We have just ended one of the most engaging elections in the nation’s history and one of the driving forces behind it was the economy. Our nation is at a crossroads, there are Americans with and Americans without and everyone is scratching their head trying to figure out how we got to where we are today. Are we seeing the effects of globalization and could we be entering the back side of the bell curve and started our downward descent? Over the past 26 years the median family income in the United States of America has increased a mere $4,000 dollars. Add in inflation and the median income has gone down. So much for every policy enacted and every politician elected as Americans are worse off now than they were 26 years ago. It does not mean crap if it does not improve the conditions for every American. Should we be surprised? I say no as Ross Perot sounded the alarm 24 years ago when he made the infamous statement during the Presidential debates of 1992 that NAFTA would create this great sucking sound. At the time, Mr Perot was looked at as a crazy nut, but in hindsight Mr Perot was 100% right. Hanjin Shipping, the seventh largest shipping company in the world, just filed for bankruptcy because of declining volumes and declining freight rates. A decline in global demand could be and very likely an indicator that there is a something happening within the globalization model. Could the benefits of globalization peeked and be reversing? Are we reverting back to a more local and or regionalized economy?
True disruptions are driven when economies experience massive shifts in cultural demand and not just “in-industry” innovations. Industries never disrupt themselves, it always come from outside. Even whole nations can experience disruptions because of failed policies just like industries are shaken up when outsiders enter a market with a different strategy and execution. Look how the space industry has been shaken up. It was not the industry leaders like Lockheed Martin, Boeing and United Technologies but a credit card processor, book salesman and a record salesman. Who is to say a whole country could not experience the same radical disruption when a particular strategy fails to deliver. One’s income or lack of thereof is a mighty force to drive a population or county to disruption as we have seen in the past election cycle. Americans, those who work or have worked, are at a breaking point in time where they are willing to change course, even encountering risk, in search of a better solution. Most of those wanting economic change have all seen the effects of doing the same thing over and over again while expecting different results. Today’s voter saw it first hand with the dot.com bubble of 2000, the housing bubble of 2007, and great recession of 2008. Bubble after bubble saw the average American loosing every time while those on the inside profited every time expanding the separation of the 1 percenters from the rest of the nation. The pieces of the oncoming wave of the “Local Manufacturing and distribution” revolution have been cast over the past three decades: direct to consumer distribution, additive manufacturing, clean manufacturing, technology, direct to consumer communications, and social media.
The future of America comes down to our ability to pivot from a global model to a LOCAL model. We can see just how it will work by examining what it cost to manufacture and distribute a pair of sneakers – nothing more nothing less but the cost of sneakers will move us from a service orientated economy to a manufacturing economy. A quick analysis of what goes into a sneaker tells us everything about where we have been and where we are going. According to solereview the average cost to manufacture a pair of sneakers is 18 – 20% of the retail price. On a 100 dollar pair of shoes, the cost to manufacture is approximately 18 – 20 dollars. The manufactured cost includes all the labor, materials, overhead for the factory, taxes, profits, while leaving approx 10% in profits for the contract manufactures. Next we add on approx 4 – 5% for transportation or (4 – 5 dollars) cost to get the shoe from China to the USA. The shoe now has a landed cost in the USA of 22 – 25 dollars. The brand doubles the price to 50 dollars to create the wholesale price in order to cover overhead, branding cost (athletes and celebrities), salaries and profits to shareholders. Now the product is priced for distribution. The “distribution network” of retailers doubles the price again to cover the cost of transportation to warehouses and retail stores, storage, labor, retail outlets, insurance, and profits.
