A recent article on The Atlantic by Derek Thompson wonders why the American auto industry has not contributed as much to the economic and specifically to the jobs recovery this time around. Derek’s analysis is impeccable and he refers to several irrefutable data points to reach the inevitable conclusion that should not really be such a surprise: In a market economy, capital efficiencies are rewarded!
We are all familiar with the electricity flowing along the path of least resistance. You could say the same about the supply chains: In a (free) market economy, (smart) supply chains flow along the path of least cost.
Here is the summary. Post recession, auto industry has made a sturdy recovery. Auto sales have zoomed almost to pre-recession levels – car production almost doubling since 2009, accounting between 15 and 20 percent of our whole recovery. But unfortunately, that growth has not generated any number of jobs worth talking about. Several reasons including the higher productivity and higher overtime hours contribute to the lack of jobs, however, Derek finally breaks the news by showing a key statistic: A record level of parts imported from outside the US keeping the employment levels in the US stuck pretty much where they were.
Then an interesting number: “The parts sector in Mexico employs 540,000 people, compared to about 480,000 in the U.S. Remarkably, Mexico's industry is already "bigger" than the United States.” So while jobs recovery is tepid, the auto companies supply chains have followed the path of least cost, in the process becoming much more efficient in their endeavor to produce more with less! Remember that the capital efficiencies are rewarded in a (free) market economy.
That is not a new phenomena either. We have seen this in the past few decades as the manufacturing shifted away from US. And again in pockets of manufacturing industries where manufacturing is coming back to the US. That is just the nature of business. The fact is that as new low cost regions emerge that also have the engineering, human capital, and the infrastructural capabilities required for servicing a given industry, the supply chains are going to gravitate towards that region. Few decades back, that region was Japan, then it was China, then it expanded to include more east/south-east Asian countries, east-European counties, Latin America and so on. The fact is simply that this combination of cost/skill/infrastructure will continue to change geographically from one place to another as developing and under-developed countries continue to catch-up on the ladder to become more industrialized, more productive, and more developed! And the supply chains will follow them around – no matter how that affects local job markets and economies.
In fact, another report from the Congressional Research Service corroborates the hypothesis above. Reproducing two key charts from the report (link below) show clearly how the investment trends with respect to the investments in the US. Quite self explanatory and supporting the facts of growing US industry with a tepid job growth.
- Cost as the Dominant Business Strategy
- The New Manufacturing Destination: Americas
- Business Strategy Must Drive Supply Chains
- Overdrive: How America's Amazing Car Recovery Explains the U.S. Economy
- Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data
- Hauling New Treasure Along the Silk Road
© Vivek Sehgal, 2013, All Rights Reserved.