Vice president of global business development for Rockwell Joe Kann (read, Rockwell's chief tealeaf reader) gave the economic lecture for CSIA this morning.
He began by noting that "understanding economics may be one of the first signs of hypothermia," but carried on nonetheless.
Most of what he said agreed with me, which is by inspection good, and my only dissatisfaction with what he said what what he didn't say in a couple of areas.
Basically, Joe noted that the double-dip downturn from 2001 to 2003 is over, and that we are in a growing economy with a very healthy long term trend. The downturn was caused by lots of factors including the dotcom bomb, 911, the corporate governance scandals, Afghanistan and Iraq, and so on. The markets have pretty much absorbed these issues, and are pressing on.
Factory orders are growing, with some softening. Joe noted that we could all call him up in three months and razz him if the softening continues, because he thinks it is a temporary issue.
Well, we'll see, Joe. Expect that phone call.
The bottom line picture, according to Kann, is "are we making more stuff now than we did in 2001 before it all went to smash?" His answer is yes.
Capacity utilization is inching up everywhere, but especially in the US. the 30 year historical average is 80.2%, above which capital expenditure rises precipitously. Right now, the US is at approximately 78% utilization, up 3% from last year. This is a Good Sign(tm).
Direct Investment by US companies in China is damping down as companies start assessing exactly what they are offshoring and outsourcing for.
Real business investment in Industrial equipment shows double digit growth and is expected to continue at that rate for the next several quarters.
The economy of the European Community, however, is still pretty ugly, and the picture isn't likely to change. Europe is the largest economic bloc in the world, and is beset by a significant set of difficulties including high unemployment, significant structural cost, and restrictions on labor movement.
There are some other things Joe didn't mention, too. Among them are the serious problem that France and Germany and Italy face in that their cultures have great difficulty absorbing foreign immigrant workers. There are third-generation Turkish Germans that the German government and people insist on treating as foreign workers, where in the US they'd be voting and running for office two generations ago.
Globalization has affected the EC exactly the same way it has the US, and the central and eastern countries like Hungary, the Czech Republic, etc., have been the EC's "China."
While the rest of the world has been making large productivity gains, Europe, especially Western Europe has been growing at less than 1% per year in productivity. This is a huge drag on the economy of the region.
Brazil and Mexico are the big, non-Asian stars. In Brazil, Lula has been found to be much less of a hairy-eyed bomb-throwing anarchist than he was portrayed and his government has instituted sound economic practices.
My hosts in Brazil last week said the same things, and they noted that Brazil needs only a generation more of political stability to reach the ignition point of a "first world" economy.
Mexico is basically fully integrated into the US economy, even a little better than Brazil. While they both experienced the double dip, they both have come out of it...Mexico a little more completely than Brazil.
Japan's growth is slowed. "The Japanese are learning to coexist with China economically. Our people in China believe that the recent saber-rattling is not a serious threat to the region, and is for home consumption in China more than anything else," Kann remarked.
India is the same story as China, just a little smaller. Both will play major roles on the world's economic stage.
The Chinese share of global trade has doubled in the past five years, with high single digit growth overall, and high teens in industrial growth segments. The economy is relatively healthy and the outlook is good for the next couple of years.
Emerging economies are growing much faster than the developed economies, but they are still much smaller. The US is still the world's largest homogenous market and production base, comprising 21% of the world's production, while Japan is 13%, while aggregated Asia is 18% and Europe is 33%, but not homogenous.
In GDP, the US will continue to lead without much change at 31% until at least 2025, but the secondary players will change. Japan will be second, but China will move to third by 2010, and Germany, UK and France will drop to the second half of the top ten by 2025.
Productivity drives living standards. Kann believes that the tide is rising, and it will raise all boats.
I'm not so sure.
China is losing manufacturing jobs, due primarily to automation, and the change in management philosophy of the State Owned Enterprises, which have been told to make a profit or die.
The real drivers toward productivity in China are quality, innovation, and so forth, with low cost ranking only as high as fourth on the list.
What people are realizing is that globalization is really extended localization. What Kann, and I, for that matter, means by this is that companies are beginning to offshore only where they have sufficiently large enduser bases to make it worth while to do so.
Contrary to popular press, US multinational offshoring has not led to significant job loss in the US, and foreign multinationals are still moving to the US in search of cheaper labor and the biggest market in the world.
Because of automation (pat yourselves on the back, friends) the non-labor production costs have equalized worldwide. It costs the same to operate an automated plastic bag factory in the US as it does in China.
And logistics can eat up the labor cost benefit, which is becoming less and less every year.
The biggest difference, Kann says, and the biggest challenges to US manufacturing are:
the US has the highest corporate taxes anywhere in the world
the regulatory compliance cost is higher in the US than anywhere else
the cost of tort litigation is higher than anywhere else
Here is where I part company with Kann's analysis. I think that he is right, so far as he goes, but he doesn't go deeply enough. There are some other issues that have as big or bigger impacts on US manufacturing. The corporate governance issues and CEO and officer compensation issues have a great deal to do with the way things are. There are lots of remedies to all of these problems, but neither political party is much inclined to do anything about them, just as in Europe.
Kann noted that he'd be a lousy prophet if he wasn't walking the walk. Rockwell, he said, is geographically diversifying while maintaining a strong US base. The current balance of sales is 60% in the US, 40% outside, and the goal is to change that to 50/50 by 2009. Joe pointed out that this goal may be difficult to reach if the US economy continues to grow at the rate it is currently. They may still be stuck at 60/40 at the end of the decade, since Rockwell continues to grow in the US.
He kindly forbore to mention that the big cloud hanging over Rockwell's head from the Solaia mess appears to have lifted, hopefully permanently.
In all, I found Joe's presentation insightful, even where I pickily disagreed.
Comments?
--Walt Boyes
