Five Major Post-recessionary Economic Realities

Guest Blogger: John Manzella

John Manzella is the author of “Grasping Globalization,” a frequent speaker on global business and policy, China, and today’s new economic and political realities and the president of Buffalo-based Manzella Trade Communications, a strategic communications and public affairs firm with expertise in global and economic-based issues. This article was recently published as an editorial in the Buffalo News.

Rough Road Ahead

Companies Must Face Economic Realities, Adopt New Business Strategies

Five major post-recessionary economic realities are impacting America and Western New York. Unless our companies adapt, succeeding in the years ahead will be extremely difficult.

No. 1: Declining U.S. Consumption

Known as the “new normal,” the current and upcoming period is distinguished by less consumption and greater personal savings. Although beneficial, companies will undergo difficult transitions.

A drop in consumer spending, which generates the vast majority of American Gross Domestic Product, will negatively impact already declining growth rates, which fell from an annual average of 3.2 percent in the 1990s to 1.8 percent over last decade. In turn, the American retail sector is anticipated to shrink, forcing U.S. manufacturers to increasingly seek faster-growing foreign markets.

According to The Wall Street Journal, of the 30 companies that comprise the Dow Jones Industrial Average, the 10 with the largest share of international sales are expected to boost revenues by an average of 8.3 percent next year; the 10 with the least are anticipated to grow just 1.6 percent.

Corporate global expansion, especially in emerging markets—which are predicted to grow three times faster than developed ones in 2011—will be even more important in the future. On average, exporting firms employ almost twice as many workers, produce twice as much output, pay workers more, provide health insurance and pensions, and have higher productivity levels than non-exporting firms, says Howard Rosen of the Peterson Institute for International Economics, a Washington, D.C. think tank.

No. 2: A More Difficult China

For years, Ford Motor Company’s slogan was “quality is job one.” If China had a slogan, it would be “stability is job one.” The focus on social order, which will continue to trump other policy concerns, is reflected in the Chinese leadership’s level of control and intense focus on job creation.

But even though instability is feared, China has developed a new post-recession confidence for a variety of reasons. First, due to the global economic crisis that began in the United States, the credibility of the Margaret Thatcher-Ronald Reagan model of free market capitalism is questioned. In turn, many Chinese now view their economic model as superior.

Second, rising Chinese and falling U.S. domestic consumption means China may rely less on U.S. markets. Today, the American share of world consumption is 27 percent; China’s is 9 percent. By 2020, both countries’ share is projected to merge to 21 percent, according to Credit Suisse, a leading financial services company.

Third, China has become the largest holder of U.S. treasury securities, a position of enormous influence. Fourth, China recently surpassed Japan to become the world’s second largest market. And fifth, China is quickly advancing up the technology chain. It’s now the world’s largest manufacturer of wind turbines and is becoming a leader in solar panel, and hybrid and all-electric vehicle production.

This confidence is reflected in China’s more assertive focus on its own interests: the development of domestic technologies, the creation of national champions and the protection of certain strategic sectors, says InterChina Consulting, a management consultancy. Plus, it has become more aggressive in its quest to secure limited global energy resources and raw materials to support its soaring growth.

While analysts say the Middle Kingdom is following a typical economic development process, it appears less willing to accommodate the interests of foreign companies and governments, and increasingly is viewed as protectionist. From the Chinese perspective, America is closing its market and has a double standard. For example, stated in Fareed Zakaria’s new book, a Chinese official asks how his country’s support of a Sudanese dictator in exchange for oil is different than America’s support of a “medieval monarchy” in Saudi Arabia for its oil.

Looking ahead, the U.S.-Chinese relationship appears unpredictable, especially since the character of China’s anticipated next leader, Xi Jinping, who is to take office in 2012, is unknown. Nevertheless, in the long term, both economic superpowers recognize the tremendous downside of a cold war and likely will cooperate well into the future.

