FT: American executives turn away from globalisation towards a more localised world

Last month the Financial Times’ Gillian Tett met Inge Thulin, the Swedish-born chief executive of 3M, an American conglomerate at the Council on Foreign Relations in New York (below).

She reports that – though 60% of its revenues and 40% of 3M’s workforce are outside American shores – Mr Thulin, when discussing corporate strategy, prefers to talk about “localisation”:

“Our strategy has changed. If you go back [several] years, there was a strategy of producing at huge facilities at certain places around the world, and shipping it to other countries. But now we have a strategy of localisation and regionalisation. We think you should invest in your domestic market as much as you can.”

Instead of “free” trade, American executives are now calling for “fair” trade, along with “reciprocity” and “equalisation” of trade deals.

When Donald Trump started talking about restoring US manufacturing last year, he tapped into a subtle trend that was already emerging. As the West Midlands Producers’ site noted, the reshoring trend, successes and possible pinch points, have been systematically explored and publicised by Aston University’s Professor David Bailey since 2013; two years it quoted Professor Dr Michael D. Johnson, Department of Engineering Technology and Industrial Distribution, Texas A&M University, briefly in the FT:

“My colleagues and I have found that importing goods from China to developed countries (for example, the US) entails numerous increased costs: transportation, inventory carrying, and production and logistics oversight. The combination of these increased costs, just-in-time manufacturing needs, and increased developing country labour rates contribute to the economic viability of localised flexible manufacturing facilities serving developed country markets”.

Ms Tett recommends a survey of US companies conducted by the Boston Consulting Group which showed that as recently as 2012 American companies were busy building cross-border supply chains, 30% with China – but 31% in 2015 planned to boost production in America and only 20% in China.

  • One reason for this shift is a rise in relative wage costs in China.
  • Another is that production costs in the US have fallen because of automation and cheap energy.
  • However, a third point is that chief executives have realised that long supply chains create political and logistical risks.

“The days of outsourcing are declining,” Jeff Immelt, General Electric chief executive, observed late last year. “Chasing the lowest labour costs is yesterday’s model.” even before Mr Trump arrived in office, the C-suite (slang: important senior executives) was losing its blind faith in globalisation. For better or worse, we face a more localised world”.

 

 

 

nnnnnnnn

Preston: building a new local economics

new start logoNew Start magazine, which champions urban regeneration that is inclusive, sustainable and socially just, has reported on the work of CLES (Centre for Local Economic Strategies) with Preston City Council. Innovative Quinton councillor John Clancy, who has been to Preston to meet councillors there at a CLES conference, has already tweeted the New Start article.

CLES is exploring how anchor institutions based in the city can bring benefits for the local economy and community.

Anchor institutions are those that – once established – tend not to move location, anchoring the local economy. They may be not-for-personal profit social enterprises, co-operatives, employee-owned and run companies,  or simply local firms with a determined loyalty to their community and workforce ‘family’ (some 2nd generation) – like Professional Polishing in 2007, which refused a highly profitable offshoring opportunity for this reason – resigning from BCC because of their promotion of these policies – and has gone from strength to strength.

cles logoThe starting point was ‘procurement spend’ – seeking to create a collective vision across institutions for undertaking procurement in a way which benefits the local economy. The supply chains of each of the anchor institutions (worth £750m pa) were analysed by CLES in order to identify particular sectors where there are gaps in expenditure in the local economy and where there is scope to influence that ‘spend’ in the future.

There were two broad objectives:

  • to analyse the extent to which anchor institutions already spend with suppliers based in the Preston and Lancashire economies and whether there is potential to repatriate some of that spend;
  • to identify whether there are any particular services used by anchor institutions which would lend themselves to future delivery by local worker-led co-operatives.

Analysing the procurement spend of six anchor institutions with their top 300 suppliers – some £750m – the research found that only 5% of their collective spend was with Preston organisations and 39% was spent with organisations based in Lancashire. £488m was effectively leaking out of Lancashire each year.

Preston skyline
Preston skyline

The findings of the supply chain analysis have prompted anchor institutions to ensure procurement spending reaps greater local economic and community reward. Local organisation Community Gateway, for instance, now asks suppliers to show the local economic multiplier effect of the delivery of its capital and maintenance projects.

Preston Council has identified local organisations in those sectors which could bid for and deliver those services in the future.

