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Nations playing leapfrog

By Frank-Jürgen Richter

Khaleej Times, February 15, 2012

Current research by logistics operators shows some signs that the UK, Europe and the US are engaging in ‘re-shoring’ which follows many years of outsourcing and off-shoring.

The simple explanation is that major firms with extensive supply chains have suffered [enough] losses over the last couple of years due to the huge floods in Thailand and the Japanese nuclear disaster that both disrupted large swathes of land, factories and all infrastructures. The complexities of the supply chains meant that manufacturing in several countries was disrupted as vital components could not be placed in situ thus the final object, be it a car, TV or whatever, could not be completed — so the assembly had to be temporarily shut down with losses to the factory owners as well as their workers and customers.

Grumbles, leading to anger, confronted factory owners who moved their production to Asia. But at the time the owners could not ignore their shareholders demands (ie. to make greater profits), so the cheap and abundant workers of Asia linked to the willingness of entrepreneurs to build factories to assemble parts to return to the home nations was an offer too good to miss. This resulted in millions of Asian rural workers flocking to cities to make more money, to remit this back home to their families, and to make the entrepreneurs rich. It also resulted in defining an out-of-work state in Europe and the US where many had nothing but idleness to look forward to, even their children could face a life of no-work.

While there were increasing calls on nations and their people to engage in austerity measures, especially in Europe, we all noted governments supported out-of-work people. But now anger at grass-roots levels against over-large bonuses have forced governments to call upon businesses to release capital. There are many large firms who have not folded, but neither have they expanded. They are sitting on considerable liquidity not quite knowing what to do. Naturally the firms are reluctant to give cash for nothing and so they have begun to re-invest in training, in apprenticeship schemes, and to buy new equipment. Of course, over time, the workless people have lost vital components from their lives — their willingness to work a full day, their knowledge of current production practices and their pride. Apprentice schemes give back all these to the young – for it is the young who are most at risk across the globe if they do not work. They may become prey for extremists.

The retrenchment of local production will not have an instantaneous effect. Firstly, local wages are much higher than the Asians pay; and as global logistics add little to the overall price of any object — there will be little reduction of costs due to shortening the supply chain. However, the most important aspect of this new wave of manufacturing in Europe and the US is that their local firms will invest in new machinery, scrapping old inefficient legacy machinery: and investment means cash will flow into many niches.

Asia, through no real fault of its own, is becoming a region populated by old people; there will soon be a dearth of youngsters willing to assemble parts for little money. Their machinery too will become [relatively] old and without careful cash-flow management their entrepreneurs will be unable to balance profits against new process innovation or even to invest in the R&D required for local re-invigoration. Asia will be faced with the stagnation that increasingly hampered the developed nations over the past quarter of a century: we will once again see nation leapfrogging nation as history constantly informs us.

Frank-Jurgen Richter is founder and chairman of Horasis, a global business community