that critical mass of products that would convince shoppers to try their luck at the mall rather than head somewhere else.

If malls and department stores so similar then why is one succeeding while the other fails?

The first difference is the Gruen transfer.

The invention of the classic indoor mall is generally credited to Vienna-born architect Victor Gruen. Gruen first outlined his vision for malls in a 1952 article in the US magazine Progressive Architecture. Most Americans were moving out to suburbia but still shopping downtown. Gruen considered suburbia soulless and heartless. The mall, he thought, could remedy these problems by recreating the town marketplace or public square and providing the suburbs with a cultural focus.

Gruen’s malls were extremely effective both at luring customers and holding them captive. The later effect was named the Gruen Transfer, much to Gruen’s chagrin as it was one aspect of the his invention that he disavowed.

From the FAQ on The Gruen Transfer’s{{3}} web site{{4}}:

[[3]]The Gruen Transfer is also the name of a television program on Australia’s ABC1 network. The show discusses the methods, science and psychology behind advertising.[[3]]

[[4]] What does ‘The Gruen Transfer’ mean? from the The Gruen Transfer FAQ[[4]]

The Gruen Transfer refers to the moment when we as consumers unwittingly respond to cues in the shopping environment that are designed to disorientate. Factors such as the lighting, sounds, temperature and the spatial arrangements of stores and displays interact, leading the customer to lose control of their critical decision making processes. Our eyes glaze over, our jaws slacken, we forget what we came for and become impulse buyers. So if you go into a mall to buy a mop and walk out with a toaster, a block of cheese and a badminton set, then the Gruen Transfer has probably played a role. Or maybe you just really like cheese.

The second difference is in the portfolio nature of a mall.

A department store is a single business that operates a number of departments. While it might include a merry-go-round and large man in a red suit at Christmas, the focus is firmly on shifting product. The department store is a shopping destination: it’s somewhere you go when you have a need to be filled.

Malls, on the other hand, operates a portfolio of businesses. While the portfolio might include retailers (or, as has been the case to date, dominated by retailers) the focus of the mall is keeping punters in the mall and keeping them circulating. As along as the punters are circulating they’re spending money, and the mall will be taking their percentage.

The mall is less concerned with shifting product than keeping you at the mall bouncing between stores, as the more time you spend there the more money you’re likely to spend. Turn up for a movie, end up having a meal, get a foot massage and have your toenails painted, and you might even buy a pair of shoes.

Consumer behaviour, as I’ve said before, is changing though. We used to head out the door to find some product we needed: soap, some nails, or a suit for the wedding next weekend. Now we head out to be entertained: to see a movie, meet friends at the food court, or even just to hide from the heat in the mall’s air-conditioning (that foot massage sounds good too).

Department stores are contracting because we don’t head out the door on a shopping mission as much as we used to. Their addressable market – people who want to spend the afternoon wandering between racks of products while they pick up a few things they need (or even things they don’t need) – has shrunk.

Malls, though, are having no problem attracting punters.

Victor Gruen was right: we do need a place that we can gather as a community. What he got wrong is that we don’t want a market place or public square. What we’ve ended up with is a casino; somewhere exciting and entertaining where we can bounce between activities or even just catch up with friends in amongst the hustle and bustle. Malls have become the casinos of middle class suburbia.

The challenge malls have is to find the mix of business that provide us, the consumers, with the most engaging visit possible. Revenues might be down a little at the moment{{5}} but it’s not a long term trend (as with department stores), the malls are still full and there’s lots of possibilities to explore.

[[5]]Sarah Danckert (18 October 2013), Mall growth plans reined in, The Australian.[[5]]

Image source: Alpha.

What’s the future of the CIO?

I have a post up at CIO of the Future called ‘What’s the future of the CIO?’ which explores where the role of the CIO might go.

The post asks the question:

As IT leaders, do we want to continue to be chief infrastructure owners and order takers?

The established CIO role seems to be fading into the sunset, which is interesting as as technology has never been more central to a business’s ability to compete. One view that many senior business people seem to hold is that technology has become too important to leave in the hands of an infrastructure manager.

The shift from on-premesis solutions to cloud-based services is removing many of the traditional responsibilities of a CIO. At the same time the focus for enterprise technology has shifted from internal to external problems. Technology has been transformed from something we own to something we use. This transformation is breaking a lot of our assumptions on best practice and consigning many hard won skills to the dustbin.

In the post I talk about the journey many Chief Marketing Officers (CMOs) are going on, experimenting with new techniques and tools so that they can use social media as something more than than just a dog whistle. This is not a journey that the CIO can lead, as it is the CMOs of have the problem that needs solving. CIOs can, however, use this as an opportunity to carve out a new role for them and their departments.<

Few companies would consider doing without a CFO and finance department, as finance is central to resource management. Few companies will be able to do without a CIO and IT department, as IT is central to a company’s ability to engage the market and create new opportunities.

While the CIO role might appear to be in decline, this is also an opportunity for CIOs to get out of the back room, do something meaningful for the business and their customers, creating a much higher status role for themselves  in the process.

The CIO is the in-depth professional who can bring together the technologies and skills that the business needs to drive itself forward, to enable it to avoid problems, and to pounce on opportunities and adapt.

You can find the full article over at CIO of the Future.