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Archive for the ‘Bidness, and Other Current Economic Realities’ Category

what_nextIn our prior post we looked at some of the data revealed in a recent report by The Economist which highlights the changing complexity of manufacturing, including fewer jobs overall, muddled in part by the ways those jobs are accounted for – or often not accounted for – as we move up the manufacturing supply chain.  We noted that those higher-paying manufacturing jobs in the “rich world” still account for a sizable share of nations’ GDP, and how much of the intellectual property retained by countries like the U.S., Germany and the U.K. continues to account for much of manufacturing’s overall value-add.

Still, keeping those jobs, and the future of manufacturing, are topics ripe for debate.  Today we’ll finish up our two-part post with what a few of the experts think.

For one thing, we can turn manufacturing from a product into a service, as Rolls Royce pioneered in the 1980s by providing its engines, service and maintenance at a fixed price, bundled package, or “power by the hour.”  The result was more stable revenues and more locked-in customers.

More recently, machines are being equipped with internet-connected sensors (the Internet of Things, or IoT, of which we’ve written before), which can gather data on how machines perform in the real world.  The accumulated data provides a trove of knowledge from which manufacturers can sell additional services to clients, and entice new customers as well.

Yet another bright spot will be 3-D manufacturing.  Here, we’re not speaking about creating playful little plastic widgets or toys, but rather complex manufacturing tasks in which design and manufacturing can be tightly coupled to produce things from motorbikes to high fashion.

But the real key, experts agree, lies in education.  Companies who offshore assembly and production work often suffer from reduced product innovation. Opportunities to learn how to do things better on the home front are often lost.  This is the natural synergy of production, where design meets reality, and the shop floor can provide feedback to designers; break that bond, and innovation suffers.  But those high-value design and innovation jobs require skill, adaptability and education.  These jobs will change over the lifetimes of workers, and they will not provide the mass employment of the past.

So it’s important to start with modest expectations, as is noted by James Manyika of the McKinsey Global Institute.  Improved education to ensure engineers are in good supply would be a good start.  A recent Bloomberg BusinessWeek article noted that nearly 75% of U.S. graduate-level advanced degrees in engineering and computer science are now going to non-American graduates.

Vocational training, where Germany proves a world-class model, and retraining programs that create new skills or refurbish current ones among displaced workers, have never been more important.

One way not to benefit manufacturing as a whole, many argue, is to disrupt global supply chains, nor will threatening companies that seek to move jobs overseas or the companies that host them.  We are reminded that it’s not so much foreign nations that have replaced so many of our low-skill manufacturing jobs, but rather, the inexorable march of industrial innovation, just as it’s done for the past 200 years.  Thus, policies favoring line workers over investments in automation will only make our industries less competitive.

Better to focus on the advanced manufacturing opportunities that lie ahead (i.e., 3D, IoT and manufacturing related services, to name three).  Educating our young talent – and providing ongoing education and retraining for new skills – is where our best hopes lie.

The sooner our leaders figure out what our manufacturers already know, the more robust will be our manufacturing prospects in the next generation.

 

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old_mfg_plant“Manufacturing exerts a powerful grip on politicians and policymakers in the rich world.”  So note the editors of the The Economist in a January, 2017 article on the changing face of manufacturing.  Their point is that manufacturing is central to what most national and political leaders across the world believe is what they want, and what their nations need.

Unfortunately, the sentiment gets a bit cloudy when they talk about “bringing back” the jobs of yore.  As Bruce Springsteen once noted, “those jobs are going boys, and they ain’t comin’ back.”

The truth is, as always, a bit more nuanced.

For starters, manufacturing has not really gone away.  But it also hasn’t stood idle.  Indeed, there has been plenty of change in manufacturing – it’s just gotten a lot more sophisticated.  It’s the less skilled jobs that are not going to return.

Manufacturing has long offered among the most desirable wages, and its products often tend to be exports, which make it especially desirable in political circles.  In the early part of the prior century, manufacturing brought lots of good-paying, semi- (or low-) skilled jobs.  That’s all changed, of course.  And as the Economist article points out, those changes included the advance of I.T. and the underlying ability to allow firms to unbundle the different tasks from design to assembly to sales so that “it became possible to coordinate longer and more complicated supply chains, and thus for various activities to be moved to other countries, companies or both.”

