The revival of the West
There is growing evidence of an industrial resurgence in developed economies, thanks to some powerful structural drivers that are allowing companies to localise production ....
..... and take greater control over their supply chains:
- Bringing production back to developed economies, or onshoring, is an emerging trend expected to strengthen, thanks to narrowing wage differentials with developing economies.
- Manufacturing advances such as automation and additive manufacturing are supporting onshoring as companies focus on the value of short supply chains and speed to market.
- Developments in shale energy are expected to give a broad boost to US industrial sectors by providing companies cheaper access to energy and key raw materials.
The great onshoring
Apple’s headline-grabbing decision to make computers in the US is not an isolated case. Last year, General Electric moved the manufacture of washing machines and refrigerators from China to Kentucky. Ford has bought home car production from China and Mexico to Ohio and Michigan. Google is assembling its Nexus Q media-streaming device in California, while Caterpillar is opening a new factory in Texas.
A 2012 survey by MIT of 198 US manufacturing firms with foreign operations found that 15 per cent of them had firm plans to bring back some production to the US, while as much as one-third are considering such a move. The trend is happening elsewhere too. In the UK last year, GlaxoSmithKline revealed plans to invest £500 million ($725 million) in a new biopharmacy manufacturing facility – the first time in 40 years the company has built a factory on British soil.
Perhaps the most critical catalyst for onshoring has been wage rises in Asia dulling the region’s outsourcing allure. According to the International Labour Organisation, real wages in Asia rose over 7 per cent per year between 2000 and 2008. In China, wages have grown even faster, hitting 19 per cent a year from 2005 to 2010, according to Boston Consulting Group. Compare this with what’s happened in developed economies. McKinsey estimates that salaries in advanced countries only rose 0.5 per cent to 0.9 per cent a year between 2000 and 2008; even worse, since 2005, real wages in US manufacturing have declined 2 per cent.
Onshoring is a good example of how companies in developed countries are keeping themselves relevant by adapting to competitive shifts and tapping into the potential that technological innovation, automation, changes in energy markets (namely the shale revolution) and superior branding can offer. As a result, investors should be mindful that powerful structural trends are supporting developed stocks, even if the macroeconomic news from the advanced world is bleak.
As production returns to the developed world, industrialised countries can display their greatest attribute – the ability to innovate. Inventing better ways to do things is a key component of the economic and corporate development process. It can be argued that innovation is a more advanced indicator of economic development than GDP. Nobel-prize winning economist, Robert Solow, estimated that “87 per cent of economic growth is driven by technical change over time”. This includes the invention, innovation and final diffusion of new products into the marketplace. Innovation is a critical aspect of Joseph Schumpeter’s “creative destruction” process in capitalist economies, a process by which new entrants replace incumbent products and firms. In music distribution, the online digital format has displaced CDs, which had replaced vinyl.
High innovation rates, based on a complex nexus between universities, government support and private companies, have bestowed an important competitive advantage on developed countries and their companies.
The global leaders in innovation are all wealthy nations. The World Intellectual Property Organisation estimates that 70 per cent of global research and development expenditure is accounted for by rich countries. This innovation edge is reflected at the corporate level. Research by Boston Consulting Group shows that 44 of the world’s 50 most innovative companies are based in developed countries.
Innovation in advanced economies has encouraged the development of robust legal systems that protect intellectual property rights and has instilled a strong corporate governance culture. Many of these factors are intangible and are not captured by GDP. The World Bank has estimated that 80 per cent of US wealth is made up of intangible assets.
Still, emerging markets are catching up. China boasts the greatest export volume of high tech products in the world. The designs, however, are often created by companies in the West, which take the largest margins on the final sale price. China is changing, though, moving not only towards a consumption economy but, within manufacturing, moving up the value chain from a made-in-China to a designed-in-China model. This is a more challenging phase of economic development, though, so gains will be hard won.
Nick Armet, investment director at Fidelity Worldwide Investment
29th April 2013
Source: Professional Planner www.professionalplanner.com.au