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Slide 1 - Industrial Asset Management Council _IAMC_

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									Managing the fragmented firm: Facility location in a global marketplace
Industrial Asset Management Council Professional Forum Phoenix, Arizona April 20,2008

Edward W. (Ned) Hill Vice President for Economic Development Interim Dean, Levin College of Urban Affairs Cleveland Sate University

Balancing the location decision

Value Creation

Firm’s source of competitive advantage
Economic Shocks Accelerated product cycles

Corporate facility strategy

Differential market growth
Currency Swings

Value contribution of a location

Edward W. (Ned) Hill

2

Location Strategies Fall Somewhere Between Two Distinct Poles...

Cost Driven “Reduce labor, facility, occupancy costs”

Performance Driven “Enhance skills, market access, and proximity to decision makers”

Edward W. (Ned) Hill

3

Structure of an industry cluster
Sources of competitive advantage

Customer
Forward linkage

Value chain of a Driver Industry or an Industry Cluster

Technology

Driver Industry

Labor Supply chain

Supplier
Backward linkage

Edward W. (Ned) Hill

4

Structure of an industry cluster
Sources of competitive advantage

What drives stickiness?
Relationship to the income statement

Customer
Forward linkage

The three drivers of location Technology

Value chain of a Driver Industry or an Industry Cluster

Driver Function

Talent Supply chain

Tacit Knowledge (learning by doing and learning by association) an enabling technology

Supplier
Backward linkage

Talent pooling Regionally thick supply in globally thin occupational markets
5

Edward W. (Ned) Hill

What are the six fragments? o Headquarters—command and control

o Administration or back office
o Research, design & product deployment

o Production or procurement o Logistics
o Sales, customer service or satisfaction

Edward W. (Ned) Hill

6

Site location in a global economy

Edward W. (Ned) Hill

7

The economy

Trade exposure of the US economy grows: Sign of comparative advantage or of global competition?
US imports and exports as percent of GDP 1979-2008

Trade

30

Dollar peak value 2002(I)

(Exports + Imports)/GDP

25

2007(IV) 29.4%

20

15

10

Sources: Exports and Imports of Goods and Services and GNP in 2000 chained dollars National Income and Product Accounts Retrieved April 21, 2008

19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
Year(Quarter)

Edward W. (Ned) Hill

Recessions marked by shading: 1990(3)-!991(1); 2001(1) 2001(4), source: NBER

9

As trade exposure of the US economy grows Balance of payments deficit explodes
(Net Exports Goods & Services as percent of Gross National Product, 1979(1) to 2007(4)

Trade

1.00

0.00

-1.00

Trade deficit (%GDP)

-2.00

-3.00

-4.00

-5.00

-6.00 Year(Quarter) 2005(IV) -5.8%

Sources: Net Exports of Goods and Services and GNP in 2000 chained dollars National Income and Product Accounts Retrieved April 21, 2008

19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
Dollar peak 2002(I) 2007(IV)4.7%

Edward W. (Ned) Hill

Recessions marked by shading: 1990(3)-!991(1); 2001(1) 2001(4), source: NBER

10

US trade in goods and services is complicated
Real value of goods and services imports and exports 1990(I) to 2007(IV)
2,000

Trade

1,500

1,000

Exports of services and goods

500

Billions $2000

0

-500

-1,000

Imports of goods and services
-1,500

-2,000

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

Year(quarter) Goods Services Goods Services

Sources: Imports and Exports of Goods and Services and GNP in 2000 chained dollars National Income and Product Accounts Retrieved April 21, 2008

Edward W. (Ned) Hill

20 06

20 07

11

China’s exports to the US increase exponentially Show extreme seasonality
Real US imports from China January 1990 to February 2008

Trade

35.0

1990-91 recession

2001 recession China joins WTO Dec 2000 China floats currency Aug 2005

30.0

25.0

$ 2008 billion

20.0 Feb, 2008 $24.1 B

China is 3rd largest export customer of US Exports of goods & services are $4-6 billion per month

15.0

10.0

5.0

0.0

19 90

19 97

Year(Month)

Source: Federal Reserve Economic Data (FRED) Federal Reserve Bank of St Louis from US Bureau of Economic Analysis Retrieved April 20, 2008

Edward W. (Ned) Hill

http://www.censusbureau.biz/foreigntrade/statistics/highlights/top/top0712.h tml#exports

20 04

12

Currency float slows down real growth in Chinese imports to the US
12 month percent change in real value of Chinese imports December 2000 to February 2008

Trade

60.0

2001 recession China joins WTO Dec 2000 China floats currency Aug 2005

50.0

40.0

12 month % change

30.0

20.0

10.0

0.0

2000

2001

2002

2003

2004

2005

2006

2007

-10.0 Year(Month)

Source: Federal Reserve Economic Data (FRED) Federal Reserve Bank of St Louis from US Bureau of Economic Analysis Retrieved April 20, 2008

