Today’s post-recessionary economic realities combined with dynamic global trends are impacting virtually every aspect of our lives—and certainly the profitability of our businesses. Unless organizations understand the following five realities and adapt, succeeding in the years ahead will be extremely difficult.

No. 1: Declining U.S. Consumption Requires Manufacturers To Seek Faster Growing Markets Abroad.

Economists are referring to the current and upcoming period as the “new normal,” distinguished by lower U.S. household debt, higher personal savings and less consumption as a share of Gross Domestic Product (GDP), says William Galston, former policy advisor to President Clinton and Senior Fellow at the Brookings Institution, a Washington, D.C.-based public policy think tank. Although the “new normal” has numerous sustainable benefits, organizations will undergo difficult transitions. For example, the American “bloated retail infrastructure will shrink,” Galston says, and this will force U.S. businesses to “shift their focus to producing more for export.”

A drop in consumer spending (which currently generates the vast majority of American GDP) will negatively impact already declining growth. In fact, U.S. GDP declined from an annual average of 3.2 percent from 1990-1999 to 1.8 percent from 2000-2009. Even when omitting the last two recessionary years, annual average growth was 2.6 percent.

For American companies, the pursuit of faster-growing foreign markets will pay off. According to The Wall Street Journal, of the 30 companies that comprise the Dow Jones Industrial Average, the 10 with the largest share of international sales are expected to boost revenues by an average of 8.3 percent over the next year; the 10 with the least international business are anticipated to grow, on average, just 1.6 percent.

Over the next decade, corporate global expansion—especially in emerging markets, which are predicted to grow by an average of more than 6 percent next year, as compared to less than 2 percent for developed ones—will be even more important for a number of reasons.

Compared to nonexporting firms, exporting firms, on average, employ almost twice as many workers, produce twice as much output, pay workers more, provide health insurance and pensions, and have higher productivity levels, says Howard Rosen of the Peterson Institute for International Economics, a Washington, D.C. think tank. Importantly, Rosen says, the only way out of our economic situation without causing more damage at home and abroad is to significantly increase U.S. exports, which, he says, are no longer just an option for the economy, but imperative.

No. 2: Rising Global Competition Requires Companies To Adopt New Strategies and Add More Value

As the deepest recession since the Great Depression recedes, American firms are preparing for a more dynamic and globally competitive business environment comprised of leaner and more efficient companies. How are they doing this?

As U.S. manufacturers cautiously shift gears from retrenchment to expansion, nearly 45 percent of respondents to a Deloitte survey say they likely will or are teaming up with other companies in pursuit of mergers and acquisitions. In addition, large manufacturers are increasing their dependence on suppliers of components as they streamline their operations to increase productivity. Why? As the level of competition rises, manufacturers are forced to specialize to a greater extent in order to become leaders or retain leadership in their core competencies. To achieve this, they are increasingly focusing on their strengths and shedding non-core functions.

This trend benefits small and medium size manufacturers by enabling them to acquire new production functions and further integrate themselves into the global supply chains of large manufacturers. Plus, to boost competitiveness, many are becoming more entrepreneurial and offering customers value that low-cost country suppliers can’t match. This includes “proprietary high-technology products, a willingness to customize, extraordinary service and parts support, flexible production runs and fast turnaround times,” says Jerry Jasinowski, former president of the Manufacturing Institute, the research arm of the National Association of Manufacturers.

To expand their core competencies and gain greater marketshare, small and medium size manufacturers also must seek partners in research and development, manufacturing, packaging, transportation, and service and support, said John Engler, President and CEO of the National Association of Manufacturers. As these manufacturers increasingly pursue global business, they should concentrate on product design, quality, and branding strategies, as well as a customer-centric commitment designed to build loyalty.