In the 1940s, one in three non-farm American jobs were in manufacturing.  Today it’s one in eleven.  Even in manufacturing-intensive Germany, it’s one in five.  Over time, as manufacturing became more productive and prices dropped, its share of GDP fell too.  Over time, more jobs moved overseas – but these were mostly low-skilled jobs, it’s worth noting.  The complicated work stayed home, while the “routine work was easily moved to poor countries,” and cheap labor.

So in a very real sense, the promise to bring jobs back rings hollow.  Low and semi-skilled jobs are not going to return to America, or the most developed nations, because they were not simply shipped abroad.  Rather, they were “destroyed by new ways of boosting productivity and reducing costs” which only served to heighten the distinction between routine labor and the rest of manufacturing.

But here’s the thing: today it is said that one-sixth of all manufacturing jobs are found in “the rich world.”  But those workers produce two-thirds of the final value of today’s manufactured goods.  Most of the low-value work shipped overseas involves final assembly that “adds little to the finish product’s value.”  For example, assembly of Apple iPads in China accounted for just 1.6% of the retail selling price.

In the U.S. the 11.5 million higher-value jobs that officially count as manufacturing jobs were, according to Brookings Institute, outnumbered by two to one by jobs in manufacturing-related services down the supply chain, after accounting for the outsourcing of accounting, logistics, HR and IT services that were once counted as “manufacturing” jobs in an earlier era.  In short: that’s a lot of manufacturing related jobs – the good ones – which we still retain.  That’s about 33 million U.S. “manufacturing” jobs, all told.

So the next time you hear someone bemoan the loss of manufacturing jobs, or herald a new era of returning jobs to America, keep in mind: the best manufacturing jobs continue to remain in the U.S. and other developed countries —  even more so when you count the related supply chain jobs.

But keeping these well paid jobs is the real and continuing task at hand.  And to see what that will take, we’ll add a few opinions, and some Economist commentary, in our next post, as we conclude this look at manufacturing today.  Stay tuned…

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small-biz-challengeIn a recent Wall Street Journal article (1/19/17), columnist Ruth Simon points out that small businesses are slow to hire.  As it turns out, statistics show that the median small business adds fewer than one full-time position a year, despite being thought of usually as “the engine of U.S. job growth.”

In 2015, about one in six small firms lost one FTE (full-time equivalent) and only one in five added more than two, according to J.P. Morgan Chase Institute, which analyzed payroll records for 45,000 small firm customers.

The truth is: the lion’s share of small business job gains in the U.S. comes from new businesses being formed, not the expansion of older small firms.  This, in a nutshell, synopsizes the challenge for American small business today:  most small firms employ just a few workers and struggle with unpredictable results.

The article goes on to quote Scott Stern, a professor at M.I.T. who notes that “There is a great disconnect between the belief that entrepreneurship in general is a driver of economic growth and prosperity, and the simple fact that most small businesses remain small.”

Nearly 90% of employer businesses with paid employees – representing just under five million firms – had fewer than 20 employees in 2014 according to U.S. Census data.  These firms account for 17% of all workers at companies with employees.

Moreover, employment and payroll spending in general prove to be “very unstable” according to the Chase Institute.  “The reality is that most small businesses do not have a steady flow of customers and a steady flow of revenue.  They have good months and bad months,” notes CEO Diana Farrell.

Creating a company is a messy and dynamic process.  Small companies have smaller cash cushions and are “more likely than big companies to adjust hours or head count to meet the ebbs and flows of demand,” according to research done at the E. M. Kauffman Foundation.

Entrepreneurship has always been challenging.  And the data show that it’s never been truer than it is today.

 

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ai_picTwo recent articles, one from Christopher Sims of the Wall Street Journal, and another featuring IBM CEO Ginni Rometty (also writing for the Journal), provide glimpses into where Artificial Intelligence – AI – is likely to take us.  And from both, one conclusion is clear: it’s all in the data.

The end of the year is a great time to be thinking about the future.  And AI will increasingly be a part of everyone’s future.  The gist of the arguments from both Rometty and Sims make clear that data – big data – will be what makes AI truly possible.

