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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (20857)	1/9/2005 5:01:05 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Come home, corporate America By Carlton Delfield Colorado Springs During the last decade, a hot topic in Japan and America has been the "hollowing out" of the two nations' respective industrial bases. The share of Japanese-owned productive capacity located abroad has grown from 8 percent in 1994 to 40 percent today. The United States currently has about 50 percent of its manufacturing base located offshore. For both Japan and America, the large outflows of direct investment, especially to China, have caused an uneasy feeling that both countries had bleak futures as manufacturing centers. Surprisingly, the pendulum is now moving back to Japan, as large Japanese multinationals are busy investing in manufacturing plants at home. Here are just a few examples of this trend. Canon is building a large digital camera facility and plans to spend 80 percent of its $7.2 billion capital budget in Japan over the next three years. This is a reversal from the past 10 years, when 80 percent of its capital budget was spent overseas. Toshiba is building a $2 billion semiconductor facility. Sharp, Matsushita and Nippon Steel are also building major plants in Japan. Overall, spending on plants and equipment in Japan is rising at a 10 percent clip. It's not that China isn't important to Japan's economic growth. China has passed the U.S. to become Japan's largest export market. In addition, it needs a strong presence in China to tap its rapidly growing consumer market as well as a low cost base to manufacture lower-tech products. For certain products, like cars, it is also likely to keep large manufacturing bases in countries like America. For example, Toyota produces more than 1 million cars annually at eight manufacturing plants in America and has two plants under construction in Texas and Tennessee. But for the more advanced capital-intensive products, the investment is clearly coming home. How can we account for this surprising turnaround, and what are the lessons for America? First, Japanese firms have learned the drawbacks of outsourcing. Supply bottlenecks, poor infrastructure, power shortages, uneven quality, difficult inventory management and high employee turnover are just some of the problems. Secondly, even though China's wages are about 5 percent of Japan's, its increasingly sophisticated factory automation has lessened the importance of labor costs. For advanced high-tech products, it accounts for only 10 percent to 15 percent of total costs. Having manufacturing closer to home also shortens new product lead times and increases cooperation between research and development and production teams, leading to a crucial edge in staying ahead of its nimble competitors. Supply lines of 2,000 miles can be problematic. Lastly, and perhaps most importantly, there is the critical issue of protecting intellectual capital. Having research, development and production closer to headquarters better protects proprietary technologies. Unfortunately, here in America the outsourcing trend does not appear to be reversing even in capital-intensive products. Many of the new high-tech jobs are for managers to manage the outsourcing process. Microsoft, Intel, IBM and Motorola all have large and growing research and development centers in China to take advantage of Beijing's cheaper pool of talent. Given China's total disregard for intellectual property rights, perhaps American executives should pause and reconsider the long-term costs of growing outsourcing programs. Their offshore research and development staff may very well walk off with proprietary knowledge and the company's future. This is not a call for isolationism or rolling back globalization, just a reminder that outsourcing has its downside. How about a little common sense and balancing short-term cost savings against long-term strategic risks? Instead of just taking the comparatively easy step of lowering labor costs by outsourcing, let's roll up our sleeves like the Japanese, improve manufacturing techniques and reap the benefits of keeping more production and technology closer to home. Carlton Delfeld is president of ChartwellAdvisor.com, a global investment advisory firm, and was a Japanese government scholar at Keio University's School of Commerce. He also served on the board of directors of the Asian Development Bank. denverpost.com