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Transportation Infrastructure & Trade: A Tale of Two Cities and Two Countries

By Elmore Alexander | 11/14/2016 | 6:25 PM | Categories: Current Affairs

I just returned from a week-long trip to Germany, where I was working with a German university on a partnership in global logistics—one that would link Bridgewater State University with universities in Germany, England, Malaysia, and Vietnam. Seeing the culmination of the U.S. presidential election from Europe was amazing. But that’s not where I want to go with this blog. Two of the highlighted issues of this presidential campaign were U.S. infrastructure (specifically, roads and bridges) and the impact of international trade on the loss of jobs. On both of these issues, the contrast that I saw between Germany and the U.S. was dramatic.

Infrastructure

Over 70 years ago, General Eisenhower experienced the German Autobahns first hand; and as president, he began the process of building our system of interstate highways. If you’re old enough to remember cross-country travel in the 1950’s or earlier, you remember travel that was slow and inefficient. Today’s highway system is quite different. The logistical marvels that we have experienced in the last 50 years clearly result, in large part, from our investment in our interstate highways and the trucking systems that they spawned. Unfortunately, underfunding and the resulting deterioration of our highway system jeopardize our future. 

The contrast to Germany is as stark today as it was in 1944.  German roads (whether between cities or around city neighborhoods) are marvels of quality and efficiency.  I cannot remember the last pot hole that I experienced on a German road.  Asphalt is pristine and smooth.  Traffic bottlenecks seem much less onerous than they do here.   Eisenhower would be shocked that today’s comparison of US and German roads harkens to the contrast that he observed during World War II.

If American roads are going to be great again, we simply have to make the kinds of investment that the Germans have been making for almost 100 years. If not, our logistical systems will simply fall apart. The good news is that President-Elect Trump talked about this issue throughout the election. Maintaining U.S. international competitivity in the upcoming decade will necessitate substantial investments in the repair of our roads and bridges. 

International Trade

I’m from a textile and furniture town in North Carolina (High Point). The town I was visiting in Germany (Reutlingen) shares very similar roots. Prior to World War II, Reutlingen was also a textile town. Today, High Point and Reutlingen are approximately the same size (100,000 inhabitants); but the similarities end quickly. 

Reutlingen saw the post-war future of manufacturing shifting to high technology and away from low-wage textiles. As textile production left Germany searching for low-wage opportunities in the American South and then Asia, Reutlingen retooled physical facilities and its workforce for high-wage, high-technology production. Today, the focus is on advanced-technology manufacturing, biotech, and medical and environmental technology. Reutlingen boasts a Bosch plant producing automotive electronics for Mercedes and other high-end automobile manufacturers. Reutlingen is reputed to be the wealthiest city in Germany.  It has a large vibrant downtown that is free of automobiles. The city becomes greener every time I visit.

The High Point economy is quite a contrast.  Only one manufacturer remains within the top 10 employers in the city—a school bus manufacturer.   Furniture manufacturing and textiles are pretty much gone.  The company that I worked for one summer during high school, Myrtle Desk, went out of business and the abandoned plant where I worked burned down a few years ago.  Downtown has been taken over by the furniture market; and with the exception of “Market Time,” the sidewalks are pretty empty.  The city has tried to build two malls in my lifetime—neither succeeded.  One has been converted into a church and office complex and connects to the retirement apartments where my mother lives.  The other is a shadow of what it was when it was built just 20 years ago and is gradually being turned into classroom space for the local university.  High Point is wealthy but far from the level of Reutlingen.  High Point, like many other US cities,responded slowly to changes in the world economy.   They emphasized low-wage/low-tech textiles and furniture manufacturing long after it was clear that such manufacturing was going elsewhere.  High Point would say that it has been victimized by free trade.  I’d disagree.

