By Scott Malone - Analysis
CHICAGO (Reuters) - Tightening credit terms and an expected rebound in energy costs may shift manufacturing patterns, with multinationals producing goods closer to their customers rather than shipping them across oceans.
That could be one of the major ways the world economy will look different when it emerges from the current downturn, executives said at the Reuters Manufacturing and Transportation Summit in Chicago this week.
"It is not out of the realm of conjecture that you will see some amount of resurgence in U.S. or North American manufacturing, particularly in a world of high energy costs," said Wick Moorman, chief executive of No. 4 U.S. railroad Norfolk Southern Corp (NSC.N: Quote, Profile, Research, Stock Buzz). "When energy costs and transportation costs start to trump other competitive advantages ... all of a sudden it changes people's perspective about the trade-offs between labor, resources and transportation."
Crude oil prices have fallen by more than two-thirds from their record peak near $150 a barrel last summer, a decline that reflects falling demand in the face of a deepening global recession. While that has eased the cost of transporting goods around the world by ship or jet, executives say the situation will probably change when the economy recovers.
Pricier credit will also encourage a more regional approach as companies may be more reluctant to have inventory -- and thus money -- tied up for weeks in transit.
Inventory en route to North America from an Asian supplier can often spend 10 to 12 weeks on a boat, said Bill Diehl, CEO of manufacturing consultancy BBK. Devoting that much time to shipping makes sense if a company can drastically reduce its labor costs, but as wages rise in China and India, "it becomes tougher and tougher" to justify that approach, he said.
EARLY ADOPTERS
Caterpillar Inc (CAT.N: Quote, Profile, Research, Stock Buzz), the world's largest maker of earth-moving equipment, is among the companies starting to put manufacturing closer to their customers.
"If you look at our manufacturing strategy ... we break it down into what we call three tri-spheres," said Group President Edward Rapp. "Building the high-volume product in the Americas that serves the industry in the Americas, doing the same things in EMEA serving ... Europe, Africa, Middle East and doing the same thing for Asia."
The Peoria, Illinois-based company relies on plants in single locations only for highly specialized equipment that it makes in low volumes, such as dump trucks that stand three stories high and weigh 1.4 million pounds (623,700 kilograms).
Likewise, Nordson Corp (NDSN.O: Quote, Profile, Research, Stock Buzz) has adopted a regional approach for some equipment that needs to be customized to meet each customer's needs.
"We make products in China, for example, today that are primarily sold within east Asia," said Edward Campbell, chairman and CEO of the Westlake, Ohio-based company. "On the other hand we make some other components that we ship worldwide, and we use a more macroeconomic set of determinants to choose where we do that."
EXPEDIENCY
Other executives suggested that any shift back to regional production would only be temporary and driven by economic needs, but that ultimately a global approach would prevail.
"That will happen kind of as a matter of expediency, not so much as a part of an overarching global strategy," said John Rice, a vice chairman of General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), the world's biggest maker of jet engines and electricity-producing turbines. "Globalization is going to continue." Continued...
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