Globalisation and The Shifting Costs of Manufacturing

by Jörgen Eriksson on October 31, 2014

img220000347A“As if Japan weren’t small enough to begin with, I fail to understand why it is necessary to think of it in even smaller units. No matter where I go in the world, although I can’t speak any foreign language, I don’t feel out of place. I think of the earth as my home. If everyone thought this way, people might notice just how foolish international friction is, and they would put an end to it.”
– Akira Kurosawa – Japanese filmmaker

Globalisation describes the process by which national and regional economies, societies, and cultures globally have become increasingly integrated through networks of trade, communication, tourism, talent flows and other immigration and transportation. This is an article with some thoughts on how Globalisation is developing and what new changes it may mean for us in the near future.

The historic background

Globalisation imageInternational exchange is nothing new. We humans have interacted over long distances for thousands of years. The overland Silk Road that connected Asia, Africa, and Europe is a good example of important trade flows that existed in the "Old World". About the same time, the Church and export of religion became an international institution,following the export pattern of Islam and Islamic culture a thousand years earlier.

Philosophy, religion, language, the arts, and other aspects of culture spread and mixed as regions and nations exchanged products and ideas. In the 15th and 16th centuries, Europeans made important discoveries in their exploration of the oceans, including the start of transatlantic travel to the "New World" of the Americas.

Global movement of people, goods, and ideas expanded significantly in the following centuries. Early in the 19th century, the development of new forms of transportation (such as the steamship and railroads) and telecommunications that "compressed" time and space allowed for increasingly rapid rates of global interchange.

In the 20th century, disruptive technologies, including road vehicles and airplanes made transportation even faster and containers and container ships enabled low-cost transportation of goods. The invention of electronic communications, most notably mobile phones and the Internet, connected billions of people in new ways by the year 2010.

image

Through the new means of transport, the movement of people and goods has increased substantially in the last few decades with great growth on the number of flights across borders.  Since the early 1980s there has been high growth rates in the number of airlines seats and in 2010 there are over 2.3 million flights per month.

The great growth in flights has allowed stronger business and personal links and today we see a much more interlinked world than in the past. I and my colleagues are first-hand witnesses of this. In our work at Bearing we often travel every week. I was myself 58 times at Nice Cote d’Azur Airport in the third quarter this year.

Globalisation

The term Globalisation came into use in the mid 1980s while I was at Stockholm School of Economics. Initially, the definition of globalisation focused on the economic side of the world, such as trade, foreign direct investment and international capital flows. Global trade and capital flows has grown enormously since the Second World War. International trade in manufactured goods alone grew an estimated 100 times from $95 billion in 1955 to $12 trillion in 2005.

More recently the term Globalisation has been expanded to include a broader range of areas and activities such as culture, media, technology, socio-cultural, political, and even biological factors, e.g. climate change. In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalisation:

  1. Capital and investment movements
  2. Migration and movement of people
  3. Dissemination of knowledge

The End of History and the Last Man

The_End_of_History_and_the_Last_ManAfter the fall of the Berlin Wall in 1989, some talked about the rise of the global economy way doing business and living. The American political scientist Francis Fukuyama authored a book in 1992 titled The End of History and the Last Man, where he wrote:

"What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government."

One argument used to support the theory was the dramatic rise in democratic nations over the course of the 20th century.

However recent events have suggested that those thoughts on harmonisation of political systems and freedom were misplaced as we see the success of a number of varying economic and national systems. The surge of China and the resurgence of Russia also challenged the "end of history" thesis, as China has a single-party state government, while Russia, though a democracy, has been described by some as de facto authoritarian

The Crises

After having surged to unprecedented levels in 2007 and until mid-2008, private capital flows including direct investments, portfolio investments and other investments towards developing countries came to a sudden stop or even reversed direction as the global financial system went into cardiac arrest, fleeing back towards the core countries of global finance that were the epicentre of the crisis. This has now started to recover but we are far from the pre-crises levels and to many this suggests a de-escalation of Globalisation.

The Shifting Economics of Global Manufacturing

However Fukuyama may be right after all, but not in the way he initially thought. Recently a new aspect of Globalisation has made itself known, and this is equalisation of costs and harmonisation of competitiveness. It was not unexpected by Economists, in fact macro economics and trade theory is very clear that harmonisation should occur over the long run, but it has happened much faster than was previously thought.

For the better part of three decades, since the fall of the Berlin Wall and end of the cold war, increasingly hyper-competitive global markets have driven corporate manufacturing investment and sourcing decisions. Latin America, Eastern Europe, and most of Asia have been viewed as low-cost regions. The United States, Western Europe, and Japan have been viewed as having high costs. At least this is the stereotype we all know.

But this worldview now appears to be out of date. In August, The Boston Consulting Group published an article on how cost competitiveness has changed world-wide.

Years of steady change in wages, productivity, energy costs, currency values, and other factors are quietly but dramatically redrawing the map of global manufacturing cost competitiveness. The new map increasingly resembles a quilt-work pattern of low-cost economies, high-cost economies, and many that fall in between, spanning all regions.

In some cases, the shifts in relative costs are startling. Who would have thought a decade ago that Brazil would now be one of the highest-­cost countries for manufacturing, or that Mexico could be cheaper than China? While London remains one of the priciest places in the world to live and visit, the United Kingdom has become the lowest-cost manufacturer in Western Europe.

These dramatic changes in relative costs could drive a large shift in the global economy as companies are prompted to reassess their manufacturing footprints. One implication is that global manufacturing could become increasingly regional. Because relatively low-cost manufacturing centres exist in all regions of the world, more goods consumed in Asia, Europe, and the Americas will be made closer to home. These trends also have implications for governments, whose leaders increasingly recognize the economic importance of a stable manufacturing base and they also have implications for the importance of smart specialisation, a topic which is dear to our hearts here at Bearing.

I recommend you to read the BCG article, to learn more about the forces and factors behind this great shift.

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

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