News Flash: Globalization, inclusive of the rise of low cost country (“LCC”) sourcing, is reshaping US manufacturing.
OK, maybe the aforementioned is not a groundbreaking revelation, but it is worthwhile to explore in a little more detail and elucidate the impact of globalization and the proliferation of LCC sourcing on US manufacturing and more specifically on our Fund investment strategy.
U.S. manufacturing employment, one measure of the impact of globalization, peaked at approximately 21 million in 1979 and has experienced precipitous contraction since as detailed in the following chart:
It would seem intuitive to blame the above depicted employment contraction on the loss of global manufacturing market share; however, according to the United Nations Industrial Development Organization, the U.S. share of global manufacturing output has remained roughly constant, approximating 22% from 1995 through 2010 and manufacturing output has actually increased from $2.5 trillion to $3.3 trillion. Undoubtedly LCC sourcing has some measurable impact on domestic employment; however, productivity gains, arguably spurred by global competition or the threat thereof, have had a much more significant impact. As detailed on the following graph, productivity, measured as output per employee, has increased 240% since 1986.
Looked at another way, had productivity stagnated at 1986 levels, and US manufacturing output grown to current levels, manufacturing employment would approximate 28 million today as opposed to the current level of roughly 12 million! Of course, if productivity stagnated at those levels US manufacturers would not be cost competitive. The impact of global competition and LCC sourcing will continue to pressure US based manufacturers to drive productivity. In fact, we believe domestic manufacturers with the best opportunity to achieve long term success will generally fall into one or more of the following categories:
- Niche manufacturers of customized products and components
- Manufacturers possessing intellectual property, technical expertise, and/or a highly skilled work force
- Cost efficient manufacturers insulated from LCC sourcing due to time and or freight constraints.
China, India, Viet Nam and other LCCs will continue to attract capital and improve their competitiveness. Thus we continue to refine our investment strategy, focusing our marketing efforts on companies possessing one or more of the aforementioned attributes. Additionally, we have successfully invested in companies whose strengths are design and marketing which, combined with supply chain expertise, have proven capable of leveraging LCC sourcing relationships.
MCM Capital Partners is a micro-cap private equity fund investing in niche manufacturers, value added distributors and specialty service businesses. For more information on our private equity firm and investment principles, contact us today.