No. 3: The Emerging Skills Deficit Demands Firms Craft New Incentives To Acquire and Retain Employees

Prior to the recession, the U.S. experienced a skill shortage at several levels. In fact, according to a 2007 survey by Manpower Inc., a leader in the employment services industry, 41 percent of U.S. companies had difficulty filling positions. This mirrored the global average.

But because U.S. unemployment rates are anticipated to remain at a still-high 9 percent through 2011 and may not return to the historicall y normal 5.5 to 6 percent rates for years, according to an Associated Press survey of leading economists, the skills deficit may remain under the radar for now. However, once greater U.S. and global growth resumes, a skilled labor shortage will once again surface for several reasons.

In The Spotlight

The U.S. Bureau of Labor Statistics says growth in the labor force is projected to slow significantly through 2016 due to babyboomers retiring and labor force participation rates of women declining. Jacob Kirkegaard, author of The Accelerating Decline in America’s High Skilled Workforce, says during the last 30 years, U.S. workforce skill levels have stagnated. He also predicts America could face “broad and substantial skill shortages” in this decade. This presents an enormous problem for U.S. firms, especially since a skill cycle that once ran for three years now lasts just nine months.

To a large degree, the future success of American businesses will depend on their ability to find talented employees—who can quickly learn new skills and implement increasingly sophisticated technologies—and retain them. And due to the corporate trend of focusing on core competencies and outsourcing the rest, the depth and range of skills required of employees will increase.

For example, according to a McKinsey Global Institute report, “a purchasing manager in a U.S. manufacturing multinational might be tasked with buying the best value inputs from anywhere in the world to supply factories in Asia. To do that job well, she would need advanced skills in a host of information technologies, the ability to coordinate the activities of colleagues and business partners in a global network, and very likely formal education in foreign languages.”

To ensure a competitive future, employers will need to create more attractive working conditions, invest more in employee training programs, continually refresh and upgrade employee skills, and work with local universities and community colleges to ensure courses offered satisfy market demands.

No. 4: Business Likely Will Become Increasingly Difficult in a More Confident China

For years, Ford Motor Company’s slogan was “quality is job one.” If China had a slogan, it probably would be “stability is job one.” The focus on social order and job creation—which has and will continue to trump all other domestic and foreign policy concerns in the foreseeable future—is reflected in the Chinese leadership’s level of control and conservative approach to economic issues, including its monetary policy.

But, even though instability is greatly feared, the leadership and large segments of the population have developed a new post-recession confidence for a variety of reasons. First, due to the global economic crisis that began in the United States, the credibility of the Margaret Thatcher-Ronald Reagan model of free market capitalism has lost some degree of credibility in the eyes of the Chinese. In turn, many in the Middle Kingdom now view their own economic model as superior.

Second, rising Chinese domestic consumption means that China may rely less on U.S. markets. Today, the American share of global consumption is approximately 27 percent; China’s is 9 percent. By 2020, both countries’ share is projected to merge to approximately 21 percent, according to Credit Suisse, a leading financial services company.

Third, China has become the largest holder of U.S. treasury securities, a position of enormous influence. Fourth, China recently surpassed Japan to become the world’s second largest market. And fifth, China is quickly moving up the technology food chain: it is now the world’s largest builder of wind turbines, a leading manufacturer of solar panels, a likely major producer of hybrid and all-electric vehicles, and as recently reported in the Financial Times, the manufacturer of the world’s fastest supercomputer with chips made in California.

This greater level of confidence is reflected in a number of ways. A more assertive China is concentrating on what it believes is in its own interests: the development of Chinese technologies, the creation of national champions, and the protection of certain strategic sectors, says InterChina Consulting, a management consultancy. And in its quest to secure limited global energy resources and raw materials to support its dynamic growth well into the future, China is becoming more aggressive around the world.

While analysts say China is following the same economic development process as many other countries, including the United States, it is increasingly perceived as less willing to accommodate the interests of foreign companies and governments and is viewed as more protectionist.

