Arun’s notes from the US in the Great Reinvention
America in the era of the Great Reinvention has a quite different mood. Landing in Los Angeles with my younger son last month, I recalled it was 25 years since my first visit. Compared to my previous visit a year ago when the mood was dire, the economy was now clearly in recovery mode.
But the mood was one of cautious pessimism, rather than the cautious optimism that I’ve found in the first phase of a recovery of the five previous US downturns. Yes the Americans feel that they have dodged the economic holocaust that the GFC could have become and they are relieved that the downturn was much shallower and shorter than expected. But there is an uneasy sense that around the corner lurks hidden dangers that will plunge the economy back into the depths of recession, or worse.
So consumer sentiment remains muted and businesses, despite having balance sheets that are awash with cash, have gone on an investment strike. The main driver of the recovery therefore has been government stimulus spending. But the resulting deficits are clearly not sustainable, at least to the extent that the spending has been consumption oriented. Even where the spending has been oriented towards infrastructure, the efficiency of this spending has been mixed.
To the average American, the dangers of the situation are obvious while the upside at best seems limited. My son and I visited Los Angeles, Yellowstone National Park in northern Wyoming and then meandered down the length of Wyoming to Denver Colorado. Wherever we went people reported that business was OK, but was far from booming. Yes people are eating out, but the average spend had fallen. Holidays are shorter. Cheaper options in most things were being pursued.
Wyoming itself is an extraordinary state. Possessing spectacular scenery, it is the ninth largest state in America, but with a population of only half a million people. Victoria is of a similar size, but with a population 10 times that of Wyoming. It still has the rugged qualities of a state that symbolised America’s wild west – rodeos are popular as is hunting, fishing and outdoor sports.
When we switched on the local radio during some of our long drives, it was easy to be convinced that America had been taken over by a rabble which was bent on selling the country out to either fundamentalist Muslims or Communists depending on the particular paranoid bias of the shock jock. The main political phenomenon in America at the moment is the rise of the Tea Party – really a protest movement of the disaffected which knows what it is does not like but has no coherent political platform.
The timeless beauty of Yellowstone National Park was invaluable in restoring perspective and sanity. As was seeing America through the fresh and innocent eyes of a 12-year old. One of the things I love about travelling with the children is the thrill of seeing the world through their eyes. It provides a new and enthusiastic perspective on familiar places and helps keep their parents young.
It’s easy from an Australian perspective to poke gentle fun at the Americans. Everything seems to be done to excess. The servings of food are generally enormous but of terrible quality. The girth of the average American has increased hugely over the past 25 years as they gorge themselves on plentiful, cheap junk food. It’s easy to speculate that this may be the first society on earth to eat itself to death. There is a surprising level of paranoia, gun laws are absurd and there seems to be no way of preventing the periodic mass shootings. People still drive gas guzzlers, albeit in notably lesser quantities.
I went to China straight after returning from America and the contrast in the mood of the two countries was palpable. In China unbridled capitalism continues full tilt – there is a mood of optimism and growth continues apace.
One of the ironies of the modern world is that an ostensibly communist government is overseeing one of great capitalist revolutions, while a capitalist government has ended up owning a number of the country’s major financial institutions and industrial companies.
But it is a danger to fall into the trap of writing America off. The country remains one of the world’s major sources of scientific research, academic excellence, intellectual leadership and creativity. Yes many countries are closing the gap on America and its relative dominance is declining. But this is not the same as absolute decline. In parallel with a decline in many areas, is growth in others. In fact it is more useful to think about what is happening in America as an era of a Great Reinvention.
Reinvention, is something that the country has done from time to time and Americans probably do better than anyone else, without revolutionary violence (ignoring the shock jocks and the rantings of the Tea Party). The problem about a time like this is that much like an Australian bushfire, the destruction is obvious, but you need to do some on the ground research to see the new green shoots emerging. Most people simply rely on stereotypes propagated in the popular media and miss major new trends and opportunities.
Take the case of US manufacturing. We all know that it’s doomed with low cost Asian manufacturing dominating the world. In fact doesn’t China already make everything? Wrong!
Well regarded research based US fund manager Turner Investment Partners has issued a report with some facts that might surprise you. Manufacturing in the US is alive and well. Consider this:
The US remains the world’s leading manufacturer accounting for about 22% of the world’s manufacturing output and is the third largest exporter of manufactured goods. Exports of manufactured goods in fact increased by 60% between 2000-2008.
- US manufacturing workers, thanks to the quality of their technological tools, are the world’s most productive – 50% more productive than workers in the 11 next-best nations.
