Re-shoring Advanced Manufacturing

Featured speaker William L. Strang, senior vice president of operations, TOTO USA told a crowd at MODEX in Atlanta that TOTO has substantially moved manufacturing of products destined for the US market from Asia to the US. “Seventy percent of the products sold in the US today are made in the US.  As few as seven years ago, 63% of product we made in China was destined for the US.  We are incentivized at this point to make product domestically in the U.S. rather than procure from our factories in China.”  Mr. Strang went on to explain that keeping design close to the customer base and getting product to market faster is a win-win.  What about a third “win?”  The environment.  The move reduced the company’s carbon footprint: fifty percent of all the power TOTO USA buys to power its Georgia manufacturing facility comes from Georgia Power Green Energy.

Many other companies are examining re-shoring as a tool for effectiveness and efficiency.  Work we completed for the American Society for Quality reinforced the finding that companies routinely view manufacturing processes as ecosystems to be optimized from supply base to consumer. Companies are weighing proximity to demand and proximity to innovation as key drivers for manufacturing-location decisions.  Sometimes there is a clear trade-off, and sometimes there is no tension between proximity to demand and proximity to innovation.  We saw alignment of innovation and demand in GE’s R&D efforts in India: the development of low-cost diagnostic devices robust enough to be carried into rural villages and inexpensive enough to be marketable.

Robotics and automation reinforce effectiveness/efficiency. Recent work Geo Strategy did in the field of robotics points to dropping equipment costs and faster ROIs.  Manufacturers’ ability to move operations to high-cost locations adjacent demand fulfills the premium on shortened supply chains without significant cost impact.  Companies like Tesla, Apple, Flextronics and Lenovo are creating jobs in the US- jobs that  once may have gone to China, Mexico, or Poland. 

Automation is the great equalizer.  Automation allows us to take products and move them to other places in the world - places like Fort Worth, TX. - Mike Dennison, President, Flextronics’ High Velocity Solutions

Those plants will be more automated than vacated plants so the workforce must be skilled.  Talent must rise to the challenge, which means educational institutions and government entities become part of the ecosystem supporting the re-shoring of viable advanced manufacturing.

A Tale of Two Companies...

Early last year, two studies brought us face to face with Petrobras and PEMEX.   Both market opportunity projects were commissioned by global OEMs interested in selling product into the oil & gas industry.  In Brazil, we green-lighted the opportunity and highlighted strategies most likely to result in sales success with Petrobras: (unique and differentiated product, an understanding of local content laws  and local business practices, climate considerations, regions incenting investment and exploration, etc.).  The bid process in Mexico looked reasonable on paper.

But the reality was not reasonable, not simple, and typically resulted in failure.  Barriers erected to keep global companies out and PEMEX’s failure to invest in energy infrastructure resulted in serious underperformance of the Mexican energy sector.  We suggested to our client that liberalization of Mexico’s energy sector needed to occur before concerted efforts were warranted.  A national effort to open energy markets to foreign investment, a new level of transparency in bid process & procedures, and a detangling of the norms and standards and sales practices that effectively barred foreign participation  would create a sea change in Mexico. 

Fast forward six months to December 2013. Mexican President Enrique Peña Nieto signed legislation enabling foreign companies to drill for Mexican oil in partnership with Pemex.   

Then, in July 2014, Mexico's Senate voted in favor of a new Electricity Industry Act.  Background:  the Federal Electricity Commission (CFE), a state-owned utility, required private generators to sell all their output to CFE: a system that handed  the government control of electricity pricing. The new law (which is still working its way through the system) creates a National Center for Energy Control and requires that generation and sale of electricity services are to be provided within "a system of free competition."

Who’s excited? 

Siemens

AES Corp.

GE

Schlumberger

This is a win for oil & gas and energy sector manufacturers/service companies, and  for Mexico.

The party is just getting rolling... 

Wake Up Call

Study results recently released by the National Bureau of Economic Research indicate the source of an innovative idea matters.  Authors of The Acquisition and Commercialization of Invention in American Manufacturing: Incidence & Impact1 indicate that “of the 18% of the manufacturing firms that innovated (i.e. had introduced a product that was new to the market) between 2007 and 2009, 49% report that their most important new product originated from an identified outside source.”  Not only that, inventions acquired from customers were less valuable than those acquired from technology specialists (universities, independent inventors, and R&D service firms). The authors infer that if inventive ideas from outside sources were removed, the percentage of innovating firms in the American manufacturing sector drops from 18% to 10%.

US manufacturing needs more efficient tech transfer protocols.  

What better shot in the arm than tech transfer from America’s National Labs?  As currently configured, the National Labs (NLs) are not optimized to contribute to US manufacturing innovation: the system needs to evolve.  This idea is gathering steam in Washington as organizations as diverse as the Information Technology & Innovation Foundation, the Heritage Foundation, and the Center for American Progress, and individuals as diverse as Senators Marco Rubio (R-FL), Mark Kirk (R-IL) and Dick Durbin (D-IL) have lined up behind the American INNOVATES Act (INNOVATES = Implementing New National Opportunities To Vigorously Accelerate Technology, Energy, and Science).  The American INNOVATES Act lays out means for transferring of NL R&D results to the private sector; improving NL operations and performance; developing a coordinated strategy for the NLs in the 21st century; giving NL directors signature authority for cooperative R&D agreements up to $1 million; permitting NL directors to use DOE tech transfer to carry out early-stage and pre-commercial technology demonstration activities.  There are other provisions in the bill’s language that similarly benefit the private sector. https://beta.congress.gov/bill/113th-congress/senate-bill/1973/text

US manufacturers would benefit from this shot in the arm.  Washington, let’s get it done.

1 The Acquisition and Commercialization of Invention in American Manufacturing: Incidence and Impact, by Ashish Arora, Wesley M. Cohen, John P. Walsh, National Bureau of Economic Research, Working Paper No. 20264, June 2014