While today’s newer smart assistants, like Alexa and Siri, are entering into our everyday lives, they represent only the beginning.  Already, Alphabet (Google), Amazon and Microsoft are making their AI smarts available to other businesses on a for-hire basis.  They can help you make a gadget or app respond to voice commands, for example.  They can even transcribe those conversations for you.  Add to that abilities like face recognition to identify objectionable content in images, and you begin to see how troves of data (in these cases, voice and image) are being transformed into usable function.

But all this data and technology, notes Sims, are not going to suddenly blossom into AI.  According to data scientist Angela Bassa, the real intelligence is still about ten years away.

Why?  Three obstacles:

  • Not enough data. Most companies simply don’t have enough data to do deep learning that can make much more than an incremental difference in company performance.  Customers are “more interested in analytics than in the incremental value that sophisticated AI-powered algorithms could provide.”’
  • Small differences generally cannot yet justify the expense of creating an AI system.
  • There is a scarcity of people to build these systems.

All that being said, Ms. Bassa, noting that there are only about 5,000 people in the world who can put together a real AI system, says that “creating systems that can be used for a variety of problems, and not just the narrow applications to which AI has been put so far, could take decades.”

IBM CEO Ginni Rometty notes that the term artificial intelligence was coined way back in 1955 to convey the concept of general intelligence: the notion that “all human cognition stems from one or more underlying algorithms and that by programming computers to think the same way, we could create autonomous systems modeled on the human brain.”  Other researchers took different approaches , working from the bottom up to find patterns in growing volumes of data, called IA, or Intelligence Augmentation.  Ironically, she notes, the methodology not modeled on the human brain led to the systems we now describe as ‘cognitive.’

Rometty concludes, fittingly, that “it will be the companies and the products that make the best use of data” that will be the winners in AI.  She goes on to say… “Data is the great new natural resource of our time, and cognitive systems are the only way to get value from all its volume, variety and velocity.”

She concludes with a noteworthy commentary: “Having ingested a fair amount of data myself, I offer this rule of thumb: If it’s digital today, it will be cognitive tomorrow.”

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mfg_jobsContrary to what you may have heard, manufacturing is flourishing in America.  The problem is that factories don’t need as many people as they used to because machines now do so much of the work.

This fact was most recently pointed out in an article by Paul Wiseman, who writes about the economy for the Associated Press.  We bring his comments on manufacturing to your attention today — as we often comment on the topic – given that the majority of our ERP clients are in manufacturing, and deeply invested in the subject.

A few facts: Manufacturing employment peaked around 1979 in this country.  Since that time, we’ve lost about 7 million jobs, even though actual factory production more than doubled since then, reaching almost two trillion dollars last year (just below the record year set in 2007).  That makes the U.S. number two in manufacturing in the world, second only to China.

It’s popular today to say that many of those jobs have been lost to ‘global trade’ and other countries’ theft of those jobs.  And indeed, many of those jobs have been lost to trade, especially to China, since China joined the World Trade Organization in 2001.  Foreign, low-wage competitors have gutted some industries, like textiles for example.

But as Wiseman points out, research shows that that “automation of U.S. factories is a much bigger factor than foreign trade in the loss of factory jobs.”  A study from Indiana’s Ball State University last year found that trade accounted for just 13% of lost U.S. factory jobs.  The majority, 88%, were taken by robots and other “homegrown factors that reduce factories’ need for human labor.”

Simply put: we’re making more with fewer people, as Howard Shatz, a senior economist at Rand Corp. has noted.  For example, GM now employs only one-third of the 600,000 workers it had in the1970s, yet produces more cars and trucks than ever.  In steel, the U.S. has lost 265,000 jobs since 1997 – a 42% plunge – while production has actually surged by 38%, thanks to super-efficient mini-mills that make steel mostly from scrap.

And the robot revolution is only the beginning.  Boston Consulting Group predicts 10% growth in industrial robots per year in the 25 largest export nations for the next ten years – a big increase over today.  One silver lining in the employment implications has been that increased use of robots coupled with higher labor costs in China and developing nations means reduced incentive for companies to chase low-wage labor around the world.

Even better, companies are rethinking where they manufacture (especially after earthquakes and tsunamis in Japan disrupted auto parts shipments, and a large Korean shipping firm went under).  So companies have been returning to the U.S. for production, “capitalizing on savings provided by robots, cheap energy and the chance to be close to customers,” notes Wiseman.

