As a result of the recent election of Barack Obama to the United States presidency and the expansion of the Democratic majority in both the House and Senate (although, as of this writing, not the speculated 60 seat, filibuster-proof majority in the Senate), Manufacturing Insights sees a number of developments that will impact the manufacturing industry in 2009.

Because of macroeconomic changes over the last few months, specifically, tightened credit markets and reduced consumer confidence, we have lowered our spending projections for 2009 from an average growth of about 6% down to 4%. Manufacturers fund IT spending through a combination of credit and cash from operations, so if credit is tougher to come by and operating performance is depressed, spending will obviously fall. The staggering drop in reported year-on-year automotive sales in October, for example, is certainly a poor sign for consumer confidence levels as we move into 2009, as is the most recent domestic jobs report that showed a net loss of over 200,000 in the same period. It was also interesting to note that over the remaining three workdays in the week following Election Day, the U.S. stock market was down in excess of 700 points.

We expect the President-elect to favor legislation to protect consumers, incentives to reduce job losses to low-cost manufacturing regions, investments in infrastructure/public works, and a continuation--at least for now--of recent defense spending levels. The administrations view on free trade is a little less clear. During the primaries, Senator Obama aggressively criticized NAFTA, yet softened his stance subsequently and has now named Rahm Emanuel as his chief-of-staff--a man who played a key role in the passage of NAFTA during the Clinton administration.

The manufacturing industry is understandably anxious about the transition in Washington, DC., but much of the anxiety is the result not of the election, but of the public's increasing focus on climate change and the environment. At the same time global competition, energy prices, and the financial crisis are squeezing the industry's profits. With public opinion generally come regulations and other government-related initiatives that attempt to change behavior--these would include taxes or tax breaks, import or export fees, and so on. And those efforts are likely to cost manufacturers more money at a time when costs are a major source of frustration--and a primary motivation for outsourcing/off-shoring. Before the election, in September, Joe Acker, a very colorful speaker and the president of the Synthetic Organic Chemical Manufacturers Association (SOCMA), made a reference to the fact that regulations were going to increase "until the wooly mammoth returns". Given the fact that we now face the combination of a Democratic President, House, and Senate, he is probably right. And the next element of this is the inevitable turnover of political appointees and staff that could bring dramatic changes to regulatory agencies, including the EPA. But most manufacturers also recognizes there are opportunities in this new political environment.
There have also been some quite dramatic consumer shifts to value products and private label brands over the last couple of months, and broad devaluing of individual stock prices during recent market volatility. As mentioned above, we do expect some modifications to IT spending levels in 2009, with a greater focus on cost-reducing investments along with consumer-centricity efforts and a continued investment in supply chain modernization.

Rather than the taxpayer checks favored by the Bush administration, we expect more investment in infrastructure and public works projects, which opens new opportunities for construction and construction supply manufacturers. In a recent letter to congress, the nation's governors requested a broad array of infrastructure projects, including airports, highways/bridges, transit systems, clean water, sewers, and broadband as part of any proposed economic stimulus package. With current depressed consumer confidence, there is a strong likelihood that any cash infusion to consumers would be used to pay down debt or increase savings rather than as new economic spending--thus blunting the effect of the stimulus.

We also expect a continuation of Bush administration defense spending levels for the near-term--or at least until the Obama Administration announces a detailed plan for ending the Iraq war. Regardless of the timing of our withdrawal, given the current economic environment, the President-elect will likely be reluctant to make spending cuts that could cost Americans jobs; therefore we expect the core defense budget will remain unaffected.

In the election campaign, Obama also proposed doubling the funding for the Manufacturing Extension Partnership that works with manufacturers across the country to improve efficiency and implement new technologies to ensure the competitiveness of U.S. manufacturers globally.

During the campaign, both presidential candidates talked extensively about the need to stem the exodus of U.S. jobs. Now that President-elect Obama is taking office in January, we do expect new incentives from the new administration in an attempt to stem the loss of domestic jobs, although we caution that incentives should still acknowledge the value in the free-market system that looks at total-cost in global sourcing decisions. President-elect Obama's campaign platform included ending tax breaks for firms that move jobs outside the U.S., and awarding tax credits to those that increase the ratio of U.S. to non-U.S. workers. But, jobs are sent overseas for many reasons, and tax breaks only have a limited effect on overall off-shoring.