The contrasts that I saw on my trip were stark. Germany invests heavily in its roads and bridges. They may be the best in the world. Furthermore, Germany invests much more than we do in worker retraining and industrial policy, leaving it much less dependent on industries that are vulnerable to competition from low-wage countries. These are critical factors for the logistics industry. Our logistics system will not continue to operate effectively with crumbling roads and bridges. Likewise, we need to identify strategies that will expand high-value manufacturing giving us products that will compete both at home and abroad. 

NAFTA and Logistics

By Elmore Alexander | 10/21/2016 | 6:43 AM | Categories: Current Affairs, Weblogs

Interestingly, the NAFTA debate of the current election cycle has focused primarily on US–Mexico trade generally ignoring the US–Canadian relationship.  Sometimes we forget how significant this latter relationship is[i]:

  1. The largest bilateral trading relationship in the world—approaching three-quarters of a trillion dollars and supporting almost 2 million jobs;
  2. The longest international border in the world—crossed by 400,000 people each day;
  3. The largest integrated electrical power system in the world—and, lest we forget, Canada is the largest supplier of foreign oil to the US; and finally,
  4. The largest system of Foreign Direct Investment in the world with the US being the largest source of FDI in Canada and Canada being the 3rd largest source of FDI in the US.

There can be no question that the United States and Canada are uniquely joined.  Even pre-Brexit, our interdependencies were much more significant than those of the European Union—we share a common language and a common level of economic development and it has now been over two centuries since we raised arms against each other.  

NAFTA created a $19 trillion dollar common market of 470 million customers.  Importantly, it was the first trade agreement that combined developed nations (the US and Canada) with a developing one (Mexico).[ii]  This is a remarkable achievement and represents an element that is critical to the future resiliency of the partnership. 

Despite Ross Perot’s warning of a “gigantic sucking sound” and Donald Trump’s recent declaration that NAFTA is a total failure, most economists argue that the agreement has had a net positive impact on all three countries.[iii]  Unfortunately, the effects have been uneven; and the post-election period will probably focus on worker adjustment programs to ease transitions from old into new jobs or to financially compensate displaced workers.  I do not, however, see a renegotiation of NAFTA on the horizon.  As a matter of fact, I think that a post-election Congress is more likely to support TPP albeit in a form that provides more worker retraining and displaced worker provisions.

The reason I expect this outcome relates to one of the most important, but frequently ignored, statistics surrounding the NAFTA relationships.  Today, approximately 40 percent of the average US import from Mexico is attributable to US value-add.  The comparable statistic for Canadian imports is approximately 25 percent.[iv]  The success story of NAFTA is not free trade but integrated economies.  For example, consider the construction of a Bombardier Learjet.  With the exception of Irish wings, the Learjet 85 is a North American product—fuselage constructed in Mexico and engines built in Canada but designed by Pratt & Whitney in the US. Automobiles are similarly North American with the parts and labor of the majority of cars spread across the US, Canada and Mexico.  When Ford recently decided to shift production of compact cars to a plant in Mexico, it retooled the plant to produce high end trucks and SUV’s at no loss of US jobs.  Actually, auto-making jobs in the US have grown by 200,000 since the end of the Great Recession.

Importantly, since the NAFTA partnership is not homogeneous, it creates opportunities for Canada and the US to utilize lower wage rates in Mexico strategically (as in the case of low margin compact cars) to compete with products from low wage Asian nations.   The development of cluster industries exploiting our heterogeneous North American comparative advantages is likely to grow in future years.  In particular, both demographics (a young Mexican workforce) and energy (huge US and Canadian reserves of low cost natural gas and clean Canadian hydroelectric power) as important hedges against Asian Tigers.  

The unevenness of the impact of trade agreements, however, is real.  Trade boosts overall GDP while redistributing the portions to capital and highly educated workers at the expense of low skilled workers.  Thus, the trade discussion needs to move forward considering funding for increased worker training and displaced worker compensation as a condition for lowered trade barriers. Economist Jeffrey Sacks goes so far as to argue that companies benefiting from free trade should be taxed to provide the funds to compensate displaced workers. 

