What Minnesota Needs to do to Remain Competitive

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What Minnesota Needs to do to Remain Competitive
Minnesota Council on Quality December 1, 2005

• Fred Zimmerman
• University of St. Thomas

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• The manufacturing world is now characterized by
• widespread technical capability,
• rapidly expanding industrial capacity,
• aging populations in industrial countries,
• worldwide stresses on employment, and
• burgeoning public budget deficits.

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Value Added per Full-time Employee, 2004

• Mining 298,583
• Manufacturing 104,417
• Professional Business Services 88,117
• Transportation Warehousing 84,883
• Construction 80,530
• Healthcare Social Assistance 62,164
• Retail Trade 59,532
• Arts, Entertainment, Recreation 41,779

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Employment Changes 1999 to 2003

• Mining - 6,400 - 11.5
• Manufacturing - 2,917,000 - 16.9
• Professional Business Services 593,000
  4.1
• Transportation Warehousing 72,000
  1.8
• Construction 526,000 8.5
• Healthcare Social Assistance 1,755,000
  15.7
• Retail Trade 1,004,000 8.1
• Arts, Entertainment, Recreation 567,000
  6.0
• Government 1,308,000 7.0

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Rapidly Expanding World Capacity

• World steel production has increased from 200
  million metric tons in 1950 to 900 million metric
  tons in 2002 and capacities have risen even more.
  
• Capacity is accelerating in other industries such
  as large aircraft, paper, cement, aluminum,
  electronics manufacturing, and many other
  industries.
• Overcapacity exists even in those countries
  expanding capacity at this time.
• The investment firm of Goldman Sachs company
  estimates that by 2006, Chinas production of
  vehicles will reach 6.9 million but internal
  demand is estimated to be 2.2 million units.
• One Korean company, Posco, will produce 27
  million metric tons of steel in 2003, compared to
  about 100 tons for the entire industry in the
  U.S..

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Aging Populations in Industrial Countries
Italy 95.17 Japan 86.63 Spain 83.97 Germany
80.23 Switzerland 67.50 Portugal 66.52 Hungary
64.13 France 63.89 United Kingdom 62.39 Czec
h Republic 61.34 Ukraine 56.33 Canada 49.88 R
ussia 49.81 Poland 46.02 Australia 45.32 Unit
ed States 43.70
Korea, South 25.43 China 21.62 Chile 20.53 Br
azil 14.17 Indonesia 11.62 Colombia 11.52 Sout
h Africa 11.42 India 10.80 Iran 10.12 Mexico
10.04 Egypt 9.07 Pakistan
8.01 Philippines 7.95 Iraq 5.76 Nigeria
5.14 Saudi Arabia 5.12
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Population under the Age of 20 in 2001
India 440,599,263 China 417,143,908 Indonesi
a 91,025,549 United States 80,796,199 Pakistan
74,310,917 Nigeria 69,478,347 Brazil
67,802,421 Bangladesh 65,546,458 Mexico
44,661,537 Philippines 38,468,855
Russia 37,434,676 Japan 25,854,638 Germany 1
7,293,423 France 15,038,908 U K
14,946,114 Korea, South 13,624,019 Italy 11,094,
599 Spain 8,263,411 Canada
8,089,233 Australia 5,339,605
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Unemployment Rates
Country 1995 1999 2000 2001 Poland
16.1 18.2 Spain 22.9 15.8 14.0 13.0 Italy
11.9 11.2 10.4 9.5 Finland 16.2 10.2 9.7
9.1 France 11.7 10.7 9.3 8.6 Czech
Republic. 8.8 8.9 8.2 Germany 8.2
8.6 7.9 7.9 European Union 10.7 9.0 8.1
7.6 Canada.. 9.5 7.6 6.8
7.2 Australia. 8.6 7.0 6.3
6.7 Belgium. 9.9 8.6 6.9 6.6 OECD,
total 7.5 6.8 6.3 6.5
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Burgeoning Public Budget Deficits, 2001
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Minnesotas Industrial Strengths

• Minnesota Has A Diversified Economy
• High Tech Employment in Minnesota Was Slightly
  Above the U.S. Average
• Minnesota Ranks High in Personal Income Per
  Capita
• Minnesotas Unemployment Rate Historically
  Lower than the Nation
• Minnesota ranks high in Patents

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However,

• Minnesota Employment and Payroll Have Grown
  Modestly
• Minnesota Manufacturing Product Growth is Modest
• Minnesota ranks low in Foreign Direct Investment
• Venture capital funding is anemic
• Minnesotas Export Performance is medium (21st
  out of 50 states.
• State is high cost
• U. S. in general has a savings rate near zero.

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Investment, Revenue and Costs for Selected
Cities, 2002 (000)
Investment Revenue Costs Profit Rank Indianapol
is 11,703 16,761 15,438 1,322 1 Colorado
Sgs 12,779 16,761 15,811 950
2 Oklahoma Cty 11,844 16,761 15,826 935
3 Phoenix 11,762 16,761 15,911 849
4 Chicago 12,678 16,761 15,961 800
5 St. Louis 12,991 16,761 16,157 603
6 Dallas-FW 12,303 16,761 16,205 556
7 Minneapolis 13,236 16,761 16,271 489
8 Houston 12,184 16,761 16,521 240
9 Boston 15,756 16,761 16,658 103
10 Location sensitive costs as displayed in the
report include labor, lease, transportation,
utilities, taxes, and operating costs. Location
Insensitive cost include materials other
operating expenses. Source Competitive
Alternatives Comparing Business Costs in North
America , Europe and Japan, KPMG International
2002
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Estimated Annual Profit by Location, 2002 ( 000)
Cities Investment Revenue Net Profit Naples,
Italy 12,364 16,761 2,542 Manchester,
UK 16,798 16,761 2,395 Winnipeg,
Canada 11,401 16,761 2,205 Toronto,
Canada 12,990 16,761 2,162 West Holland,
NL 14,757 16,761 1,979 Vienna,
Austria 17,369 16,761 1,772 Toulouse,
France 12,759 16,761 1,584 Minneapolis,
US 13,236 16,761 489 Darmstadt,
Germany 15,311 16,761 247 Yokohama,
Japan 54,570 16,761 (2,945) Note Net
Profit estimated revenue minus location
sensitive costs minus location insensitive
costs Source Competitive Alternatives Comparing
Business Costs in North America , Europe and
Japan, KPMG International 2002
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Some Further Concerns

