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INSIDE LIVEXCHANGE: You Rank, We Rank, Some Stank

Dean Barber, Principal, Barber Business Advisors, LLC.

By Dean Barber
From the July/August 2012 issue

Rankings on the value or worth of places have been all the rage for some years now. Many magazines and news organizations rank places according to some secret sauce formula that we are usually unsure about, but which we will still hold up as true and credible when it serves our purposes.

And on the flip side, rankings are to be ignored and even scoffed at when they do not recognize our place as being the better place. This is especially so when it comes to best places to start a business, run a business, live, work, retire and die.

Yahoo, my default home page, is especially adroit at picking up these type of stories from different news outlets. Last week, I may have read best places for aromatic breezes from stockyards. I should have saved that one.

Indeed, if your community is ranked high for just about anything where a positive spin can be spun, the local economic developer will likely jump on that like a dog on a bone for purposes of marketing, proving that some independent third party thinks your community is particularly notable.

Dungtown: Best City for Collecting Buffalo Chips. Compacton: Best City for Landfill Reclamation. Sootville: Most Affordable Place for Cremation. These are great achievements.  Such rankings set a community apart and differentiates it from the competition, which is what brand consultants say we must do.

Hell: Worst Place to Spend a Summer Vacation or Eternity Suffering for the Sins of Your Past. I’m pretty sure I read that somewhere.

So you probably heard that Texas has been ranked as No. 1 yet again for best business climate in the United States by CNBC.  This is the sixth year that CNBC has ranked the states for business climate and no doubt it has resulted in economic developers nationwide either nodding their heads in approval or shaking their heads in disapproval, depending on where their respective states landed in the rankings.

For companies considering a simplistic approach to where to sink capital investment, this could be seen as a rough guidebook of sorts, although I happen to believe that would be a huge mistake. And I am not just saying that because I am site selection consultant.

Rather, I believe a company should consider location for business reasons after much internal due diligence. In short, senior management should not decide to invest millions into a place because of what a cable television network may say. You do it because it makes the most sense in terms of your long-term strategic plans of serving your customers well.

Dallas, where I chose to relocate after doing some of my own self-evaluation, makes a lot of sense for
my consulting business, which is national and international in scope, for many different reasons. And while I truly enjoy living here, I cannot afford to be and would not be serving my clients well if I were a shill or homer for Texas.

As I tell corporate clients, I work to take them where they need to be. As such, the search is always a tailored process and can take us to just about anywhere.

So the question poses itself, do these magazine and cable network rankings color or skew my thinking in any way? The answer is not really. I mean, I read the stories, maybe file them away in the back of my mind, but I do not put a lot of weight in them.

I do believe, however, that Hell is a one place to avoid.

We all know there are certain places in this country, where the cost of doing business is higher for a variety of reasons—labor costs, taxes, regulatory climate, real estate, logistics, etc. But does that necessarily mean there should be an investment stampede into Mississippi and an exodus from California?

Sometimes, and this a might come as a bit of shocker to some of you but it shouldn’t,  a company actually needs to be in a place where the operating costs might be higher, but which are offset by other special factors. For example, if a company needed precision machinists—workers who had highly specialized technical skills—to say rehab jet engines, New England or Germany just might be the right place.

Even though the labor rates are significantly higher, the skilled workforce is there and because of the nature of the work, in which the cost of labor does not figure prominently in the overall total costs of the work to be performed. In other words, if site selection was exclusively all about labor costs or taxes or fill in the blank, which thankfully it is not, then Caterpillar or GE might not be moving manufacturing capacity back to the United States. In short, it’s more complicated than that.

That is not to say that companies have not migrated investment dollars from high-cost places to lower-cost places to maximize profits. Sometimes that makes sense, but sometimes it does not.  Sometimes companies need to be where the talent and the technical skills are higher, and are willing to pay the price in order to better compete. More often, they need to be in proximity to their customers.

So I look at published rankings with a bit of a jaundiced eye. Do I believe that Texas is a better place for business? Well, yes and no. There is certainly a positive vibrancy to the business climate here, and I’m happy with my choice of moving my business here. And I may even have developed a bit of swagger. But Texas will not work for everyone. (First, you have to learn to walk in boots.) The better choice, depending on the needs of the company, might be South Dakota, or Arkansas, or Pennsylvania or even, gulp, California.  The better choice means a deeper dive into the data and motivations of a company willing to take a hard look at itself and its customer base.

But sometimes companies are not so introspective and wise. Sometimes senior management takes a simplistic approach, hence the herd rush to offshore certain (not all) production. Sometimes it makes imminent sense to have a plant in China, especially if your aim is to serve a Chinese market with your goods or services.

Net Zero
[In this year’s presidential campaign] each candidate [says] the other has poor record or a contributing record to this bad thing that we think of as offshoring. But the reality is that companies continue to ship jobs abroad and any re-shoring trend has been quite limited. For every company bringing work back to the U.S., there’s another shipping jobs out of the country, a Bloomberg review of petitions filed with the U.S. Labor Department on behalf of displaced workers shows.

“Our conclusion was a net zero,” Michael Janssen, author of a new study of the trend for the Miami-based Hackett Group, told Bloomberg. “Some of these jobs that are coming back get a lot of press. But there are just as many that get no press coverage still going offshore.”

Manufacturers have added 495,000 jobs since January 2010, when factory employment bottomed at almost 6 million below the 2000 level, according to the Bureau of Labor Statistics. Of that 6 million, almost 40 percent were lost to other countries, says Robert Scott of the Economic Policy Institute. At the current pace, it would take another 25 years for the U.S. to regain all the factory jobs lost in the past dozen years.

Some of the best-known re-shoring examples have not meant a shutdown of production offshore, but rather a re-examination by management of building products closer to customers. When Caterpillar announced in February that it would move production of small tractors and excavators from Japan to a new plant in Athens, Ga., to create 1,400 American jobs, none of the 1,000 Japanese workers lost their jobs. The company simply moved production because demand for those products was higher in North America.

It is true that China’s cost advantage is eroding, according to the Hackett Group’s “total landed cost” measure, which includes raw materials, manufacturing, transportation, inventory and taxes and duties. In 2005, production in China was 31 percent cheaper than in advanced nations. By 2013, the gap will be down to 16 percent—small enough for U.S. production to make sense in some cases.

But many jobs that China will lose will simply shift to other low-cost Asian locations. Factories in Vietnam, Indonesia, Thailand and the Philippines will benefit, but that won’t help American workers.

Tim Leunig, an economics professor at the London School of Economics, told Bloomberg what may be the sad truth: “The next president of the United States—whoever he is—will end his term with fewer Americans working in manufacturing than he inherited.”

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