In fact, for some time many U.S. business executives have said their relationships with China are deteriorating. Plus, during a speech in Shanghai, U.S. Chamber of Commerce President and CEO Thomas Donohue said although his members’ experiences in China’s market are positive and profitable, “concerns have risen to the highest level in 10 years.” In turn, several bills are making their way through Congress to penalize China for a number of economic and trade practices.

Similarly, from the Chinese perspective, America is becoming more protectionist and has maintained a double standard. For example, stated by Fareed Zakaria in his book, The Post-American World, a young Chinese official questioned how China’s support of a dictator in Sudan in exchange for access to its oil is different than America’s support of a “medieval monarchy” in Saudi Arabia for its oil.

In the future, how the U.S.-Chinese relationship progresses is unpredictable, especially since the character of Xi Jinping, China’s next leader in the 18th Party Congress in 2012, is unknown. However, in the long term, both economic superpowers understand the need to work together and recognize the tremendous downside of a cold war. Consequently, they are likely to cooperate to various degrees well into the future.

Nevertheless, in the short term, tensions likely will rise over a variety of issues, especially China’s currency valuation and the U.S. trade deficit. This, combined with China’s more assertive pursuit of its interests, likely will make doing business there more difficult. As a result, U.S. corporations should ensure that their Asian development plans are not dependent on one market.

No. 5: Rising Global Protectionism Should Encourage Greater North American Economic Integration

For U.S. companies to expand internationally, it’s essential that policymakers—both here and abroad—do not craft anti-globalization or protectionist policies. Unfortunately, this is not the case.

According to Roger Altman, Deputy Secretary of the Treasury during the first Clinton administration, trade protectionism is rising and global economic and financial integration are reversing. Altman is not alone. The rise of protectionism is an increasing threat to the global economy, said Lawrence Summers, Director of the White House National Economic Council. It makes people poor, nations hostile and reduces opportunities for businesses and workers, he continued.

This protectionist anti-global trend, however, has not kept America’s competitors from forging new trade deals. The United States remains a party to 11 active free trade agreements involving 17 countries. Foreign competitors, however, have well over 300 existing free trade agreements without U.S. participation and are negotiating new ones. This is putting American companies at a competitive disadvantage.

In the absence of establishing more job-creating bilateral and multilateral trade agreements, U.S. companies are wise to further deepen economic relationships with Canada and Mexico, our two largest foreign buyers.

Long gone are the days when finished products were shipped across our shared borders destined for each other’s retail shelves. Today, it’s not uncommon for parts to begin their manufacturing process in the U.S., then be shipped to a plant in Canada for refinement and testing, then to Mexico for assembly, and ultimately to a European buyer. In this new dynamic, the U.S., Canada and Mexico don’t just make goods for each other—together we make goods for the world.

Today, greater North American economic integration will promote the spread of technology and further boost investment, innovation, productivity and competitiveness while creating more good-paying jobs and keeping prices low for consumers.

But the speed and efficiency at which North American supply chains operate—a critical factor impacting costs—are being challenged by a degrading U.S. transportation infrastructure that doesn’t only involve international bridges. The U.S. Chamber of Commerce says there has been a significant decline over the last five years in how America’s transportation infrastructure is serving the needs of international trade and the overall U.S. economy. Plus, a bipartisan panel of experts and two former transportation secretaries estimate that an additional $134 to $262 billion must be spent each year through 2035 to rebuild our transportation infrastructure.

If we focus on the pro-rail European model or follow the lead of Warren Buffett, whose company bought the Burlington Northern Santa Fe railroad in anticipation of rising fuel costs that spur demand for rail (which is significantly more fuel efficient and greener than trucks) the U.S. will be better positioned to compete.

Where do the Chinese stand in this regard? China’s trains are the world’s fastest, its network of tracks the longest, and its expansion plans the most ambitious, says Keith Richburg of The Washington Post.

This article appeared in Impact Analysis, November-December 2010, and The Buffalo News, December 4, 2011.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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