This strategy should be very familiar to people within the logistics industry. Mark Levinson's landmark book, The Box, provides a great description of our experience with the introduction of standardized shipping containers.  To allow the introduction of standardized containers over the objections of longshoremen in the 1960’s, shipping companies agreed to share the efficiency gains through guaranteed but unnecessary jobs.  Surprisingly (or not), the efficiency gains were so great that the introduction of the new technology resulted in labor shortages not surpluses in the very first year of the agreement.

The world economy is not perfect, but it is hard to make a rational case for isolationism.  I, for one, think that rational analysis will lead us back to a discussion of how to make trade work to the betterment of our economies in the upcoming months.  For logistics, this means an increasingly important role in making the transportation system an increasingly efficient part of the world economy.

 

[i] https://www.whitehouse.gov/the-press-office/2016/03/10/fact-sheet-united-states-%E2%80%93-canada-relationship

[ii] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

[iii] http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/

[iv] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

Is Our Transportation System Magnificent, Mysterious or Just Maddening?

By Elmore Alexander | 09/19/2016 | 1:05 PM | Categories: Books

If you followed my recommendation to check out Parag Khanna's new book Connetography, and were frustrated to find it to be a dense, academic read, you will be pleased with my latest recommendation, Door to Door.  The author, Edward Humes, is definitely more geared to popular writing having written 14 books, earned a Pulitzer Prize and being a regular writer for the Wall Street Journal, Forbes and the New York Times.  In Door to Door, Humes tackles the same issue as did Khanna--how important are logistics and supply chains to the economy and our life styles?  His answer is both entertaining and frightening.  He begins by describing the congestion of the Los Angeles highway system and follows with a detailed description of the transportation footprint (how many miles of transportation are involved in a product’s production process) of a ubiquitous product--the soda can.  Quickly, he convinces us that our lives depend on as well as are being destroyed by the transportation required for even the simplest products in our market baskets. 

Humes has four basic themes within his book:

  1. Our everyday products have gigantic transportation footprints;
  2. As a result, every part of our transportation system is terribly congested;
  3. Increasingly sophisticated application of information technology is our only path around this congestion; and
  4. Failure to make significant investments in our transportation infrastructure could be perilous.

He does not, however, see our prospects as hopeless. He describes five trends that have the potential to change the calculus of the transportation dynamic:

  1. The transformation of China into a modern economy raising their wage structure and making increased foreign investment in Chinese manufacturing less attractive;
  2. The re-shoring to the U.S. of off-shored manufacturing;
  3. The development of 3-D printing manufacturing potentially allowing products to be made even as they are being delivered;
  4. The expansion of sharing/crowd-sourced traffic apps and ride sharing (Uber, for example); and
  5. Driverless cars, trucks and airplanes.

The net effect of these changes will be to reduce the amount of driving on American roads and to increase the degree to which products are manufactured here in the United States as opposed to abroad.  Actually, per capita driving peaked in 2005; and only our recent experience in cheap gasoline has caused the annual rates to increase in the last two years.   Clearly, the change is even more dramatic for Millennials—driving by 16 to 34 year-olds has dropped by almost 25 percent in the last decade!  The growth of Uber and similar “sharing economy” companies is likely to change traditional travel patterns even further.   And driverless vehicles could be a reality as early as 2020.

Just as Khanna provided a comprehensive picture of the supply-chains from a global perspective, Humes provides an understandable and entertaining picture of what these supply-chains mean for you and me in our everyday lives--dare I say "where the rubber meets the road"?  If you're interested in a frightening and informative read, Door to Door is a book you shouldn't miss.

Shanghai Pilot Free Trade Zone: A Look into the Future or a Snapshot of the Past

By Elmore Alexander | 08/28/2016 | 8:29 AM

Any visit to China is striking. The size of everything is overwhelming.  The contrast of old and new is striking.  If you’re revisiting, the obvious growth is a shock.  If, as was the case for me, the time span between visits is over 10 years, the change can be almost impossible to fathom.  