In the short term, however, tensions probably will rise over several issues, especially China’s undervalued currency, the U.S. trade deficit and intellectual property. In turn, doing business there likely will become increasingly difficult. As a result, U.S. corporations should ensure that their global expansion plans are diversified.

No. 3: Soaring Competition

As the deepest recession since the Great Depression recedes, firms are preparing for an ultra-competitive global business environment comprised of leaner companies. What are their strategies? Many companies are pursuing mergers and acquisitions, and large manufacturers are increasing their dependence on suppliers of components to streamline their operations to increase productivity. Why? As competition rises, manufacturers are forced to specialize to a greater extent in order to retain leadership in their core competencies. To achieve this, they are increasingly focusing on their strengths and outsourcing non-core functions.

This trend benefits smaller manufacturers by encouraging them to acquire new production functions and further integrate themselves into global supply chains. Plus, to boost competitiveness, many are becoming more entrepreneurial and offering customers value that low-cost country suppliers can’t match. This includes “proprietary high-technology products, a willingness to customize, extraordinary service and parts support, flexible production runs and fast turnaround times,” says the National Association of Manufacturers.

Additionally, smaller manufacturers should seek partners in research and development, manufacturing, and packaging, as well as concentrate on product design, quality, branding strategies, and a customer-centric commitment to build loyalty.

No. 4: Skill Shortages

Prior to the recession, the U.S. experienced a skill shortage at several levels. In fact, according to a 2007 survey by Manpower Inc., a leader in the employment services industry, 41 percent of U.S. companies had difficulty filling positions. This mirrored the global average.

But because the U.S. unemployment rate may remain exceptionally high for years and not return to the historically low rate of about 6 percent, the coming skills deficit is overlooked. However, once greater growth resumes, a skilled labor shortage will surface for several reasons.

The Bureau of Labor Statistics predicts labor force growth to slow significantly due to babyboomers retiring and participation rates of women declining. Jacob Kirkegaard, author of The Accelerating Decline in America’s High Skilled Workforce, says for three decades U.S. workforce skills have stagnated. He predicts a “broad and substantial skill shortages” this decade. This presents an enormous problem for U.S. firms, especially since a skill cycle that once ran for three years now lasts less than one year.

To a large degree, the future success of American businesses will depend on their ability to hire and retain talented employees who can quickly deepen their knowledge base and implement increasingly sophisticated technologies. To achieve this, employers will need to create more attractive working conditions, invest more in employee training programs, and work with local universities and community colleges to ensure graduates have the right skills.

No. 5: Rising Global Protectionism

For U.S. companies to successfully expand internationally, it’s essential that policymakers both here and abroad don’t craft protectionist policies. Unfortunately, protectionism is on the rise and is increasingly threatening the global economy, says Lawrence Summers, Director of the White House National Economic Council.

This post-recession trend, however, has not kept America’s competitors from forging new free trade agreements, which number over 300 without U.S. participation. This is putting the U.S., with only 11, at a competitive disadvantage.

In the absence of establishing more job-creating trade agreements, U.S. companies are wise to deepen economic integration with Canada and Mexico, our largest foreign buyers. This will promote the spread of technology and further boost investment, innovation, productivity and competitiveness while creating more good-paying jobs here.

Long gone are the days when finished products were shipped across our shared borders destined for each other’s retail shelves. Today, it’s not uncommon for all three countries to jointly produce products for overseas buyers. Hence, the U.S., Canada and Mexico don’t just make goods for each other, together they make goods for the world.

But the speed and efficiency at which North American supply chains operate—a critical factor impacting costs—are being challenged by a degrading U.S. transportation infrastructure that doesn’t only involve international bridges, like Buffalo’s Peace Bridge. A partial solution is to focus on rail, which is considerably more fuel efficient and greener than trucks.

Once normal global growth resumes, the demand for energy resources, especially in emerging markets, will skyrocket along with fuel prices and boost demand for rail. With this understanding, last year Warren Buffet’s company, which owns The Buffalo News, bought Burlington Northern Santa Fe railroad. China, a country investing heavily in rail, also understands this.