Edward W. (Ned) Hill

13

2008

Dollar peaked in February 2002 Down 35% from peak value on March 1
Currency
Broad trade weighted value of dollar (1997=100) 140
130 Dollar Peak Feb 2002 129.53

China joins WTO Dec 2000 122.87

120 China floats currency Aug 2005 110.76

110

Index 1997=100

100 March 2008 95.77

90

NAFTA Jan 1994 90.47

80

70

60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

July 1990 March 1991

Year(Month)

March November 2001

Source: Federal Reserve Economic Data (FRED) Federal Reserve Bank of St. Louis from Board of Governors of the Federal Reserve System Retrieved April 17,2008

Edward W. (Ned) Hill

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2008

Dollar falls against major industrial currencies
Index of value of US Dollar to currency from January 1999
Dollar
140 Euro Zone Recession 3/01 to 11/01 Dollar peak Feb 2001

Currency

increases in value
130

Euro 120 United Kingdom Japan
Index (Jan 1999=100)

110

Yen nears 100 per dollar
Dollar less than a Loonie

100 Euro 90 Canada 80 Japan United Kingdom

70

Dollar Decreases 60 in value
19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

Canada

20 07

Year(Month)

Source: Federal Reserve Economic Data (FRED) Federal Reserve Bank of St. Louis from Board of Governors of the Federal Reserve System Retrieved April 17,2007

Edward W. (Ned) Hill

Data are monthly January 1999 to March 2008. To calculate percent change from January 1999 subtract 100

20 08

15

Dollar falls against major industrial currencies; Yuan down by 14% since float
Index of value of US Dollar to currency from January 1999

Currency

Dollar

140 China enters WTO Dec 2000 130

3/01 to 11/01 $ peak value China allows limited currency float Aug 2005

increases
in value

India 120 Mexico

Index (Jan 1999=100)

110

100

China’s currency increases 14.3% in value to dollar—half way there?

90 Mexico 80 South Korea 70

China

Dollar
Decreases

in value

60

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

Year(Month)

Source: Federal Reserve Economic Data (FRED) Federal Reserve Bank of St. Louis from Board of Governors of the Federal Reserve System Retrieved April 17,2007

Edward W. (Ned) Hill

Data are monthly January 1999 to March 2008. To calculate percent change from January 1999 subtract 100

20 08

16

Price of oil has skyrocketed since January 2007
Monthly average spot price per barrel of West Texas Light in real $2008 104% increase from Jan 2007 to April 2008

Oil Shock

120

April 17, 2008: $116.69

100

Per barrell ($08)

How big is the bubble? What is the equilibrium price? How is it effecting location risk?

80

60 Jan 2007: $57.24

40

20

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

Year(Month)
Source: St Louis Federal Reserve Bank, from the Wall Street Journal, http://research.stlouisfed.org/fred2/series/OILPRICE Download April 19, 2008

Edward W. (Ned) Hill

20 08

17

US manufacturing

Manufacturing drops share of GDP; Increases are in white collar services and health care
Manufacturing
Supersector Gross Domestic Product Goods-producing Natural resources & mining Construction Manufacturing Service-producing Utilities Wholesale trade Retail trade Transportation & warehousing Information Finance & insurance Real estate, rental, & leasing Professional & business services Management of companies Administrative & waste services Educational services Health and social assistance Arts, entertainment & recreation Accommodations & food services Other services Private household workers Government Federal State Local Military Two-digit NAICS code Share of Change in Gross Domestic Product Percent Share 1978 1998 2006 2006-1978 100.0 100.0 100.0 30.7 21.5 19.7 -11.0 5.0 2.1 2.9 -2.1 4.8 4.2 4.8 0.1 20.9 15.2 12.0 -8.9 54.0 65.0 66.6 12.6 2.1 2.0 2.0 -0.2 6.5 6.1 5.9 -0.7 7.6 6.8 6.5 -1.1 3.7 3.1 2.7 -1.0 3.5 4.3 4.4 0.9 4.7 7.2 7.6 2.9 10.1 11.8 12.5 2.4 3.2 6.4 6.8 3.7 1.6 1.8 1.8 0.2 1.3 2.9 2.9 1.6 0.6 0.8 0.9 0.3 3.9 6.0 6.8 2.9 0.6 0.9 0.9 0.3 2.3 2.6 2.6 0.3 2.3 2.4 2.2 0.0 0.4 0.2 0.2 -0.2 15.3 13.6 13.7 -1.6 5.4 4.0 3.9 -1.4 5.8 6.0 6.2 0.4 2.4 2.3 2.3 -0.1 1.8 1.2 1.3 -0.5

11, 21 23 31-33 22 42 44-45 48-49 51 52 53 54 55 56 61 62 71 72 81 PH GVF GVL GVS ML

However, data on shares distorts our understanding of the economy
19

Source: Economy.com, 200(4), Retrieved March 2007.