In the interim between my visits, China created the Shanghai Pilot Free Trade Zone. This 11 square mile industrial/international trade park located outside of the city and adjacent to the airport opened in 2013 to experiment in financial and foreign investment changes designed to make the Chinese economy more open and accommodating.   It is impressive.  From the ornate entryway reminiscent of gateways into Chinese communities to massive warehouses for imports and exports to high rise headquarters for multinationals and Chinese administrative offices, this is obviously a new and different China.  My group saw everything from a wine importer with a cellar to rival almost any in the world to a retail store that was a mini Wal-Mart.  The names on the outside of buildings were a virtual "who’s who" of multinationals. 

The most interesting part of the Zone to me, however, was a visit to the trade administration building. This is the comprehensive service center for the Zone—the place where you go to fill out all of the paper work that lets you conduct business.  The building is the tallest in the Zone, and it was hopping with activity.  Imagine a Department of Motor Vehicles office in any U.S. state and you’ll get the picture.  But this is China—we’re talking about the DMV on steroids.   We were only allowed to enter in groups of five, and what we saw were lines after lines of individuals.  The individuals not standing in lines were sitting waiting to stand in lines.  And, of course, our guide pointed out the line that you stood in to find out which of the other lines you needed to stand in.  Our guide talked exclusively about rules, regulations and bureaucracy while assuring us that the strategy was to make doing business easy and convenient.  I had my doubts.

My research upon returning home confirmed my observations—“all that glitters is not gold” in the Shanghai Free Trade Zone. Let me direct you to three articles that I found informative.

None of this should be surprising. Even getting goods across the US-Canadian border can be complicated and unreasonably slow. And everything about the Free-Trade Zone is not negative--moving clearances from weeks to days is significant.  It does emphasize, however, that there are no easy solutions to any problems. Infrastructure enhancements like the Shanghai Free-Trade Zone are important steps to more open trade.  Cultural impediments cannot be ignored.  Truly free trade will come at the end of long negotiations and even longer experience with trade relationships. 

U.S. Productivity: Is there a Crisis?

By Elmore Alexander | 08/09/2016 | 3:43 PM

In a recent blog (“Chinese Manufacturing Productivity”), I wrote about the problems of Chinese productivity, noting that, while growth rates were high, the absolute level of productivity was between 15-30% of OECD averages. This week, we were disappointed, but not surprised, to learn that US output per hour worked fell 0.5% in the second quarter to end up down 0.4% over the last year.[1] Most writers point to the beginning of the Great Recession as the proximate cause of this decline.  However, productivity actually began to fall before 2008.[2]

I recalled that, back in the early 2000’s, I invited one of the regional Federal Reserve Bank presidents to speak to MBA students at my university. He proposed that productivity increases spurred by the revolution in information technology had reset the classic relationship between unemployment and inflation. He predicted continuing growth in both productivity and GDP and declines in unemployment without any impact on inflation.  But the promise of information technology and unlimited productivity growth faded.   And then came 2008! 

So where are we?  Have we found the 21st Century equivalent of “stagflation” (low growth coupled with high inflation of the late 70’s) in a new equilibrium of anemic growth despite low interest rates? Not necessarily.

The driver that led to what Alan Greenspan and Robert Shiller characterized as “irrational exuberance”[3] was the impact of information technology on the economy. Information technology drove productivity and productivity drove growth. However, despite the expectations of my Fed prognosticator, this cycle came to an end. When you add in the impact of the Great Recession, you get the slow growth recovery that we’re now experiencing. A recent article by Neil Irwin, [4] one of The Upshot writers at the New York Times, posits three theories for our current situation:

  1. The Depressing Scenario—technology has done what it can and productivity will not improve;
  2. The Neutral Scenario—the economy is so dramatically changed that our measures just can’t keep up;
  3. The Happy Scenario—we’re in a stage of investment in new technologies that will take several years to kick in but will ultimately yield dramatic productivity increases.

