Manufacturing returning to USA! What is the proper ASEAN response?

20110712-stockpickIt is an old story, but it is also a new story.

About a year ago, a Thai anto parts firm, invested in acquiring a run-down and going out of business, USA auto parts firm. The Thai company, Thai Summit Auto, said the USA automobile manufacturing capability was returning, and Thai Summit wanted to be a part of that recovery.

  • Few believed what Thai Summit said about the USA auto industry! But the latest, is that Thai Summit Auto just donated money to build the city, where its USA factory sits, a performance arts center.

Is East Asia losing its competitiveness advantage back to the USA? Perhaps, as more and more USA firms move back to start manufacturing in the USA. The competitiveness of American factories is being helped by rising labor costs in East Asia, though wages there are still much lower than in the United States and falling energy costs, says Washington Post Tech. But meanwhile, the latest is that Google, throught its Motorola subsidiary, is to make its mobile phone in the USA.

  • Washington Post Tech says:

Motorola Mobility, once a pioneer in shifting manufacturing to China, is opening a smartphone factory in Texas, the company said Wednesday, joining a small but growing movement toward bringing technology jobs to the United States. The decision follows announcements by major tech firms, including Apple and Lenovo , planning to add U.S. manufacturing capacity after more than a decade in which the flow was almost exclusively in the other direction — with millions of jobs going to East Asian factories known for low wages and minimal labor protections.Tim Cook offered his thoughts on wearables, and a hint about what his company may bring to the market. The shifts to the United States are fledgling, and some industry experts say the companies are motivated less by long-term manufacturing needs than by public relations strategy. At a time of rising governmental scrutiny of technology companies, analysts say, there are few better ways to acquire allies on Capitol Hill than to create manufacturing jobs in lawmakers’ home districts. But Motorola Mobility officials said they see significant business logic to having a factory close to the engineers who are designing a new flagship smartphone and the customers they hope will buy it. Officials say it aids innovation while allowing for leaner inventories and lower shipping costs. “Doing that work of actually assembling the phone close to home will allow us to fix things faster, innovate faster,” said Dennis Woodside, chief executive of Motorola Mobility, a division that was bought by Google last year for $12.5 billion. East Asia remains home to most suppliers of electronics components, a long-term advantage that will make it difficult for a large percentage of high-tech manufacturing jobs to move to the United States, some analysts say. Previous pushes to attract more factory jobs have largely fizzled in the face of competition from East Asia and Latin America. “This is Groundhog Day, big time,” said Timothy Sturgeon, an MIT researcher on globalization. “On the other hand, this doesn’t mean that this isn’t significant news.” The United States lost 5.5 million manufacturing jobs, about one third of the nation’s industrial workforce, between 2000 and 2009, said the Alliance for American Manufacturing, an advocacy group founded jointly by industry and the United Steelworkers union. The outward flow of jobs has stabilized in recent years, with the numbers of factories opening and closing roughly equal (Source).

  • In sum, USA competitiveness, a total picture against the global picture, is marching back. Earlier, Time Magazine, also had an article, about how manufacturing is returning to the USA, not just tech.

How can and should  ASEAN respond? Clearly, there is a need to focus on competitiveness, to keep attracting investments.

The following is from ADB Research

  • Enhancing Productivity Growth and Competitiveness in ASEAN

Raising productivity through capital deepening and improving the quality of workers is one of the important potential policy levers to achieve faster and sustainable economic growth. This paper advocates adopting the model of the East Asian countries, deepening capital through technology transfer, and improving the quality of the labor force by promoting learning to boost both growth rates and living standards in the ASEAN region.

From table 2 shows average annual labor productivity growth by industry for the ASEAN countries. Columns 1 and 2 show labor productivity growth in the agricultural sector, columns 3 and 4 show labor productivity growth in the manufacturing sector, and columns 5 and 6 show labor productivity growth in the service sector. The data indicate that relative to labor productivity in agriculture and manufacturing, labor productivity in the service sector has increased slowly among the ASEAN countries. Thus, increasing service sector productivity should be an important priority for these countries. ASEAN countries have achieved little change in their labor productivity as they continue to make labor-intensive goods. We argue that it is important that they graduate to higher-skilled work to get more value-added.

We can gain specific information about how to make ASEAN countries more attractive to foreign and domestic investors from the surveys conducted by the World Economic Forum (WEF). WEF surveyed 13,000 business executives from 133 countries between January and May 2009 to obtain their expert opinions on a wide range of aspects of the business environment in which they operate. The qualitative data gathered provided insights into microeconomic and macroeconomic aspects of national competitiveness. These data, along with hard data and survey indicators from other reputable data sources, were then utilized to construct the Global Competitiveness Index from which WEF has based its competitiveness analysis (WEF 2009).

WEF defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country”, which sets a country’s “sustainable level of prosperity” (WEF [2009: 4]). Below we summarize the main obstacles that each ASEAN-5 country faces in achieving greater global competitiveness.

Of the 133 countries, Indonesia ranks 54th. The country lags behind in terms education and training, with low secondary and tertiary enrollment (ranked 93rd and 90th respectively) and very low primary education expenditure (ranked 127th). The country also falls short in the area of technological readiness, ranked 103rd for personal computers, 101st for Internet users, and 94th for mobile telephone subscribers. The country’s overall quality of infrastructure–with electricity supply, ports, and roads ranked 96th, 95th, and 94th, respectively–require upgrading. The banking system, ranked 96th, also needs to be improved. The business environment is impaired by excessive red tape required to start a business (121st), burdensome bureaucratic procedures (99th), high costs associated with exits by workers (119th), and unethical behavior of firms (102nd). Worker health is another concern, with a high incidence of tuberculosis and malaria (ranked 108th and 105th, respectively).

