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Coming Home

A new tsunami is heading toward these shores. It has already begun and its impact will be felt in communities across America. To be sure, it remains subtle, but is gaining momentum and power as it races eastward.

For some time, various sources have reported the growing costs associated with doing business in China. Shipping costs are up over 15 percent and wages in Chinese factories have risen 15 to 20 percent annually for the past four years. Harold Sirkin (Boston Consulting Group) has predicted that overall business costs in the U.S. and China will converge around 2015, meaning there is no sensible reason to move manufacturing to China when there is no real cost advantage.

Combining transportation, storage, labor, and general operating costs, the playing field is becoming more level. And, with more delivery and quality issues now being identified, there is a growing case for relocating back to the U.S. Coupled with these justifications are even more reasons to consider a shift.

The U.S. remains the world’s largest economy and, even though it remains in a tenuous recovery, there are signs that the current careful, deliberate approach is beginning to pay dividends. The population continues to grow, consumer confidence is increasing, unemployment is drifting downward, and new jobs are being introduced. These are all good signs and, when combined with expedient business decisions, signal an emerging environment that will support robust manufacturing growth.

Much of our work at The Futures Corporation involves mapping ‘converging variables.’ We are currently watching fuel, container, and labor costs, along with community willingness to share some portion of new plant startup investment and provide long-term incentives. But another variable has emerged that is just as potent: the innovation/ design/ manufacturing/ shipping/ purchasing cycle has accelerated. Due partly to the desire to avoid large inventories and to accelerate product turns, many outlets want just-in-time ordering, which requires fast response times from proximal manufacturers. Cycle times between China and the U.S. have grown too long and require too much transportation and storage to meet growing demand for rapid turnaround AND decent pricing. Retail and wholesale outlets want smaller inventories and rapid resupply, neither of which is possible with plants in China, unless larger inventories are kept on shore. This, of course, is exactly what most managers want to avoid.

Innovation and rapid prototyping has also added to the equation. Many firms are concerned about accelerating development cycles to keep pace with competitors. This translates into a formula that requires proximity, small inventories, fast delivery, and quick response to market fluctuations.

Most observers have recognized that the entire equation has begun to shift and accelerate. Those who wait too long to re-shore manufacturing may miss rapidly evolving markets, causing delays that could cost hundreds of millions of dollars. Delay could also cause a serious loss of market share or a repositioning of market leaders. Consequently, there is a burgeoning interest in finding suitable community locations to build or relocate manufacturing plants. Communities that recognize this phenomenon can reap enormous rewards IF they create suitable value propositions that match industry needs.

This raises a key question: Are communities throughout the U.S. recognizing this major trend and preparing for the next 10-to-20 year cycle? This one trend could very well be the essential event that will boost the U.S. economy out of its post-recession doldrums and launch the next boom cycle. Are communities prepared? Do they recognize what is occurring and are they making plans to attract emerging enterprises seeking optimal locations?

Economic development requires insight, prescience and a dedication to trend analysis. The data are clear: this is a major shift that will have enormous consequences to American business, consumers, and the economy. As the U.S. labor force becomes more realistic about wages and benefits, relocating manufacturing to American communities becomes the fundamental factor in a new economic equation. Proximity, reduced manufacturing costs, rapid response and pride in American goods are potent forces for change.

Unfortunately, the question remains, do community leaders, planners, and economic development professionals recognize the trend and are preparations underway? The communities that recognize this major shift and plan accordingly will prosper. Those that fail to perceive the opportunities or to prepare accordingly may continue to struggle. This would be unnecessary. It would also be a shame for those communities.

With over three decades working in and with federal, state and local government, John Luthy understands public agencies.  Known for his real world, straight talking style, he is a leading futurist specializing in city, county, state, and federal government long-range thinking and planning. John is the author of Operations Planning: A Guide for Public Officials and Managers in Troubled Times, and The Strategic Planning Guide, both published by the International City/ County Management Association (ICMA). His 2010 book, Planning the Future – A Guide to Strategic Thinking and Planning for Elected Officials, Public Administrators and Community Leaders, is being hailed as the best book for public managers and community leaders who are committed to building a sustainable future.  An innovative and dynamic presenter, John is frequently asked to speak and consult on how to prepare public organizations and communities for emerging challenges (public futures at http://www.futurescorp.com).

