Globalization and Free Trade Agreements

By Timothy Chen | Published: March 19, 2015 – 9:32 am

I recently read an article in the Wall Street Journal that analyzed capital investments by multi-national car manufacturers in North America. These multi-billion dollar investments in car manufacturing facilities both completed and planned covered the period from 2005 through 2020. The time line of investments completed and planned during this period shows four (4) in the American Southeast and seven (7) in Mexico. The author’s thesis is that a significant reason that these companies have decided to make these huge investments in Mexico rather than the American Southeast is because of the greater number of Free Trade Agreements that Mexico has negotiated with other countries representing large current and future markets. Certainly, the USA and Canada currently represent a significant market for manufacturing facilities in Mexico. The NAFTA trade agreement has been a significant factor in this trade relationship. Even so, I would assume that the differences in labor costs / component material costs are not sufficient to justify the significant investments in local infrastructure, local suppliers and local work force training over many years. I think that we are seeing a shift in strategic planning by these companies (Audi, Nissan, Mercedes-Benz, and BMW). The Mexican Free Trade Agreements with the European countries, South American countries and those in the Far East will offer in the future a competitive pricing edge that cannot be matched by products manufactured in America’s Southeastern facilities. The current reluctance by some in the US Congress to accept Free Trade Agreements seems like an exercise in futility. As the saying goes – “That horse has already left the gate!”. From a moral perspective, we should congratulate Mexico for its far sighted thinking since Free Trade Agreements work both ways. They have opened themselves to trade coming in the other direction. I have read that the NAFTA Agreement has caused significant harm to Mexican small farmers since the American farmers are enormously productive. So what do I take away from this discussion? Globalization is no longer defined by how we address a market confined to a specific country, but how to efficiently serve many markets (which happen to be divided by political country boundaries). The WSJ article is “Trade Pacts Give Mexico An Edge” by Dudley Althaus and William Boston (March 18, 2015).

Rapid Prototyping using 3-D Printers

By Timothy Chen | Published: November 9, 2012 – 11:14 am

I have read several articles recently on three dimensional printing. The concept is to “print” plastic or metal, layer by layer forming three dimensional objects. Each layer is approximately 20 to 30 microns (0.02 to 0.03mm) thick. Coordinated by a three dimensional computer automated design (CAD) software, the designed object is sliced into thin layers, each layer sequentially printed by the three dimension printer. Think of an inkjet printer, designed to continuously print on top of the previous layer, building up the object based upon a design concept captured in a software database. This new approach to the manufacture of fabricated products could change the concept of globalization. We believe that there is value to the ability to prototype quickly, try the product through market trials and make modifications on the fly based upon market feedback. Once the local market trial is completed, the volume production can be performed in the most cost effective manufacturing source/ location. The concept permits multiple versions of the same basic product, tuned to meet the requirements of each “local” market. In other words, the antithesis of “one size fits all” or “Any color as long as it is black – Henry Ford.” WETA Workshop … How to make Hobbit stuff

Mathematics of Globalization

By Timothy Chen | Published: September 5, 2010 – 10:40 pm

I recently read an article in The New York Times – “Exchange Rate Hurts Toyota, giving Rivals a Chance to Leapfrog It” (September3, 2010). The gist of the article is that because of the strengthening Yen against the US Dollar and the fact that Toyota imports 35% of the autos it sells in the US, their products are less competitive and they are losing market share. The article goes on to quote a Toyota spokesperson in Tokyo … “Our goal is to produce cars where they’re sold … the idea is to try to make as many cars locally to increase local content. That just makes business sense.” The change in thinking is extraordinary.

A More Complete Globalization Analysis

By Timothy Chen | Published: June 10, 2010 – 9:50 pm

Any discussion of globalization tends to be sharply focused on the lost of traditional manufacturing jobs. The conversation begins with the fact that this manufacturing facility closed and the production was moved to “you name the low wage country“. I read an article which quoted an analysis performed by the Personal Computing Industry Center at the University of California, Irvine. The center estimated that for the Apple iPod, thought manufactured in China, that the Chinese labor content represents 2% of the wages involved in the design and manufacture of the product. Whereas the American labor content represents 70% of the wages (engineering, software and distribution). The implication is that if the total picture is analyzed, the labor that is being performed in “you name the low wage country” are the lower skilled value add labor and what is be retained in America is the higher skilled value add labor. Of course the ratio depends upon the type of product. Highly technical electronic products would have a more favorable American labor content. Products with less technology, such as furniture, would probably have a distribution that not as skewed, thought the furniture designer and all of the support labor to market, sell and distribute would be significant. The true issue with globalization is that the value add labor in America requires a skilled work force. Americans have benefited significantly from the higher standard of living that has resulted from globalization. We should focus on the real issue, how do we train the next generation of workers so that they have the opportunity to participate in a global economy.