Edward W. (Ned) Hill

Real value of gross domestic product from manufacturing does not show decline in real dollar terms (1978-2006)
Manufacturing
1.7 1980-1983 1990-1991 2001 2006 $1.61 trillion

1.5

Real Manufacturing GDP (Trillions of $2005)

1.3

1.1

0.9

0.7

0.5

Source: Economy.com, 2007(4), retrieved March 2007

19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06
Year

Edward W. (Ned) Hill

20

What are the underlying trends in US job growth
Five changes in the cyclical pattern of job growth

1. Macroeconomic uncertainty— flexibility is key 2. Creative destruction —fewer recalls, job growth comes from job creation not revitalization; in the US capital investment may be the job creation driver. 3. Productivity Growth —better, faster, smarter, fewer throughout the recession; a combination of technology, management and global supply chain integration 4. Benefits wedge —difference between wage and salaries and total compensation and revenue generated per worker 5. Cost uncertainty —health care, torts, mandates, energy. 6. In the upper Midwest there is a 6th reason …

Edward W. (Ned) Hill

21

Check the right answer question: The manufacturing crisis is the result of:  Recession and weak recovery?
To an extent, add federal macroeconomic policies that are skewed against manufacturing; tax policies that encourage consumption of traded goods, and energy imports

 Unfair trade treaties and unfair competition?
Doubtful: Enforcement is an irritant and the US is as good with non-tariff barriers as an nation

 Pegged currencies?
To an extent with China and Japan

 Other
Root causes are productivity growth, failed corporate strategies, “legacy” costs and work rules that inhibit workplace flexibility

Edward W. (Ned) Hill

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The irony of firm strategy
o Large firms are vertically disintegrating by outsourcing and reaching globally, especially if they have slow growth products
o Three primary forces drive large manufacturer supply chain decisions o Production/acquisition cost o New market opportunities o Product innovation o What is missing? Telecon and transportation

o Small and mid-sized firms in the supply chain need to become more vertically integrated, focused on providing solutions and superior customer experience o Firms need to own their intellectual property or have proprietary knowledge o Realize that markets hate margins—remember the real lesson from the 1985 best selling management book In Search of Excellence
Edward W. (Ned) Hill 23

Don’t pack up and run away yet o What about top line revenue growth? It is the net that matters, not the gross cost savings o How does the move affect customer services and quality of the customer relationship? The customer’s experience o How does globalization affect minimum scale of operations in Tier II & III manufacturers? o Can you manage a long, thin, supply chain? o Shipping costs are killers on the China model when shipping 100% back into the US market. o Mid-sized volume at low per unit price exported solely for the US it is usually not a cost advantage to go to China. o The China advantage: Large volume at low price point or with some local China market demand
Edward W. (Ned) Hill 24

Observations—required changes in business behavior
Economic perceptions:
Regional business leaders

o Business strategy needs to shift to top line revenue growth, while maintaining middle line cost discipline o “There is a difference between a lean organization and an anorexic organization.”
o “You cannot starve yourself to health.”

o “If you cannot export in this dollar environment you have a problem.” o “In product innovation there should be no such thing as failure, only feedback. You need a system of constant and low cost feedback.” o “Fail fast; fail cheap.”—Doug Hall

Edward W. (Ned) Hill

25

Five types of companies
1. Product innovators — Grow the top line of their income statement without blowing up their cost structure. Can manage continuous product innovation and own intellectual property or have proprietary knowledge Process innovators & global competitors — Manage the middle of their cash statements and ride their product catalogs. Have deployed IT to tighten their value chain. Developing global supply chain. Lifestyle firms — Goal is not growth but owner’s control and earning target income. Are not profit maximizers. Frequently have no intellectual property or proprietary competitive advantage. One trick ponies — Commodity business dependent on a single business or production relationship Dead and dying companies — Job shops in auction markets

2.

3.

4.

5.

Edward W. (Ned) Hill

26

Everyone wants high-tech operations…
Silicon Island Silicon Rain Forest Silicon Sandbar Dot Commonwealth Silicon Mountain WebPort Cyber District E-Coast Silicon Tundra/

Silicon Orchard Silicon Glacier Silicon Forest
Silicon Vineyard Silicon Village Silicon Gulch Silicon Valley Multimedia Gulch Silicon Island Silicon Beach Digital Coast Media Del Rey Silicon Desert Cyberchella Valley Silicon Freeway Biotech Beach Silicon Gulch/ Silicon Hills Silicon Valley Silicon Plains

Silicon Mountain

Silicon Valley North

Silicon Snowbank

Silicon Mountain Automation Alley

Silicon Necklace

Silicon City
Telecom Valley

Silicon Hill Silicon Island Silicon Alley
Silicon Valley Forge Philicon Valley Silicon Holler Silicon Seaboard

Silicon River Silicon Mesa Silicon Prairie Silicon Hollow

Silicon Dominion/ Silicon Triangle Silicon Plantation

Telecom Corridor Silicon Swamp Silicon Bayou
Silicon Seaboard/ Internet Coast

Silicon Beach

… fight the allure of economic development fads; do not lose sight of true competitive advantage

Source: Deloitte Fantus

Edward W. (Ned) Hill

27


								
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