Nearshore Rust Belt

All the global city at half the cost. That was my first thought while reading this article in the Financial Times while flying to Akron/Canton last Thursday:

So, as bankers reel in shock, this poses an intriguing new question: will recent experience now force a rethink of assumptions in non- financial spheres too? After all, in recent years so-called “Davos man” has taken it for granted that globalisation, free market capitalism and innovation were all thoroughly good things. But as faith wilts, might business leaders rethink their dependency on, say, cross-border manufacturing supply chains, too?

There are hints of a change afoot. This week, for example, Gerard Kleisterlee, chief executive of Philips, the electronics group, told the Financial Times he expected large companies to move away from far-flung globalised supply chains. He blamed the shift on “green” issues, explaining, “a future where energy is more expensive and less plentifully available will lead to more regional supply chains”.

But green issues may not be the only factor at work. In recent years, western manufacturers have scrambled to streamline their operations in ways that were often similar (e.g. all turning to China for cheap manufacturing). But this concentration has created new vulnerabilities and forms of contagion risk. Or, as a fascinating report* prepared for the World Economic Forum last year notes: “The economic optimisation of supply chains, with the geographic concentration of risk as a frequent corollary, has enhanced the systemic vulnerability to a supply chain failure.”

On one hand, offshoring never has been more popular. On the other hand, global supply chains are not so farflung. Mitigating risk and company logistics are why many American companies seek a presence in Mexico and even Canada instead of venturing into cheaper labor markets halfway around the world.

Domestic nearshoring opportunities also exist. A good example is the VXI call center that just landed in Youngstown:

Youngstown was targeted early on, [Nick Covelli, VXI senior vice president, sales and marketing,] said. “We have some outstanding employees who hailed from Youngstown,” he said. Over time, those employees kept suggesting the area as a possible location, so VXI officials asked their site consultant to focus specifically on Ohio and Pennsylvania.

VXI officials were “pleasantly surprised” when they contacted local officials, who took a “very similar approach” to their work as VXI does, and were impressed with their confidence and positive attitude, Covelli said. Local officials asked what it would take to make the deal work for Youngstown, and explained the benefits of the area labor pool and higher education system.

“In the downtown area, what you guys have going on, that was really quite impressive,” he added.

In deciding, VXI eventually narrowed to two communities, Youngstown and another one “not too far away” in Pennsylvania, Covelli said, which had a “very aggressive incentive plan on the table [although] probably not as good financially” as Youngstown’s. “But with the availability of the site, the confidence that we had in the labor pool and the attractiveness of the community for bringing several hundred jobs, we felt we could be successful with those three components in place,” he said.

Youngstown won the deal with trust and sound financial risk management. The reason we don't see more nearshoring in the Rust Belt is because most people don't realize the opportunities available. Pittsburgh is a very inexpensive world class city. The rest of the country is just beginning to make this discovery. And as the Financial Times article indicates, the fickle winds of globalization may soon favor America's forgotten hearth of innovation.