Excused From the Table

Three years ago I had the opportunity to keynote the national EPA Conference on Water System Sustainability, held in Atlanta.  During the conference, I met with members of the Congressional Budget Office (CBO) who made it clear that the federal government could no longer fund local water systems at previous levels. Even more disheartening, CBO staffers noted that many programs related to water, wastewater, health, recreation, and community development that had enjoyed historically strong support would see reduced funding. I was encouraged to share this news with local officials during my travels and work with cities and counties. When I suggested that this was the role of professionals in D.C., I was told that it was not politically expedient to share such bad news and that the CBO and other Washington agencies had been told to avoid any public announcement.

For those who subscribe to Bloomberg News, you may have seen the February 28 article reporting that Stockton, California has filed for bankruptcy. The article reported that Governor Brown refused to discuss the situation, which in many ways signals the current fiscal environment, but also the growing schism between federal, state and local government. While some states are seeing some revenue growth due to a broad (but weak) US economic recovery, aid to cities and counties continues to decline. In a very real sense, it is ‘every man for himself.’ There is some humor here, in that this phrase can be partially attributed to the 1924 Our Gang short film of the same title, in which the Gang generates revenue through a combination athletic club and shoe shine emporium. The ensuing high jinks resemble many contemporary economic development ploys, most of which fail to embrace reality.

As stark illustrations of actions taken to avoid bankruptcy, Pontiac, MI has eliminated its police force and Cleveland, OH has demolished thousands of already condemned structures in a effort to sustain or improve property values. Unfortunately, for every reported action taken by local government, there are hundreds of critical actions taken to reduce costs while preserving historic values and service levels. As noted many times in this Blog, there is a major re-centering occurring in America. For close to 60 years, money has flowed freely, and was particularly apparent during the early days of New Federalism, during which block grants flourished.

The latest incarnation of New Federalism is the largely unannounced policy to reduce funding to the locals until they are forced to either forego or reduce service, or find new revenue sources. Whether by increasing taxes, private-public partnerships, new enterprise mechanisms, or bake sales, local government is now facing a major shift in operating philosophy, described in my book, Planning the Future. That is, communities must decide what is essential and what should be eliminated, reduced, maintained or expanded. Demand is NOT declining, so the prospect of conflict is high as expectations grow for both service expansion and reduction. Within five years, even if local government expands to meet demand, this trend will fully bloom into more frugal government, better strategic planning, and highly accountable public operations.

The number of communities that are tamping down budgets is enormous. Not to say I am an advocate of reducing services while demand for those services is expanding, but I do believe in careful planning that attends to programs and services that serve the greatest common good. The key is to get ahead of the curve and begin the process now, before community fabric is so frayed that recovery is difficult. Through proper planning, public leaders can recognize critical issues, evaluate impact, establish goals, then identify strategies that allow remediation and define new options. Now is not the time to blame state and federal government but to recognize universal trends that affect all communities. This is a new era. Most communities are facing local realities that are forcing them to confront conditions that seem too harsh or punitive. This new era is neither temporary nor nebulous. And, it is not punitive. It is the new norm…at least for quite some time.

Consolidation, collaboration, and contraction require careful planning. What is happening locally? Are grand plans being made that cannot possibly be funded long-term? Are strategic plans grounded on carefully articulated issues and are the impacts of those issues clearly stated?  Are there clear discussion points and decision points? Have a series of If-Then scenarios been developed by local stakeholders and government leaders? Do you know what’s at stake for every decision? Time will tell…

With over three decades working in and with federal, state and local government, John Luthy understands public agencies.  Known for his real world, straight talking style, he is a leading futurist specializing in city, county, state, and federal government long-range thinking and planning. John is the author of Operations Planning: A Guide for Public Officials and Managers in Troubled Times, and The Strategic Planning Guide, both published by the International City/ County Management Association (ICMA). His 2010 book, Planning the Future – A Guide to Strategic Thinking and Planning for Elected Officials, Public Administrators and Community Leaders, is being hailed as the best book for public managers and community leaders who are committed to building a sustainable future.  An innovative and dynamic presenter, John is frequently asked to speak and consult on how to prepare public organizations and communities for emerging challenges (public futures at http://www.futurescorp.com).