Malaysia, in 24th place, fares well in general. It faces weaknesses in macroeconomic stability with government deficits ranked 110th, threats of terrorism (ranked 97th) and crime and violence (ranked 95th), secondary and tertiary education (with rankings of 98th and 71st, respectively), and worker health (with high prevalence of tuberculosis, malaria, and HIV/AIDS, ranked 89th, 84th and 81st, respectively). Female participation in the labor force is also low, ranking 107th.

The Philippines, in 87th place, ranks the lowest overall among the ASEAN-5 countries. Its low ranking is due to problems with the public institutional environment. These problems include escalating corruption (ranked 130th), favoritism in decisions of government officials (ranked 128th), inefficient legal framework in settling disputes (ranked 123rd), diversion of public funds (ranked 122nd), wasteful government spending (ranked 119th), unethical behavior by firms (ranked 116th), and burdensome government regulations (ranked 113th). In addition, the threat of terrorism (ranked 124th) cripples businesses in the country and deters investment. In the labor market, job creation is hindered by a lack of labor mobility (110th) and costly exit of workers (ranked 109th). Goods market inefficiencies, such as bureaucratic procedures and time required to start a business (120th and 113th, respectively) and burdensome customs procedures (117th), backward technologies (119th), poor health of workers (with tuberculosis incidence ranked 113th), and poor infrastructure (with ports, roads, and telephone lines ranked 112th, 104th, and 102nd, respectively) keep the country from achieving greater global competitiveness.

Thailand, ranked 36th, has higher productivity levels than most of its ASEAN neighbors. Its global competitiveness is weakened by the threat of terrorism (ranked 107th), unreliable police services (ranked 88th), restrictions on capital flows (ranked 87th), and time required to start business (ranked 89th). The country also lags behind in the area of health of labor force with HIV, tuberculosis, and malaria with rankings 107th, 97th and 95th, respectively and labor force inefficiencies such as uncertainty of wage determination (89th) and costly exits of workers (84th). Intellectual property protection and property rights, with rankings 77th and 73rd, respectively) need attention.

Viet Nam, in 75th place, faces obstacles in the areas of macroeconomic stability, financial and goods markets, infrastructure, institutions, and higher education and training. Instability of macroeconomic conditions (with inflation and burgeoning government deficits ranked 126th and 110th, respectively), tariff barriers (126th), weak investor protection (126th), underdeveloped banks (111th), and excessive red tape required to start a business (111th) turn off investors. The country also suffers from poor quality of overall infrastructure (111th), weak auditing and reporting standards (ranked 108th), burdensome government regulation (ranked 106th), and a lack of business sophistication (ranked 105th). The educational system, ranked111th, is also an outlier.

Thus, to facilitate foreign and domestic investment in ASEAN countries, the weaknesses highlighted above need to be addressed. These issues are particularly salient in the lower income ASEAN countries. The Philippines ranks low (105th) in terms of the quality of the country’s public institutions because of misallocations of government spending, dubious dealings between the government and the private sector, and pervasive corruption.17 Viet Nam discourages investors with burdensome government regulations and weak auditing and reporting standards and with low rankings for the transparency of government policy making. Indonesia also faces a deficit in its public institutions. Corruption in these countries needs to be confronted to restore the public trust, strengthen the economy, and attract investors.

The Philippines, Indonesia, and Viet Nam—ranked 93rd , 82nd, 76th respectively in terms of health and primary education and 68th , 69th, 92nd, respectively in terms of higher education and training—need to respond to the demands for a more innovative and flexible workforce (WEF 2009). The goal should be to improve human capital in order to climb the value chain.

Concerning health and primary education, more investments in this area could foster the development of the “creative industries” later. ASEAN countries other than Viet Nam will find it hard to compete with low wage countries such as the PRC. It is thus important to climb the value chain and engage in knowledge-intensive activities. Ensuring that children have adequate nutrition, healthcare, and primary education is essential to developing workers who can flourish in these higher value-added activities.

Concerning higher education, it is desirable to provide a high quality education in science and math at the secondary school level and scientific and engineering training at the university level. Governments and the private sector could invest in schools and research institutions, teacher training, restructuring the curricula for science and technology subjects, and subsidizing research and development. Scholarships for science and engineering students could also be helpful, as the ability of countries in the region to assimilate new technologies depends on the quantity and technical capabilities of local engineers. As local workers become more skilled, firms can proceed from low-skilled activities to the higher value-added aspects of production.

For instance, garment makers in the Philippines could become more involved in the design aspects of production. Similarly, in Indonesia palm oil producers could process palm oil domestically and lumber companies could ship timber to domestic furniture makers instead of to firms abroad. As workers become better educated, they should become better informed about production technologies and consumer tastes. This in turn would allow them to participate in more profitable production activities.

A more educated workforce would also be better informed about conditions in world markets. For instance, seaweed growers in Indonesia were unaware that world prices of seaweed had soared in recent years. So they continued to receive low prices for their products. If workers were more technologically prepared, then they could easily check world prices daily on the internet.

To help finance expenditures on human capital formation, funds that the government currently spends on promoting exports and attracting FDI could be redirected towards education, nutrition, and healthcare (Nambiar 2009). As Park (2009) argued, it is probably desirable for ASEAN countries to eliminate biases that favor exports. In some ASEAN countries export processing zones and subsidies require substantial government expenditures. These funds would be better spent improving health, education, and nutrition.

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