The global manufacturing industry is in crisis as the need to purge to lower cost centres in Asia, and India for competitive survival has this industry stakeholders participating in a perfect storm.
Manufacturers in North America have no choice but to adopt more advanced and leaner forms of business practises, and seriously consider outsourcing more of their production operations. The profit crunch continues to ramp and with the steady beat to increase revenues, the reduced profitability of all NA operations puts enormous pressure on this industry sector.
In Canada, the reeling increased value against the loonie has purged out even more profit, with the Canadian currency closing at nearly a 30 year high of US94 cents. The Canadian dollar has increased against the US$ over fifty percent which means the attractiveness to the US to source parts in Canada for their operations is no longer as attractive for sourcing. The reality no matter which way you cut it -the higher cost of wages, commodities, energy and transportation costs cannot compete for production and distribution against lower cost countries.
So what are the leadership questions that CEO’s and the board should be asking for competitive survival. We are in a crisis and there is no way of putting lipstick on the pig. In our research, we see 4 key questions that each CEO and Board Director needs to earnestly define for growth capacity development?
1.) What is your unique business core innovation or service offering (specialized knowledge that is not easily replicated)? If you cannot easily answer this question - then your business has likely already been commodities.
2.) What is your capacity to hold a competitive position of strength in your major market(s)? (what stickiness factors do you have around your company’s value chain, what services do you have that are world-class and can command a premium for high value service experience)?
3.) What alternative global production and go to market channels can you execute upon to increase your profitability? (Our assessment is that you cannot compete effectively on labor wages against the developing countries and with a percentage of the overall business costs tied up in labor and equipment a real re-think is required for long-term economic survival for the entire NA Manufacturing industry.)
3.) What is your organizational capability to attract, develop and retain talent? (with the perfect demographic baby boomer retirement storm arriving rapidly, how well positioned is your organization to source the best and the brightest)? To see a copy of a research white paper, we wrote on this topic, see http://www.helixcommerce.com/pdfs/perfectstorm.pdf.
The stakes are very high as Manufacturing in the United States alone generates about $1.4 trillion, and accounts for nearly three quarters of the US’s industrial research and development (R&D), two-thirds of its total exports of goods and services, and supports more than 20 million. Over 45 percent of U.S. manufacturing output is traded internationally, either as imports or exports, significantly higher than the mere 3 percent that the rest of the U.S.business trades internationally. This trade exposure has also doubled in 20 years. Because of the global nature of manufacturing, prices in manufacturing are generally flat and declining. In the past decade, manufacturing prices have increased by only 4 percent,while prices in construction, health care, education, and other non-manufacturing industries have soared by nearly 60 percent in Germany,China, and Brazil, not in a neighbouring city or in another state. Profits in these sectors plunged by an unprecedented 67 percent between 2000 and 2003.
In Canada, the outlook is just as dismal. Since 2002, an estimated quarter million jobs were lost across Canada due to plant closures Manufacturing accounts for 17 percent of the Canadian economy and 15 percent of the workforce, with 95 percent working full-time and wages 22 percent higher than the national average. Every dollar of manufacturing output generates $3.05 in total economic activity, with shipments exceeding $600 billion in 2006, accounting for two-thirds of Canada’s total exports of goods and services. Manufacturing also accounts for 30 percent of tax revenues paid to all levels of governments.
A recent OECD report reinforces that the international trend is towards knowledge-based economies, and investment in science, technology, and innovation have become key factors in economic growth. China, Mexico, Eastern Europe,Brazil ,and India are expected to absorb a growing share of the world’s manufacturing activity. Staying competitive requires becoming part of “open innovation systems” through global networking, plus shifting to global supply chains that produce specialized components.
We are in a C level change in the Manufacturing Sector. To not create a global production system for manufacturing will only result in demise. The global landscape has changed, new market realities are codified, and the rules of the game have simply shifted.
CEO’s and Board Directors need to execute change brilliantly. The stakes are at an all time high. Yet despite the doom and gloom there are viable alternative growth pathways all around us. It simply starts with a new vision and the courage to change! Although the focus in this article is on the manufacturing sector, CEO’s cannot be complacent in any industry in North America - as lower cost centres for every industry type will come under seige - simply due to the incredible labour pool available in India, China, and other rapidly developing nations.