We have written quite extensively in our research on Profitable Proximity sourcing, when companies take a bigger picture look at total costs, and even in the absence of legislative incentives we are already seeing renewed interest in manufacturing in the U.S. This is partly due to the economic transition that is changing 'low-cost countries' into 'emerging markets'. With that transition come wage increases to reach globally fair wages (thus blunting much of the workforce cost advantage for all but the most labor-intensive industries like hi-tech). The other factor that may bring manufacturing back to the U.S. is the increasing role distribution costs are playing in the overall supply chain cost of a product. It is also important to point out that global demand is shifting--away from a 'western dominated' and more to an 'eastern evolving' profile--and profitable proximity is also about balancing supply and demand.

The fact is manufacturers are moving manufacturing to other countries because of workforce costs and/or customer growth outside of the U.S. This is a balancing act in the product lifecycle and the supply chain--where should companies locate research & development (R&D), design, manufacturing, or service, and what are the implications for the supply chain? Perhaps a better approach is to look at each of these elements separately and encourage the right ones to be located in the U.S. Given President-elect Obama's interest in promoting science and technology, this could be a good reason to argue R&D and design remain in the US, without penalizing these companies for moving other elements outside if the decision makes sense given other factors such as cost and sustainability. Government appears to be moving aggressively on this already with the extension of the important R&D tax credit written into the $700B rescue package.
For IT investments, companies should take advantage of supply chain applications to optimize their networks and make them as efficient as possible. Other investments in global trade management, governance/risk/compliance, product lifecycle management and collaborative applications to support the complexity of extended organizations and encourage faster, more efficient innovation will also be important.

As we observed previously, the incoming president's view on free trade is evolving. Following aggressive criticisms of NAFTA during the Democratic primary where he took a strong protectionist tone, his rhetoric changed during the general election process to be one of 'opening' a dialogue with Canada and Mexico to push for the inclusion of enforceable labor and environmental standards in the agreement. More recently, President-elect Obama has described himself as a free-trade proponent who wants to be a tougher trade bargainer on behalf of the U.S.

Given the rhetoric shift, it does seem less likely that President-elect Obama would seek to renegotiate NAFTA in any substantial way - despite the backing of organized labor. It is Manufacturing Insights' opinion that manufacturers' difficulty in securing price increases forces them to be as globally efficient as possible - outsourcing/off-shoring jobs in the service of maintaining low consumer prices. Indeed, the current U.S. recession will increase cost pressures in the short to medium term, probably leading to an increase in off-shoring - particularly service related functions where transportation costs are minimal or non-existent.

Much of the presidential campaign season was focused around the call-to-action of energy independence. Clearly the future of global energy sources will be a big part of the 'currency of the future'. Indeed, part of the Obama energy plan includes investing $150 billion over the next ten years to build green energy capabilities while creating five million new jobs.

With energy as an input to manufacturers' processes (heating/cooling and operating facilities), and products (as feedstock or raw materials), manufacturers need to make it clear that a government-driven transition to renewable energy sources and restricting gas and oil consumption for domestic production will potentially change the supply/demand equation and raise the cost of energy in the short term. Manufacturers need incentives to change to renewable energy with a transition period that allows U.S. manufacturers to remain cost competitive.

There are many opportunities through new IT investments--in the short term driving as much efficiency as possible through governance/risk/compliance, manufacturing execution systems and product lifecycle management applications.

While we do expect the incoming administration to take a more proactive environmental stance than their predecessors, it is naïve to assume that the economy won't initially take front-and-center in the priority list. Still, manufacturers are going to work as quickly as possible to be a step ahead of regulations so the cost of compliance doesn't become unmanageable. They can do this by working with the new government to help them understand what change is possible in specific time frames and what incentives they need to help recover the necessary costs of those changes. Already, the President-elect has proposed that part of the $700 billion rescue package be allocated to the ailing U.S. auto industry in the form of loans to finance retooling to manufacture more energy-efficient vehicles (given the plummeting sales of gas-guzzling SUVs). This is consistent with the energy plan goal to have 1 million plug-in hybrid cars on U.S. roads by 2015.

On the IT side, there's the obvious connection to Environmental Health & Safety applications, but also new applications that help with tracking greenhouse gas emissions and collaborative tools that lead to better decision making across the organization. We also expect companies to look to manufacturing execution systems to make sure they have the foundational data necessary.

Domestically and internationally, the view of Barack Obama's election victory is quite positive. The general view--rightly or wrongly--is that the incoming administration will take a less protectionist theme (thus being more friendly to international manufacturing), be more nurturing of international opinion/input, and be a better friend to the environment than the current regime. What this means in terms of new regulation remains to be seen, although it seems likely that things will get more complicated, not less. The wild-card, of course, remains the economy, and all these other issues will take a back-seat to repairing both the credit markets and consumer confidence. To continue this conversation, please feel free to contact Simon Ellis, practice director, Supply Chain at sellis@manufacturing-insights.com.
Manufacturing Insights