Personally, I subscribe to the Happy Scenario. A recent Brookings Report[5] detailed some of the drivers of such a perspective:

  • New technologies in energy
  • Industrial robotics
  • 3D printing and active manufacturing
  • Big Data
  • The “internet of things”
  • Investment in infrastructure

Each of these drivers has significant implications for the logistics industry. While research on driverless vehicles and Big Data may be consuming huge investments today with minimal returns, no one doubts their ultimate impact.  Furthermore, the presidential candidates of both political parties have championed investment in rebuilding our network of highways and bridges. The impact of even a modest increase in such spending will have a dramatic impact on GDP and productivity and, particularly, on logistics productivity. 

Is this a time to be complacent? No. Do we want to chauvinistically ignore Chinese productivity growth?  No.  As I argued in my last blog, it’s time to “double down” on innovation and technology not to abandon them.

 

[1] Associated Press: http://nyti.ms/2b3hFED

[2] Nick Bunker: http://equitablegrowth.org/equibableblog/did-the-great-recession-reduce-u-s-productivity-growth/

[3] https://www.amazon.com/Irrational-Exuberance-3rd-Robert-Shiller/dp/0691166269/ref=sr_1_1?s=books&ie=UTF8&qid=1470767557&sr=1-1&keywords=irrational+exuberance

[4] http://NYT.ms/1TgrJVD

[5]https://www.brookings.edu/~/media/research/files/papers/2013/3/us%20productivity%20growth%20baily%20manyika/us%20productivity%20growth%20baily%20manyika.pdf

Chinese Manufacturning Productivity

By Elmore Alexander | 07/20/2016 | 11:17 AM

I recently made a two-week trip to China visiting a variety of businesses and universities. This was my fourth trip to China but my first to the mainland in about 15 years. To say the least, the contrast was dramatic.  Even in Shanghai, which appeared to be on steroids when I last visited, had exploded in the interim—gigantic skyscrapers had sprouted from open fields and the infrastructure of elevated highways had become ubiquitous. It was clear that the amazement and praise that we hear about the Chinese economy is well deserved. I was excited to find opportunities to build partnerships that will send our logistics/supply chain students and faculty members to study at a university in Beijing and bring students from China to Massachusetts to study alongside our students and with our faculty members.

My observations, however, were not completely positive. We visited a Hyundai plant outside of Beijing.  It was a marvel of automation and production.  Thousands of cars rolled off a precise and pristine assembly line while we visited.  This was not my first visit to an auto assembly plant.  I’ve visited plants in Japan, Germany, the Czech Republic and India as well as the Ford plant in Dearborn.  All of these plants were every bit as automated and impressive as was this plant.  And to paraphrase Henry Ford, you could have had any color Hyundai that you wanted as long as it was white.  Actually, the notable difference was in the number of workers on the assembly line—the difference was huge.  Activities that I have seen two or three workers performing in Dearborn or Eastern Europe were being performed by six or seven workers in Beijing.   “Just in time” delivery of parts was clearly the driving force for production, but “lean manufacturing” did not appear to be present.

I quickly headed to the library on my return. I confirmed my questions about Chinese productivity.  An excellent summary of what I discovered is in Schumpeter’s article in the June 25th Economist: (www.economist.com/news/business/21701151-china-inc-needs-better-management-become-more-productive-sleepy-giant)   Schumpeter confirms the suspicions from my observations:

  • Half of China’s 20 largest industries operate at a loss;
  • Chinese productivity is growing but gross productivity is just 15-30% of OECD averages; and
  • Six Sigma and Lean Manufacturing do not dominate Chinese management.

It’s not that different, in some respects, from what I saw 10 years ago in apparel production—quality control was happening at Long Beach because the Chinese manufacturers did not have middle managers with sufficient skills in quality control to execute the processes at the plants. Dramatic improvements in the sophistication of manufacturing have been made, but it is clear that Chinese manufacturing still has a long way to go.