• Minnesota is Geographically distant from Emerging
  Markets
• The Supplier Base has Fewer Incentives
• Minnesota has Few Emerging Big Ticket Industries
• Minnesotas Labor Force Growth is Slowing
• Minnesotas Utility Infrastructure is Weaker
• Corporate Mergers and Management Changes have
  Reduced Industrial Strength and Transportation
  Resources
• Minnesota Factories are Old

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Manufacturing and Community Prosperity

• In the categories where manufacturing was
  gathering strength, every major employment sector
  grew substantially. Total employment increased
  from 35 to 63 percent. The increases were less
  than 10 percent in the groups where manufacturing
  was declining, even though the 1990s were
  generally prosperous years.
• Counties gaining momentum in manufacturing
  reduced poverty, more rapidly increased household
  income, and had lower unemployment rates while
  those counties with weakened manufacturing
  experienced deteriorating conditions even
  during good times.
• Among the 690 counties examined, those with 10
  percent of civilian employment in manufacturing
  averaged about 1,000 in county and local taxes
  per person in 1992 while the counties with 30
  percent averaged 650 and those with 40 percent
  averaged 562.

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Conclusions

• Competition is tough all over.
• US is likely to do better than Europe.
• US is higher cost and less proficient than many
  emerging countries.
• Minnesota is more of an average state than it was
  fifteen years ago.
• The assumption that we can retain prosperity
  without manufacturing is without foundation.
• With burgeoning trade and fiscal deficits, along
  with flat employment, we may need to thoroughly
  investigate whether the US is in some form of
  gradual economic decline.

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Conclusions II

• Outsourcing and overseas production are rising
  not so much because US wages are high.
  Outsourcing and overseas production are
  increasing due to the search for
• improved supplier and worker capability
• improved supplier and worker dependability
• heavy levels of investment in plant and
  equipment.
• reduced bureaucratic involvement.

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Conclusion III

• Competition is a Family Affair.
• The ability of Manufacturing to compete in world
  markets is the responsibility of all of us!

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Recommendations

• Creatively improve the lot of the intermediate
  suppliers.
• Have people in education work a full year.
• Bring people into teaching with industrial
  experience.
• Increase the retirement age to at least 70.
• Target state scholarships to industrial needs.
• Cooperate with good companies -- not losers.
• Aggressively protect local companies from
  self-serving predatory investors.

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Recommendations (Continued)

• Greatly encourage investment in plant, equipment
  and R D.
• Greatly encourage investment in plant, equipment
  and R D.
• Greatly encourage investment in plant, equipment
  and R D.

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Math Scores
Singapore 604 6.3 8 14.4 Korea, Rep.
of 587 2.0 8 14.4 Chinese Taipei 585 4.0 8 14.2 H
ong Kong, SAR 582 4.3 8 14.2 Japan 579 1.7 8 14.
4 Belgium (Flemish) 558 3.3 8 14.1 Netherlands 54
0 7.1 8 14.2 Slovak Republic 534 4.0 8 14.3 Hungar
y 532 3.7 8 14.4 Canada 531 2.5 8 14 Czech
Republic 520 4.2 9 14.4 Malaysia 519 4.4 8 14.4 U
nited States 502 4.0 8 14.2
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Science Scores
Chinese Taipei 569 8 14.2 Singapore 568
8 14.4 Hungary 552 8 14.4 Japan 550
8 14.4 Korea, Rep. of 549 8 14.4 Netherlands
545 8 14.2 Australia 540 8 or 9 14.3 Czech
Republic 539 9 14.4 England 538
9 14.2 Finland 535 7 13.8 Canada 533
8 14.0 United States 515 8 14.2
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High Tech Exports
1997 2000 2001 US 31.5 33.2 32.1 2 Canada 14
.0 17.2 15.3 9 Mexico 17.1 22.0 21.7 27 Jap
an 25.9 28.1 26.0 0 China 12.7 18.4 20.4 61 Si
ngapore 55.1 61.5 59.7 8 Malaysia 47.8 58.2 56.9
19 Indonesia 11.0 15.5 13.4 22 India 6.4 ..
.. n/a Korea 26.0 34.2 29.1 12
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Repelling Forces
1. Shortage of land 2. High costs of land,
particularly if it is polluted 3. Objections of
residents 4. Inadequate infrastructure 5.
Insufficient supply of good labor 6. Building
codes that block modernization 7. High labor
costs 8. Incompetent management 9. Costly or
ineffective public services 10. Cumbersome
regulation 11. Mergers and acquisitions 12. Poor
transportation 13. Companies reach the end of
their useful lives 14 Litigation
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Attracting Forces
1. Shifting locations of major customers or
suppliers 2. Work ethic 3. Quality 4. Even-handed
Legislative, legal and tax climates 5.
Industrial swarming 6. Economic incentives 7.
Transportation. 8. Ownership changes 9.
Attractive wage rates 10. The weather