The most interesting part of this example is the cost of manufacturing labor as a percentage of the retail price. Using the assumption labor should not exceed 15 – 20% of the manufactured cost, we are looking at approx $4 dollars or labor cost at just 4% of the retail price based on the current global sourced model. The coming disruption will consolidate all $100 dollars and redistribute in such a fashion labor can be paid a living wage, profits will be higher and flexibility improved. Who would not want better choice of labor, located closer to the end users and the fact that labor would be earning a living wage? Currently our nation is struggling with the fact that many service jobs do not provide a “living wage” and the government has moved to force an artificial wage on such businesses by way of a 15 dollar minimum wage in many states and cities. Problems are not fixed by way of artificially changing what is the free market price by regulations, but by fixing what has caused the problem in the first place. Our abundance of cheap labor and lack of demand for this segment of the workforce has kept overall wages stagnant for the past 3 decades. Our government officials and their supporters have profited from this situation while our nation has paid the ultimate price. We can see by the record high stock market compared to the horrible median family income. During the Bush administration 50% of all employment growth was in the construction trades helping to accelerate the housing crisis and encourage the employment of illegals for profit. Enforcement of our existing immigration laws and the development of localized manufacturing to offset the need for foreign manufacturing will create the demand and environment where workers earn more than 15 dollars an hour because their productivity and their supply warrants such pay based on merit not regulations. The “Local Manufacturing & Distribution” disruption eliminates the need for external intervention by governments while allowing smaller more nimble companies the ability to compete against multinational companies on their home turf.
We have seen the distribution side of the model change significantly in the shoe industry by way of Amazon and their newly acquired division Zappos. The new consumer distribution model does not benefit the manufacturer’s margin but it does change the margins and suggested retail price offered on the retail side. The online model proves brick in mortar distribution is not required to reach the final customer even when it comes to shoes. The next step of the disruption is when the manufacture takes over the retail distribution of the product and sells directly from factory to the customer. More and more manufactures are selling directly to the consumer through many different models most being either direct sales or subscription. Window manufactures are a prime example of “factory direct” selling of locally or regionally manufactured products. The manufacturer now has 75% of the retail revenue stream to get the product from the factory to the consumer, a much better position than 50% of the wholesale revenue stream. Now comes the real disruption that has global implications, the shortening of the actual distance between the site of manufacturing and the consumer. Under the current globalization model parts and product are shipped around the world multiple times over before a product is purchased by a consumer. The distance between the factory and the consumer is changing with the invention of new manufacturing processes like additive manufacturing or minimal subtraction allowing for cost effective manufacturing to take place right here in the USA. Add the growing number of consumers connected directly to the cloud via mobile devices and manufactures have a marketing platform direct to the consumer that is practically free. Transportation cost is more or less eliminated because local and regional manufactured products benefit from factory direct shipping where the purchaser pays for the delivery cost direct from the factory their home of business. In addition, manufacturers are able to redistribute cost what would have been used to pay import tariffs to the offset increased labor cost all while being extremely competitive in a global market. The United States of America is half way through the greatest disruption since the industrial revolution and no one sees it or will admit it is happening.
Disruptions have direct and indirect effects throughout the economy and this disruption is no different. Beyond the obvious of manufacturing, the real estate industry, advertising, branding and support agencies will all be effected in this changing environment. The need for these services will be changing as companies consolidate operations into more manufacturing facilities and less office space – all in one facilities will be the wave of the future. Not a good time to be investing in office space. Traditional channels used to connect the manufacture with the consumer will also be challenged as mobile devices and social media eliminate whole industries and layers of cost normally associated with traditional wholesale distribution, retail distribution and sales. The final explosion and driver of the disruption will come with the reduction in corporate income taxes and possible implementation of tariffs, on imported goods subsidized by foreign governments, in order to offset any unfair advantage the imported goods may have over locally produced American goods. The wave will start as companies across the nation world find it more profitable to onshore, to the United States of America, manufacturing and services that were once off shored, to foreign countries like China, to improve profit margins. Companies will invest in new manufacturing methods to capitalize on the latest technology and take advantage of government incentives. Manufacturing jobs will flourish in areas of our nation that have been decimated by globalization. America will once again be a competitive manufacturing and exporting nation giving any nation across the world a run for their money while providing affordable quality products for consumers here at home. The “Rust Belt” will no longer exist and it will become known across the world as the “Manufacturing Belt” of America. Quality and price will once again return to our nation as we rebuild our nation and make it great again.