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58% will decrease their holiday spending by approximately 25%

December 1, 2009

You can make a case that people who travel on vacation overseas during a deep recession must have disposable cash.  Hard to relax if you’re spending the money which could save your house or if you think your job is at risk.  Last week, on a business trip overseas, I saw multiple Duty Free shops banged up, closed, ‘For Rent’.  Not many people wearing non-business attire carrying bags of trinkets. Lots of anxious looking café owners peering forlornly onto the sidewalks.  Perhaps this was due to the exchange rate of USD 1 = Euro 1.5, but I think it’s the canary in the coal mine.

In the ‘States, the recently published Black Friday weekend retail results had average spending falling to $343 a person, down from $372 a year ago (per the National Retail Federation).  While the drop in spending per person was only around 8%, a recent survey of a panel of ‘Highly Involved Moms’ from a well known market research firm (National Data) has some scary implications for Holiday Season shopping:

Holiday spending in 2009 vs. 2008

58% will decrease their holiday spending by approximately 25%
– 18% will increase their holiday spending by approximately 35%
– 24% will spend about the same

Category spending most on in 2009
29% said Clothing
– 27% said Electronics
– 22% said Toys
– 13% said Gift Cards

Traveling by air in 2009?
67% said No
– 33% said Yes

While items already in the stores were imported months ago (note big issue for the US economy as I didn’t say ‘manufactured’), it does show a bad 2010, no matter what the economic and market gurus say about a V shaped recovery.  If people won’t spend during this Holiday Season, forget about anything but basic replacement based consumption for next year.  As a planning premise, the consumer is out of the market and so our recovery will have to come from somewhere else.

During that business trip I ran into the proprietor of a Wine shop in San Juan, Puerto Rico, with an interesting perspective on the recovery.  In Puerto Rico, the Pharmaceutical industry was lured to the island by multi-year tax breaks (the same way we lured foreign car plants to the Southeast) and now has some 60 factories on the Island.  Why not, he proposed, offer a US Corporate Income Tax free ride for 10 years on any manufacturing jobs returned to the US?

The point is everyone is starting to realize that a nation of consumers working for, or as, importers/brokers/service providers/house flippers and suing each other all the time is not really sustainable for the entire country and we need to focus on US value added and not just cheapest import price and adjust public policy accordingly.

How can we do this in our tightly interconnected globalized economy? We most certainly can bring jobs back to the US with a new manufacturing policy based economy as my friendly wine merchant proposed.  At the very least we have to focus on being the source of the most value added in every product, including the design, product vision, local support and contracting/sourcing components because unless you supply the most value added inputs in a cash to cash cycle, you’re supplying cheap labor.  Even China has this reality.  Apple’s iPhone is made from components sourced mainly in Japan and South Korea, based on a US design, but only assembled in China, who gets only about 5% of the total iPhone value.  Foreign car manufacturers get this.  Based on US Gov’t data, those foreign car plants in the Southeast actually supply only around single digit value add in the form of final assembly and painting.  For example, GM engines are often made in Mexico, while those of BMW and Mercedes Benz are produced in the Fatherland.  Thematically, they use their expensive labor to produce high value add goods which we, at cheaper labor rates (remember – we have to work like dogs so a German car worker can take 10 weeks off by law), put through final assembly or drive off the ship and polish up before it hits the dealer’s showroom.

Economists love to quote statistics and charts, and the BLS has a 2009 beauty showing US manufacturing actually holding its own and slightly growing from 1980 on.  These tend to be in high value added items, such as computer chips, CAT tractors, defense equipment, etc.  Meanwhile, most of us buy things on a daily basis having  much less value add, such as clothes and consumer electronics and that is where the huge number of manufacturing jobs reside. And so, there’s a statistical imbalance between quoting a healthy manufacturing sector and total US manufacturing employment as a percent of the economy. If you get HBO, look at their documentary on the garment industry, ‘Schmattas – From Riches to Rags’ to get the picture and its effect on people. Having grown up in a family with blue collar manufacturing based roots, I got to see that a factory is the center of a micro-economy of parts and supplies vendors, and so every factory returning to the US would employ not just its own workforce, but a set of concentric rings of employees. For example, where China uses cheap labor to produce cheap consumer electronics, we could use robotics and flex assembly lines in lean processes.  We would then have people produce not just assembly line equipment, but the ‘O’ rings, fasteners, welding rods, lubricants, spare parts, components, etc.

We used most of our Cash for Clunkers dollars to help mostly Japan recover faster than we are, because our leaders looked at revenue numbers, not value add. Rather than rely on economic theory about the markets to run our economy, we should focus on value added in the US as our underlying rationale for all decisions.  In 1933, during the Great Depression, Willie Sutton was caught by the FBI and asked why he robbed banks.  Looking amazed at the stupid question, he replied “because that’s where the money is”.  In 2009 and beyond, during the Great Recession, we have to focus on “where the value add is”.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

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