Lancashire Council has reframed its procurement practices so that there is greater emphasis on economic and social value.

Postscript: other initiatives

  • Living Wage – Preston City Council has been a Living Wage employer since 2009. It seeks to ensure other organisations across the public, commercial and social economies pay their own employees. The principle of the activity links to community wealth in that it seeks to provide a fair level of pay for Preston residents and also ensure the circulation of income within the local economy.
  • Move your Money – Preston City Council has become part of the Move your Money campaign. This seeks to encourage communities to bank in a more ethical way. The Council has also helped establish a new credit union (‘Guildmoney).

• Guild co-operative network – the council and its Social Forum supports worker led co-operatives and encourages other anchor institutions to utilise local co-operatives, most of which are engaged in front line provision.

,

Outsourcing – or insourcing?

The Centre for Local Economic Strategies (CLES) has some unwelcome news for the recently formed National Outsourcing Association. 

The NOA hopes to become “the pre-eminent organisation in the UK that enables and promotes successful outsourcing for the benefit of end-users, suppliers and supporting intermediary organisations”. It will collaborate with banking, financial services and insurance companies, the public sector, retail, IT, telecommunications, the media, utilities, pharmaceutical,  transport and travel sectors, with an increasing membership ‘in the SME space’. 

It is also funding a new all-party group led by Bob Blackman, Conservative MP for Harrow East and former Leader of Brent Council, formed to ‘help government save money through outsourcing’. 

A paper from CLES, however, dispels a few myths around outsourcing, counteracting “attempts to portray in-house services as old fashioned, monolithic and bureaucratic, against a private sector capable of innovation, entrepreneurship and achieving value for money . . .” 

Poor privatisation track record 

“A whole host of people are suggesting that the best way of ensuring efficiencies is by outsourcing everything to the private sector. But for a long time we have suspected or known that marketisation of public services is flawed in many ways. 

“We have seen the failed privatisation of the railways, the government having to bail out the banks and take them into public ownership, and we have seen the government having to intervene yet again to the tune of billions of pounds in order to ensure that PFI came off the critical list.” 

More recent outsourcing problems 

CLES points out that local government has found outsourcing social housing and care services less than successful, with cases such as the high profile failure of care home operator Southern Cross and the poor accounting procedures revealed during the ongoing investigations after Connaught and ROK went into administration. 

Is outsourcing on a wholesale basis the best way of delivering public services?  

CLES sees a role for the private and voluntary sector in the delivery of public services as suppliers, additional providers of new or non-core services and where services are struggling to cope with demand, but insists that they are not a substitute for core public services delivered directly and democratically accountable to citizens and service users. They quote Paul O’Brien, the chief executive of the Association for Public Service Excellence (Apse): 

“Is outsourcing on a wholesale basis the best way of delivering public services?  Based on experiences over the past couple of decades, mainly in England where there is a much more mixed economy of provision, I would have to say the answer is no.” 

The tide appears to be turning as many local government services are now being ‘insourced’ 

Apse has carried out research into why so many local government services, including from administrative, back office, grounds maintenance, street cleansing, refuse and waste are now being insourced following a period of having been carried out by the private sector. The most quoted reasons for bringing services back in-house are: 

  • poor contractor performance;
  • the need to improve the quality of the service being delivered in order to achieve value for money;
  • workforce problems encountered including poor career development opportunities and a lack of motivation among staff;
  • and the need to address poor customer satisfaction levels.  

Leo King in Computer World – well worth reading – gives the most recent example of an insourcing decision: “West Dunbartonshire Council has rejected a detailed shared services proposal in favour of localised, cordoned-off services, in a move countering the plans of other councils across the country to merge key back office functions.” 

But four out of five government departments are now trapped – ‘contractually committed’ 

In January he reported the ‘damning’verdict of an advanced analysis of government contracts, conducted by deal price measurement firm ProBenchmark, that “Four out of five government departments are trapped in their outsourcing deals, stifling efforts to slash budgets”. 

As CLES confirmed, “authorities who had entered into large scale, long-term strategic partnerships found it difficult to negotiate efficiencies required under the Gershon targets, as they were contractually committed with private sector partners unwilling to give up profits.” 

Difficult times ahead for such councils, for the National Outsourcing Association and for their allied all-party group?