Onshoring is seeing a resurgence in manufacturing in the United States. The knock on effect for industrial and commercial real estate is debatable. What lessons, if any, are there for the South African market?
Firms like Ford, Carlisle Tire and Wheel Company, Otis Elevators, General Electric and Whirlpool have relocated some jobs back to the U.S. or opted to upgrade existing U.S. plants rather than resort to off-shore operations. This is in the wake of the World Financial Crisis.
There is some political incentive; it may be the patriotic thing to keep manufacturing plants at home. But in the end it’s the big buck that cracks the whip. In June 2010 Master Lock a world player in the manufacture of security products, brought over one hundred jobs home that had been previously off-shored.
US President Barak Obama used the ‘on-shoring’ of the Master Lock factory in Milwaukee to highlight the Democrats Blueprint for an America Built to Last. The ‘blueprint’ is essentially an incentive scheme for the on-going creation of manufacturing jobs in the U.S. Coupled with this is the removal of deductions for offshoring jobs overseas. The political message is clear.
Heavy equipment manufacturer Caterpillar is opening a giant facility in Victoria, Texas, in the process of shifting production from Japan back to the U.S. In February, the firm announced it would also shutter a 62-year-old plant in London, Ontario – Canada that makes locomotives and move production to Muncie, Indiana. Jumping on the bandwagon is Japanese carmaker Honda which is investing $98 million in its largest vehicle engine plant in Anna, Ohio. A significant number of firms have moved some jobs back to the U.S. or opted to upgrade U.S. plants rather than resort to off-shore operations. So there is significant movement on the manufacturing landscape.
In some cases, firms are actually reopening mothballed factories. In others, firms surveying the landscape have opted to open plants in states within the U.S. with the lowest labour costs and unionization rates. Something South African corporates wouldn’t be able relate to given the uniformity of unionisation across the country’s provinces.
In South Africa labour remains arguably at acceptable levels in the manufacturing industry – for example we aren’t seeing PE’s motor manufacturing plants moving to Botswana due to unmanageable wage demands. South Africa’s Chemicals and the Agriprocessing industries are geographically anchored and aren’t able to be moved offshore. So labour in those industries is unlikely to fear offshoring any time soon.
Onshoring in the US though has contributed to a steady revival in manufacturing jobs within the U.S. since mid-2010. Employment in the sector is expanding at an annual pace of approximately two per cent. But manufacturing as a percentage of the U.S. workforce will continue to fair lower down the scale since higher productivity is one of the draw cards for Onshoring.
Higher productivity means fewer workers producing the same amount of goods. Without appearing cynical, it must be said that this would not bode well with labour in South Africa since it would seem more desirable to have greater numbers employed to produce the same amount of goods for the sake of employment figures. But since there is no such incentive in South Africa onshoring is not a relevant dynamic in the economy for that reason. There is also the migrant labour dynamic to consider.
But there are lessons to be learned from ‘the equation’ used by U.S. corporates when it comes to deciding on the location of new factories. Factors weighed include: shipping costs and real estate; infrastructure and supply chain competence; cost, quality and obtainability of labour; proximity to suppliers and customers; taxes and incentives.
Previously, cheap labour and shipping costs clinched it for China and other emerging countries. However the labour market in those same countries is not putting up with the pay and conditions heretofore endured. Labour costs in China for example have risen on average almost 20 per cent per year over recent years. The result is that there’s a higher premium to pay. Similarly volatile oil prices are being felt on the transportation leg. Some estimates have transportation rising 20 to 25 per cent in the next three years!
But back to labour, in the U.S. over the previous four decades, productivity has hit the roof. Output per worker in the manufacturing sector has grown 136 per cent since 1987. According to William Strauss, senior economist at the Federal Reserve Bank of Chicago, what it took 1,000 workers to do in 1960 requires only 184 workers today. In 2005 goods produced in China and shipped to the U.S. were 22 per cent cheaper than products made in the United States. By the end of 2008, the price gap had dropped to just 5.5 per cent.
