The Evolving Excellence Crystal Ball

Sometimes we surprise even ourselves.  Unfortunately.  From an Evolving Excellence post nearly thirty months ago:

Ahh... to be a world tourist.  Globetrotting from country to country in search of lower direct labor costs to help offset unrecognized internal process waste cost.  The first stop was Mexico, then on to Honduras or the Dominican Republic.  After a while there were too many gringos there as well, so how about a nice cruise over to Asia. 

China's pretty nice... lots of cheap labor... that should do just fine for a while.

Uh oh.  It's only been a few years but something's going wrong.  Why are labor costs shooting up?  It's not tracked, but it appears training costs are going through the roof as well.  What's going on?

Time to start looking for the next destination.  Africa is looking pretty good.  It's going to cost a lot to move the factory over there.  But surely the reduced labor cost offsets moving, retraining, putting more inventory on ships, and rejiggling the supply chain.

Yes, Africa was in our sights.  And so it has come to pass.

After the fall of the Berlin Wall, Japan's Sumitomo Electric Industries joined a crowd of automotive suppliers setting up low-cost plants on Europe's eastern rim. But now, Sumitomo is shifting production south of Europe—to the ancient Moroccan port of Tangier and to Bou Salem, a market town set among wheat fields in northern Tunisia. As costs rise in Eastern Europe, the company says, it's getting harder to make a profit. North Africa, by contrast, offers far lower wages and plenty of eager workers.

Sumitomo isn't the only company beating a path to the Maghreb, a swath of four developing countries along the Mediterranean's southern shore. Led by Morocco and Tunisia, the region of 84 million people is attracting serious investment—more than $30 billion over the past five years—to build everything from auto and aerospace factories to five-star resorts and call centers for multinationals.

Why?  Labor cost, obviously.

The Maghreb's appeal is obvious. It's in the Continent's backyard: Tangier lies just eight miles from Spain across the Strait of Gibraltar. The region's governments are relatively stable and business-friendly. And it's cheap, with factory wages averaging $195 to $325 a month. Compare that with the average $671 monthly paid by French automaker Renault at its Dacia Logan factory in Romania.

And who's going?

Those numbers help explain why Renault is building an assembly plant in Tangier that will be one of its biggest anywhere. The factory is expected to employ 6,000 workers, and Moroccan officials say it could attract suppliers that would provide jobs for 35,000 more.

Europe's aerospace industry is just as bullish on the region. Next year, Airbus plans to open a $76 million factory in Tunisia with 1,500 workers. And the industry's suppliers already employ more than 10,000 in the Maghreb, making fuselage panels, high-pressure pipes, and much more. France's Groupe Safran, for instance, has six facilities in the Maghreb employing almost 1,400 people. Inside its airy, brightly lit factory near the Casablanca airport, women in white jackets painstakingly weave electric wires into cables destined for Boeing and Airbus jets.

There are risks.  But the narrow-minded see the short term reward.

Despite such uncertainties, the Maghreb looks relatively well positioned to ride out the economic storm. Unlike Eastern Europe, it didn't gorge on foreign debt. And while the U.N. says overseas investment in the Maghreb dropped by some 5% last year, that's not bad compared with the 21% decline in the Middle East. "We are seeing some projects delayed or scaled back," says James Morrow, Citigroup's chief for Morocco, Tunisia, and Libya. But, Morrow says, "it's the next logical location for companies that want to diversify their exposure."

"Diversify their exposure."  Yes, sure.  Instead of focusing on improving internal business fundamentals and efficiency.  With so many companies now headed to Africa after stints in Mexico, Asia, India, and elsewhere... and that demand then raising the labor costs they sought to minimize. 

Where next after Africa?  I guess Antarctica is wide open.

Comments

[Bryan]

Antarctic? I like it. The fish that can be used for wages to pay for penguin labor will be worth more than our currency in the next 15 years.

[Jason Grijzen]

If the theory is that companies are moving their factories based purely on cheep labour from desperate people then my bet isn't on Antarctica, that's just silly. With the way things are going, the next desperate third world countries that companies move to based off of people willing to work for pennies will be the US/Canada. I'm being a bit sarcastic of course, but I do think that alot of things are going to change in North America. Several unions will colapse, and I won't be surprised if we see a drop in minimum wages. I'm probably just stating the obvious here...

[Joseph C. Samuel]

It seems most of the companies think that the labor is the problem.

My first boss who was a Sindhi(people from Sind province in Punjab, India) are known for their frugal spending in business. He peronally monitored each and every spending. His father asked for the 2Rs. that was missing when my boss settled the account with him and inisted that he gave it back. (I was a witness to that event). That time,1993, the turnover was over 500Million Rupees!

I think many of the companies should move to a family managed organization mind set and must a frugal attitude in spending. Unfortunately companies see labour wages are the only cost that is killing the company.

In my company where I am now I can see where they can save plenty of money but whenever I speak about that the other diretors shoot it down. Could it be that it is the same case everywhere?

[Jason Grijzen]

Your issues with your ideas being shot down are not unique to your company. I think that's how many companies work. I have found that you can only change something to save money (or make any improvement for that matter) with ease if you can.

1. Do this change for free, or nearly free. Management generally requires ALOT of proof that money spent can equal money saved (which is justifiable). The only problem with that is to get the quantifiable data needed to make a decision often requires spending time or money, and sometimes you can’t even get support for that. There may be many hidden costs, or smaller business expenses that could be dealt with, however Management will figure it’s less expensive to loose money that way then to spend the time or money to fix the problem. Usually they just hide the costs in things like overhead and hope that the numbers they assign will cover it. Unless something is obvious, large and staring management right in the face there is little chance they will do anything about it. This is why you usually don't see anyone trying to improve efficiency in a company until the company is almost out of business.

2. Make this change without affecting the work habits of someone in management or at a level of work higher than the change ie: if you change the way an assembly person produces parts (ie: one at a time v.s. batch) and that's the only person affected, there shouldn't be a problem. But if the manager of that production person is required to change the way they schedule labor, there will be a problem. Its human nature to resist change, this resistance will increase the further you go up the corporate ladder because these individuals will have the power to resist the change. Which is why large scale culture shifts will only happen if they are being driven by people at the top.

This does not mean that your ideas will never get adopted. Personally I find the best approach is to work less and less in a technical manner and more and more like a sales person. I have to "sell" ideas to management. It's frustrating as I would like them to take up Lean on their own initiative. A management team SHOULD spearheaded Lean, but a lot of times you have to make due with presenting management with Lean and then getting their buy in. I'm not sure how sustainable this situation is, as your Lean efforts will probably only continue as long as you are there to spearhead them. I’m sure I’ve read somewhere that Jim Womack once said he would simply quit a company that was approaching Lean without management support. (please don’t quote me on this as for the life of me I can’t find the particular article). The only thing you can hope for is that you build interest and then Management chooses to get involved. Another approach I’ve tried is doing process improvement in a "skunkworks" fashion. Most people don't believe results until they see them, so I find something small that isn't the focus of management's attention and I use that to prove out an idea. People will adopt an idea if it makes them money or makes their job easier. It's a slow and frustrating process but you slowly move forward.