In conclusion, it appears the global scramble for cheap labor is fading.  It’s being replaced by more intelligent use of current resources, including robots, closer to home.  And thus, the real manufacturing jobs of the future will go to those best able to program, manage, repair and otherwise thoughtfully deploy the equipment and the supply chains that will be at the heart of the new manufacturing.

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taxtips2016Our friends at Insight Accounting Group recently provided a list of ways to reduce your 2016 tax liability.  Following are a few of their suggestions that we think you’ll find timely.  As always, be sure to check with your own tax adviser.

Business equipment: This year the Section 179 expense deduction maxes out at $500,000 – and this includes software purchases as well, we might add.  That’s the amount of expense that can be fully written off this year.  There is a 50% bonus depreciation for qualified property placed in service anytime during 2016.  Special limits apply to vehicles.

Business trips: If you’re traveling to wrap up year-end business deals, you can write off expenses including airfare, lodging and 50% of meal costs if the primary motive (note, not the exclusive motive) is business-related.  Costs attributable to personal side trips are nondeductible.  And by the way, the current IRS allowance for mileage related auto costs is a flat 54 cents per mile, plus tolls, parking and fees.

Entertainment and meals: You can deduct half the cost of entertainment and meals associated with a “substantial business discussion.”  Except…

Company outings: If you throw a company-wide holiday party before year-end, you may be able to deduct up to 100% of the cost if you meet certain requirements, such as inviting your entire staff.

Hire your child: If you hire your child, say over the holidays, reasonable wages paid for actual services rendered are deductible, just like for other employees.  They’ll be taxable at your child’s tax rate, too, which may be lower than that of you or your business.

Job credits: If you hire workers from certain targeted groups including veterans and food stamp recipients, you may be able to claim the Work Opportunity Tax Credit, which is limited to $2,400 per qualified worker.

 

The tax code is huge and complicated as we all know, but wise business owners know to take advantage of the legal and ethical loopholes provided.  The handful above are ones you want to be sure to know about.

 

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globalizationWe noted in our prior post the recent flattening in growth of the global trade of goods and services.  At the same time, we noted, according to Information Week, McKinsey and Trends eMagazine, among others, the global exchange of data is soaring, leading to a range of competitive advantages that we noted in the post.  Today, we look at what these same folks are saying about the impact this will have on companies, and why it matters to yours.  (Original source content can be found here.)

Following, then, are four key developments emerging from this trend:

  1. The successful companies of the next decade will be those that embrace digital globalization. McKinsey suggests 6 actions:
  • Reevaluate the need for physical locations when a website can be just as effective
  • Consider whether creating new offerings in different markets beats the same product in each
  • Decide whether to manufacture off-shore or locate close to the customer
  • Evaluate “monetizing assets” such as customer data to develop new products/services
  • Recognize the threat for industry disruption from competitors in emerging markets
  • Protect digital assets from hackers by keeping security software up to date; train employees
  1. Countries that impose limits on data flows will damage their own economies and deprive their citizens of the benefits of digital globalization.

Information Week notes that countries as diverse as Australia, Brazil and Greece have enacted policies that limit storage of data.  Over 100 nations have or are working on laws designed to prohibit personal data from moving across national borders – for varying reasons.  But, as Brookings Institution has found in a 2011 report, a 10% rise in a broadband penetration causes a 1.3% jump in economic growth.

  1. The Internet of Things will ignite an explosion of data flows. As this next state of the digital revolution unfolds, smarter devices, sensors, GPS and artificial intelligence “will revolutionize logistics, fleet maintenance, agriculture, healthcare and many other industries.”  According to Cisco, within 3 years, over 40% of data flows will be via machine-to-machine connections.
  2. The global trade in goods is unlikely to return to previous levels. American companies are re-shoring manufacturing operations back to the U.S.  As 3-D printing advances, companies “will create more products and intermediate goods as they are needed and where they will be used, rather than ordering from overseas suppliers.”

That’s the future of business and data globalization as defined by several of the world’s best prognosticators and subject matter experts.  While some of their advice is aimed at larger companies, industries, even countries… the lessons should not be lost on today’s small businesses.

 

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