Time to Market

By Timothy Chen | Published: March 17, 2009 – 1:01 am

I am of the opinion that one of the advantages of globalization is shorter time to market. Why is “short time to market” important? Basically, I do not believe that anyone can predict the future with any level of accuracy. General trends can be predicted, but it is impossible to consistently predict actionable specifics that can be used by an enterprise to plot what the specific products the future market will require, hence future product requirements. The only reasonable strategy is to develop a product development cycle capability which is flexible and can quickly get a product to market. Thinking of the global market as a source for product components, provides advantages in lower product cost and shorter time to market. I often wonder how the automobile industry has managed to survive with 3 to 4 year development cycles. The recent run-up in gasoline prices last year demonstrated how quickly the market can change. The automobile industry was and is currently faced with products offerings that featured few products that the customer want. I suspect that part of the answer is a culture based upon NIH (Not Invented Here) and an unwillingness to cannibalize existing product markets for greater leverage. The industry has made an effort to move away from a vertical integration mind set (everything is manufactured in-house from raw materials to finished automobiles) touted by Henry Ford in the early 1900’s. They have attempted to spin-off major components as separate business entities (axles, transmissions, etc.). Unfortunately, these spin-offs still bear legacy ties to the original automobile manufacturer which closely tie their future to the original automobile firm. Take Away Thought: The global market should be thought of as a smorgasbord of products and services. Product planning is a constant evolution based upon close consultation with the firm’s suppliers and customers. Constant product evolution implies a willingness to cannibalize existing products through the introduction of new and better products. An example of those that failed to adapt to change are those firms that made huge profits just 10 to 15 years ago in 35mm SLR cameras and 35mm film. The majority of the market has switched to digital cameras and is gradually switching to using their mobile phones! PS: Here is a radical thought … rather than supporting the traditional automobile companies with R&D funds for the development of the future alternative power systems, maybe the US Federal government should put their support behind a separate entity that could supply power systems to all manufacturers, domestic and international. Another thought is invest the R&D funds with the traditional automobile companies, but insist that the technology that is developed is “open source” and available to all!

Globalization – What is it?

By Timothy Chen | Published: March 14, 2009 – 5:54 pm

Globalization has been used in context of nation to nation trade. In a more general sense the word can be interpreted as an entity incorporating the products and services of others in the development, sale and distribution of their products and services. We typically think of manufactured products and services, though one could make the case that the current American financial crisis was spread worldwide by that sale of those financial instruments globally. In other words, single financial instruments sold individually, many financial instruments packaged into larger financial packages, financial derivatives sold based upon the fluctuation in performance of those financial packages. Take away thought: Any business to business transaction can be thought of as globalization. Total vertical business integration is not cost effective, feasible or competitive. Vertical integration is an anathema to robust business flexibility or the ability to shift approaches quickly as the market changes. NIH (not invented here) and the concept of “sunk costs” must be avoided.

Globalization & Collaboration

By Timothy Chen | Published: March 3, 2009 – 6:07 pm

There is an article in the March 3rd, 2009 issue of the Wall Street Journal (“Intel Turns To Taiwan For Its Push Beyond PCs”) which I believe illustrates the competitive advantage of globalization. Intel has agreed to share its microprocessor technology with a Taiwan based IC contract manufacturer (TSMC) in the development of new integrated circuit products. The custom IC products will integrate the microprocessor technology from Intel with the unique circuitry specific to narrow market applications for production by a company that specializes in custom IC manufacturing. The implication is that the joint ventures customers will also gain a competitive advantage in the development of their product(s) due to the higher integration at the IC device level. Take Away Thought: By leveraging the competitive value add from each partner ( Intel’s microprocessor technology expertise and TSMC’s manufacturing expertise ), their customers have the potential to become more competitive. This ripple effect of improved productivity gains is good for all.

Service Based Economy

By Timothy Chen | Published: February 24, 2009 – 5:26 pm

The trend in the United States is to an economy based more upon services and less upon manufacturing. Many blame this trend upon globalization or the movement of manufacturing to “low wage” parts of the world. Certainly to a certain extent this is true. However, another factor is the significant improvement in manufacturing productivity and the shift from an emphasis on low skill manual labor to automated machinery requiring fewer, technically skilled technicians to maintain and operate. I watched a show last night on the Discovery Channel – “How Things are Made”. I was fascinated by the automation demonstrated in the manufacture of everything from batteries, to tin cans, to camera lenses. The combination of low cost imported goods (when was the last time anyone purchased a piece of clothing made in the USA??) and high manufacturing productivity has resulted in unprecedented high level standard of living for those who are able to compete. I suggest that rather than a detriment, the world has greatly benefited from globalization. Take Away Thought: We in the developed economies must share the global economic pie with those who have a lot less. Even with the huge growth in its economy, the Chinese still have a huge population living at a very low subsistence level.

Efficient Resource

By Timothy Chen | Published: February 17, 2009 – 10:44 pm

Globalization has been defined as requirements seeking the most efficient resource. We tend to conceptualize this as a nation to nation exchange or in terms of monetary measurement. I suggest that every time baseball players are brought in from the Dominican Republic, an orchestra conductor from Venezuela (Gustavo Dudamel will lead the Los Angeles Philharmonic), etc. … this exchange should be considered as globalization. These exchanges are made to improve the overall performance of the products offer (e.g. better baseball team, better orchestra, …). Take away thought: The Internet has significantly enabled efficient resources, physically located anywhere, to have the exposure to a wider potential market. Better products should result.

Globalization – Not necessarily just cheap labor

By Timothy Chen | Published: February 9, 2009 – 8:16 pm

In today’s Wall Street Journal, there is an article about the new version of the Amazon Kindle. This very popular e-book product incorporates a unique display technology which is supplied by a company based in Taiwan. In this case, global sourcing was necessary to obtain the technology and volume manufacturing capacity for a very critical component of this e-book product.

Take away thought: BRIC … Brazil, Russia, India, China have been identified as the rapidly emerging economies. Each has developed technical expertise in specific disciplines which are competitive in the global market … for example, the USA will probably have to depend upon Russia to deliver our astronauts to the International Space Station for the near future, India has developed a reputation for providing IT support personnel, … The global market is more than lower labor costs, engineering design and development resources may have a more significant long term impact … develop relationships that can be expanded to incorporate these higher level value added capabilities.