- In 2008 U.S. manufacturing workers earned an average of $71,623 annually, 26% more than the $57,064 that non-manufacturing workers made.
- There are 286,000 US manufacturing companies today.
As Turner emphasises, US manufacturing is not so much dying as changing. Yes a number of the industrial titans producing basic products and third rate cars have collapsed. It is also true that the service sector has grown faster, reflecting the fact that the increase in American wealth has been directed more to spending on services, than more goods. This has meant US manufacturing generates less jobs in total. But it makes more high-end products than before.
As Turner points out, low wages are not the only component of manufacturing costs. US manufacturing is moving to exploit the nation’s strengths in sophisticated research and development, engineering, manufacturing, and management; access to raw materials and major markets; proprietary technologies; and infrastructure.
In fact Chinese firms have invested about $5billion in US manufacturing facilities in recent years. One example, Yuncheng Plate Making, the world’s largest manufacturer of gravure cylinders used to print labels on plastic soda bottles, has opened a state-of-the-art plant in South Carolina. The company purchased land for the plant for about 25% of the price of the land in China. Electricity in the U.S. proved a bargain, too: Yuncheng pays just four cents per kilowatt-hour in Spartanburg, versus up to 14 cents in China.
While some of the US manufacturing titans are suffering, many smaller companies are rising to take their place. According to the Cato Institute, for every one US manufacturing industry that’s suffering a decline in revenue and profits, two US industries – led by small companies – are growing.
There are endless examples that US fund managers I meet come up with, and one has to bear in mind that small in America, is often quite large in Australia. To consider just a few examples cited by Turner (in reviewing these, bear in mind that to be in the top 20 of listed companies in Australia requires a market capitalisation of only around $A12bn).
First Solar of Arizona (market capitalization: about $A12 billion), the world’s largest maker of thin-film solar modules, has the lowest manufacturing costs per watt in the solar-energy industry. It’s objective in the coming 4 years is to try and achieve price parity in power generation for its products, at 53-63 cents per watt, with conventional fossil-fueled sources of electricity. First Solar was first in the industry to break the $1 per watt barrier in 2008.
- Johnson Controls of Milwaukee (market capitalization: about $22 billion) makes heating, ventilating and air-conditioning systems for buildings; automotive batteries for conventional, hybrid, and electric vehicles; and automotive-electronic systems. It has been routinely named one of Industry Week’s 50 best manufacturing companies. Turner think rising automobile production in emerging nations presents a long-term opportunity for a financially strong, well-managed multinational supplier like Johnson Controls to increase its sales and profits.
- Three leading companies in the health care sector – DePuy (a unit of Johnson & Johnson), Stryker (headquarters: Michigan; market capitalization: about $23 billion), and Zimmer (headquarters: Warsaw, Indiana; market capitalization: about $13 billion) – make orthopedic products such as artificial hips and knees. Those products command some of the highest profit margins in the health-care sector.
- Caterpillar (headquarters: Peoria, Illinois; market capitalization: about $44 billion) is the world’s largest maker of construction and mining equipment, diesel and natural-gas engines, and industrial gas turbines. More than 3 million of Cat’s machines are in use worldwide.
The coming few years will see a tug of war between the negative macro-economic forces of the Great Deleveraging, that is still going on and the positive micro-economic forces of the Great Reinvention. And sometimes it will result in episodic crises. But do not make the mistake of ignoring the emerging great opportunities in this changing and at times dangerous landscape.
In Denver we stayed with a cousin who had come to America after the vicious riots in Sri Lanka in 1983. She took us to a game of baseball which the Americans regard as a fast version of cricket. Unlike even a slow game of cricket though, baseball is a game where the ball so dominates the bat that scoring runs is rare. This was the second game that I had ever attended and unlike the first, where it was at least the sixth innings before any batter was able to hit the ball, it was an exciting game going down to the wire, 9-7.
The sixty thousand or so spectators originated from all corners of the globe. But as they sang the Star Spangled Banner and God Bless America, which my cousin joined in a heartfelt way, it was clear that they were all Americans. And it was hard not to marvel at the ability of this country to have absorbed endless waves of immigration and refugees over hundreds of years and to have absorbed everyone into a country which is diverse, argumentative, but still at peace with itself.
For all the conflict that America has with the world, more people of all persuasions want to go there to settle, than to any other country.
As I watched my son land his first trout in the upper reaches of the Colorado River, with the Rocky Mountains in the background, it was easy to appreciate why. America remains a country of vast beauty, opportunity and ideals.
Thriving in the era of the Great Reinvention is going to require perspective. The perspective that comes from doing some basic research and looking behind the stereotypes. And the perspective that comes from taking some time out to go fishing.