Thus, the recent Chinese “slowdown” should not be surprising. And as Schumpeter suggests, a more important focus for Chinese “corporate chiefs” might be concentrating “on the nuts and bolts of management” as opposed to shifting to “innovation and technology.”  On the other hand, how powerful will Chinese companies be when they get around to Six Sigma and Lean Manufacturing? I suspect this emphasizes the need for Western “corporate chiefs” to concentrate even more on “innovation and technology.”

 

Perspectives on Foreign Trade and China

By Elmore Alexander | 07/14/2016 | 8:52 AM

The conflict between global business and the general public is raging.   The establishment political parties in the United States have been challenged on the Left by a presidential candidate who says that there has never been a single trade agreement that he’s been comfortable with and on the Right by a candidate who doesn’t think that it would be a big deal if a global trade war erupted.  The success of the Brexit vote is a frightening illustration of the breadth and depth of the anger in the public.   The idea of bringing jobs back from Asia (today from China, tomorrow from Vietnam, and yesterday from Japan) sounds very appealing to a factory worker in Ohio or Michigan.  It does not, however, recognize the interwoven nature of global business.  Over the past 50 years, we have become a global economy—the evolution of transportation and communication initiated the change and the development of global supply chains has cemented global interdependence in our DNA.

There is no better source for understanding where we are and where we are going than Parag Khanna’s new book Connectography (https://www.amazon.com/Connectography-Mapping-Future-Global-Civilization/dp/0812988558/ref=sr_1_1?ie=UTF8&qid=1467288779&sr=8-1&keywords=connectography).   Khanna holds a Ph.D. from the London School of Economics and is a CNN Global Contributor.  Formerly, he was a fellow at the Brookings Institution and senior geopolitical advisor to U.S. Special Operations Forces in Iraq and Afghanistan.  He brings a unique geographical and supply chain perspective to an understanding of globalization. 

Khanna’s basic argument is that supply chains, not political boundaries, define how the world economy works.  He argues:

  • that connectivity has replaced division (infrastructure connections are more important than political boundaries),
  • that devolution and aggregation are the most significant dynamics of the world economy (shifting economic activity to regions of countries and the world where they never were before and creating alliances that no one would have imagined even 5 years ago), and
  • that the current “war of the world” is over connectivity not territory.

He uses his perspective as a geographer to overlay maps of the world with various sorts of supply chain data to illustrate how dramatically the functioning of the world economy is becoming less and less defined by political boundaries.

I was reading this book during a recent trip to China where I visited the traditional cities of Shanghai and Beijing as well as Wenzhou, one of the smaller Chinese cities (only 12 million inhabitants).  Wenzhou has experienced a “super nova” existence going from the bright light of entrepreneurial expansion to near collapse from corruption and inability to sustain growth (http://www.economist.com/news/china/21700451-city-renowned-its-business-acumen-battles-recover-financial-crisis-it-once-was-lost).   Nevertheless, it has developed a focus and a footing in several growth industries including the development of general aviation in China.  This is exemplary of the economic liberalization that Khanna describes in China where power and money are shifting away from the centralized government in Beijing to a federation of mega-cities with surprising authority to define their own futures.  And the tax structure in China now gives these mayors the money to move forward with such initiatives in at least a somewhat autonomous fashion.  While it would be foolish to assume that the Chinese Party has been replaced by entrepreneurial mayors, China is no longer a monolith that be understood through a single lens aimed at Beijing or Shanghai.

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Elmore Alexander

Elmore Alexander

Elmore Alexander is Dean and Professor of Management in the Louis Ricciardi College of Business at Bridgewater State University in Bridgewater, Massachusetts. Prior to joining Bridgewater State, he served as Dean and Professor in the School of Management at Marist College. Previously, Dr. Alexander was Dean of the School of Business Administration at Philadelphia University, Director of the Division of Business and Management at Johns Hopkins University, Associate Dean and Chair of the Management Department within the Kogod School of Business at American University in Washington, D.C. and Professor of Management and Director of the Fogelman Executive Center at the University of Memphis.



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