IS THE WORLD FLAT OR ROUND?

IT ALL DEPENDS ON THE PRICE OF OIL

     In my last blog, The Last (Man)-ufacturing Standing Strategy, I argued against Canadian manufacturers liquidating their factories and becoming strictly importers and distributors from Asia.

To me, maintaining your ability to make product on this side of the pond  makes good sense as a hedge against unforeseen events that could change the cost structure of your imported goods literally overnight.

In his recent Canadian bestseller entitled "Why Your World is About to get a Whole Lot Smaller", Jeff Rubin, former chief economist for the CIBC, agrees.  He maintains that because the world demand for oil is increasing much more rapidly than its supply, oil prices will inevitably rise dramatically.  And when this happens Mr. Rubin predicts that:

     "All of a sudden, the globalizing forces of the last three decades will come to a screeching halt.  While trade liberalization and technical change have flattened the world, the soaring prices for energy are going to make the world rounder again.  And this smaller, rounder world is going to look more like the past than what we are accustomed to expect from the future." 

     Flat or Round, Global or Local, that's the million dollar questions that manufacturers in this country have to ponder.  In fact, fuel to the Peak Oil debate was added just yesterday as Richard Branson, the colourful U.K. founder of Virgin Airlines, warned his government of the pending spike in oil prices in the next 5 years that will result in an economic downturn more severe than the credit crunch recession we are currently living through.  So even mainstream business leaders are beginning their attempt to adapt to a world of $100 plus/barrel oil prices. 

     One thing is for sure.  There's no denying the effect that oil prices have on world trade volumes.  Between 1960 and 1973, when oil averaged $15.00/bbl., world exports as a share of global GDP increased 50%.  Similarily between 1987 and 2002, when oil averaged $27.50/bbl., the increase was 66%.  Conversely, between 1974 and 1986, when oil averaged $50.00/bbl., this world trade percentage contracted -2.5%.  In a recent example of this phenomenon, just look what happened in 2008 when oil prices hit $130/barrel and container freight rates from Asia tripled.  All of a sudden, manufacturers like Procter and Gamble and Emerson Electric began reevaluating their supply chain strategy, re-sourcing purchases in closer proximity to their plants and customers.  Others began to bring back production to North America as skyrocketing shipping costs combined with higher labour and exchange rates tipped the cost equation back to local production.  Listen to one company's experience during that time:

                         "My cost of getting a shipping container here from China just keeps

                           going up-and I don't see any end in sight, says Claude Hayes, President

                           of the retail heating division at DESA LLC.  The privately held company,

                           known for making the heaters that warm football players on the sidelines,

                           recently moved most of its production back to Bowling Green Ky., from

                           China.  Mr. Hayes says the company was lucky to have held onto its

                           manufacturing machinery.  "What looked like an albatross a year and

                           a half ago," he says, "today looks like a pretty good asset."

     In another example, Mr. Edward Monser, Emerson Electric's chief operating officer, said at that time that with $100 plus oil making logistics costs a problem, "their larger strategy is to regionalize manufacturing, producing as much as possible within the part of the world where its sold."  Finally, look at the experience of Bremen Castings, a family-owned foundry in Indiana.  They have seen a wave of customers bring work back from China and other low-cost countries.  One of their customers, a pump manufacturer, which had moved more than $1 million worth of metal-casting work from Bremen to China two years ago, called "to reactivate everything.  They told me the cost of transport from overseas was the straw that broke the camel's back-and they said they didn't see it going back down any time soon."  These are only a few of what I'm sure were literally thousands of examples of companies who rejigged their make versus buy manufacturing strategies in order to save cost and respond to new customer demands for local production sourcing.

     While, the recession in 2009 has cooled oil demand and prices in the short term, if Richard Branson and others are right, local manufacturing may get another unexpected boost shortly as oil prices rise sharply again.  Words like Locavore, Staycation, and Near Sourcing, that describe consumer and business adaptation to a world of expensive oil may yet become mainstream before too long.   Companies who I have blogged about previously, like Aerated Home Fashions(AHF) of Montreal, have already developed marketing campaigns around convincing their Big-Box customers of the benefits of local sourcing including lower shipping costs, just-in-time deliveries, and lower inventories.  Others like Roots Canada, another previous blog entry I invite you to read, have used their branding power, online webstore, and new flexible manufacturing technologies including cell production modules, lean manufacturing,  and integrated Computer Design and CNC Cutting Systems that are rapid response and tool free,  to serve local consumer demand more rapidly and cost effectively than they can from Asia.

     If the future of the consumer marketplace changes in part from one of uniform global preferences where everyone buys the same things no matter where they are in the world, to one of more local tastes and customs that create specialized niche markets for many products, it may provide a competitive advantage for Canadian manufacturers who have always dealt with producing a wider array of items in their factories to cater to a more fragmented, lower volume demand.  In fact, during my 35 years of selling machines and tooling to companies with both U.S. and Canadian factories, in almost every case the Canadian factories were more efficient, always able to do more with less.  Whether it was plant layout, modifications to machinery, tooling changeover times, or staffing levels, Canadian manufacturers always seemed to be better. 

     It remains to be seen what the future will bring.  But one thing is for sure.  I wouldn't be so quick to give up on making some or all of your product here in Canada!