Despite productivity gains, the manufacturing sector has stopped losing jobs, instead there have been gains. Hitting rock bottom at approximately 11.5 million workers in January of 2010, the U.S. market has added 421,000 new manufacturing jobs. The sector is growing at an average annual rate of about two per cent, the fastest rate of expansion since the mid-1990s.
A lesson for South Africa is that U.S. analysts believe that production never really disappeared. But there are factors that are strengthening it, including a lowering of wages for manufacturing employees. Real hourly wages for U.S. manufacturing employees have remained flat since 1970. In 2000 average wages were $14.35 an hour in 1970 and $14.63 in 2009, according to the U.S.’s Bureau of Labour Statistics. Would S.A. unions put up with that? Could S.A. workers settle for less for the sake of keeping their jobs and still increase productivity?
Then there’s the issue of what is referred to in the U.S. as ‘right-to-work’. This legislation prohibits agreements between unions and employers to create “closed shops” and limits auto-payment of union dues. Closed shops are workplaces where every employee must belong to the union as a condition of employment. It could be argued that in S.A. the social/political pressure makes it impossible for such legislation to be considered or even at ground level, enacted.
Currently, 23 U.S. states have some sort of right-to-work laws in place and that’s where the plants are being reopened or built.
The difference in quality of U.S. labour is a factor too. “Many of the manufacturers moving back from Asia and India say the quality control there is atrocious,” says K.C. Conway, executive managing director of market analytics with Colliers International. “We have quality control, a well-trained work force. It’s much more robust here than in Asia.” South African manufacturing labour quality seems to vary in reputation across the board but excels in the automotive and agriprocessing industries for example. There doesn’t seem much to tempt local manufacturers to move to Lesotho or Swaziland for example since workers from those and other Southern African countries populate our workforce anyway.
Both the U.S.’s President Obama and S.A.’s President Zuma have spoken much about the improvement of infrastructure. In President Zuma’s case there has been large allocations to infrastructural improvement in this year’s budget. Theoretically this should reduce the cost of moving goods around the country. Obama has proposed $476 billion through 2018 on highways, bridges and mass transit projects for example.
In overview one school of thought is that U.S. manufacturing has never really gone away. The U.S. produced 18.2 per cent of all goods globally in 2010, of course it used to be so much more, and China has surpassed the U.S. 2010 marked the first year since the late 1800s in which the U.S. was not the largest producer. China, with $1.92 trillion in manufacturing output has taken the title.
Along these lines, one is pointed to the fact that although it’s true that the majority of consumer goods are produced in China, the U.S. specialises in heavy machinery and goods that are the product of highly-skilled labour. Automobiles, airplanes, aerospace components and pharmaceuticals are all divisions where the U.S. retains a hefty share of world production.
In the final analysis the assumption we may make is that the U.S. commercial real estate industry should be strengthened by on-shoring though not as dramatically as we may be tempted to conclude. The total industrial market vacancy rate stood at 9.5 per cent at the end of the fourth quarter of 2011. It declined in every quarter of 2011 and is down a full percentage point from its recessionary peak of 10.5 per cent at the beginning of 2010. For flex space, vacancies are a bit higher—12.6 per cent at the end of the fourth quarter—but there too the rate has declined from a peak of around 14 per cent in 2010. Manufacturing space tends to be very specialized and often manufacturing companies build their own buildings and they don’t need to buy the space that existed previously. The exceptions to this might be smaller secondary and tertiary suppliers that support larger manufacturers. Those kinds of firms tend to locate in flex space.
Although South Africa doesn’t find itself in an on-shoring situation the lessons above remain for us to observe. Manufacturing activity in South Africa rose to a two-year high last quarter, fanning expectations that growth in the economy’s second-biggest sector is gaining impetus. This surpassed those recorded among South Africa’s main trade partners during the same quarter. Manufacturing accounts for 15% of South Africa’s economic output and 13% of formal employment. In the fourth quarter of last year, it recovered from a recession in the previous two quarters, expanding by 4,2%, according to official data. The knock on effect on industrial and commercial property is presumed and likely but can be unreliable and inaccurate to monitor.