|
Nowhere
to Run...
Nowhere
to Hide. Virginia's
"New South" economic development
strategy is floundering in the globally integrated
economy.
Albert
Prillaman, president of Stanley Furniture,
Inc., returned from a scouting trip to
China
last month to visit suppliers and evaluate
long-term relationships. What he observed
both impressed
and unnerved him.
China
has abundant supplies of the hard woods used in
the manufacture of furniture, with even more north
of the border in Russia. Chinese employees work
hard, and they’re very productive. Chinese
businesses are capable of manufacturing to very
high standards. And everyone is eager to learn
more. “There’s capitalism and Americanism
breaking out all over,” Prillaman says.
“They’re not hung up on the communism thing.
They’re trying to build a life for themselves.
And they know
America
is their market.”
Five
years ago, China
supplied five percent of the hard-wood furniture
sold in the United States. Today, the volume is closer to 40
percent. In five more years, Prillaman says, the
number could be 60 percent as U.S. furniture companies outsource even more of their
manufacturing. Stanley Furniture, headquartered in the hamlet of
Stanleytown near Martinsville, needs to
integrate
China
into its supply chain to survive. Prillaman hopes to
keep Stanley’s higher value-added manufacturing
processes in the U.S.
– but he’s not venturing any assurances.
Furniture,
long an economic pillar of mill towns across
Southside Virginia is fast going the way of
textiles and apparel. Indeed, manufacturing
as a whole in
Virginia
is hurting. Despite scores of announcements
of new facilities and plant expansions,
manufacturing has declined as a percentage
of Gross State Product (GSP) from 15.8
percent in 1990 to only 12.2 percent a
decade later.
There appears
to be a massive disconnect between the
realities of the global marketplace and Virginia’s economic
development policies. The Old Dominion
pursues a classic "New South"
strategy – "new" in the sense
that it post-dates the Civil War – of
recruiting out-of-state corporations to
locate their business facilities here. The
ploy made sense after the devastation
wrought by the Late Unpleasantness, and even
through World War II, when the South
remained an economic backwater that offered
Northern capital access to cheap land and
cheap labor. It served
Virginia
well,
arguably, into the 1980s when European and
Japanese corporations invested here to gain
access to U.S. markets. But
in a globally integrated economy in which Mexico, Brazil, India
and China
set the bar
for cheap labor, Virginia
is fast
losing its allure.
Influenced
by the drum-beat of press releases announcing the
latest plant expansions –- in the latest coup, EsselPropack
will create 81 jobs in Danville to manufacture
toothpaste tubes – Virginians have persuaded
themselves that they are national leaders in the
economic development game. In 2000, Virginia
recorded expansion projects totaling $6.3 billion
– a state record and one of the top performances
in the country. Site Selection magazine
named the Virginia Economic Development
Partnership and the Greater Richmond Partnership
as two of the Top Ten economic development groups
in the country. We may not be
Silicon Valley
or Las Vegas
– and wouldn't want to be – but such a
performance would seem to ensconce us in the top
tier of growth states.
Virginians
are very
good at closing industrial real estate deals. But
they’re competing for a shrinking supply of
prospects interested in locating in the
U.S.
Meanwhile, old manufacturing facilities in the
commonwealth are being shuttered as rapidly as new
ones are being built. According to Bureau of
Economic Analysis numbers, the economic value of
Virginia's manufacturing sector
increased only 35.5 percent during the 1990s –
barely ahead of the 31.8 percent inflation rate
over the same period, and trailing the 40.8
percent increase in U.S.
manufacturing.
The
emphasis on recruiting manufacturing investment
has distracted Virginians from alternative
economic development strategies that could have
proven more fruitful. Despite the emergence of
Northern Virginia
as world-class technology powerhouse, the state
ranked only 17th nationally in the measure of prosperity
that matters most in a full-employment economy – increase in per capita
income (1991-2001). An
analysis of income growth within Virginia over
roughly the same period, 1990-2000, shows clearly
that the income growth was concentrated in
Northern Virginia, led by a 64 percent increase in
Fairfax County/Fairfax city/Falls Church. With
some isolated exceptions, the performance of downstate localities
generally was more in line with Arkansas and West
Virginia. (Click here to see
chart and interpretation of numbers.)
Economic
developers are well aware, of course, that
they’re chasing a shrinking pool of
manufacturing investment dollars. Accordingly,
they have broadened their hunt in the past decade
to back-office operations and call centers –
anything that creates jobs and brings in new
investment. Unfortunately, they’re running into
another dismal reality: What China is doing to
manufacturing, India
is doing to the back-office business. Building off
a phenomenally successful software industry in the
Bangalore
region, Indians now are performing less exalted
clerical functions that were once thought to be
impractical to export overseas.
A
case in point: In 1988, Rakesh Gupta, his brother
and sister founded a company called TechBooks,
which prepared content – editorial, statistics
and databases – for publication in print and
electronic format. The company soon developed
promising niches providing composition services
for scientific and professional publishers. This
year,
the Fairfax-based company is expected to generate
$52 million in sales, is growing into new markets and is
growing at a rate of 25 percent or more per year.
Gupta
attributes his success, in part to the company's
early embrace of XML technology but also to what
he calls the “Delhi
model” – the delegation of the most
labor-intensive jobs to its Indian workforce in
the Delhi
region. Two thousand of the company’s 2,300
employees work there. India
can draw upon a labor pool of 300 million people
fluent in English, millions of whom are college
educated and willing to work for a fraction of U.S.
wages. Meanwhile, high-bandwidth
telecommunications make it easy to transfer large
volumes of work to India
with no loss in productivity.
“Clearly,
the Indians have been leaders in software writing
and programming,” says Tom Cunningham, CEO of
Techbooks. “Now they’re moving another step,
to the utilization of that technology. Coding,
tagging, content preparation, forms processing,
call-center staffing, help desks – anything that
requires well-educated human interaction or
involvement.” For decades, U.S.
business tended to steer clear of India, which aligned itself with the
Soviet Union
during the Cold War. But attitudes are rapidly
changing. Cunningham predicts that American
companies will be employing millions of Indians
within a few years. “If you’re not outsourcing
[to India] today, you’re sub-optimizing your
performance.”
The
technology-intensive tasks performed in
back-office operations and fulfillment centers are
precisely the kind of business that many downstate
Virginia
localities are hoping to recruit as a substitute
for manufacturing investment. Despite strenuous
efforts by the Gilmore administration to steer
business from
Northern Virginia
’s info-tech sector to downstate Virginia, however, investment never amounted to more than
a trickle. Ironically,
thanks to the presence of many successful Indian
entrepreneurs in the region,
Northern Virginia
has developed stronger commercial ties to India,
on the other side of the world, than to other Virginia
communities 100 to 200 miles down the Interstate.
In
sum, the antiquated “New South” recruitment
strategy targets corporate capital that is
increasingly prone to locate in advanced
Third World
regions such as China, India,
Latin America
and the Asian Rim. Other than accepting Third
World wage levels, there are only three ways to
compete successfully for this investment: provide
government subsidies or achieve higher
levels of productivity. So far, Virginia economic
policy has focused mainly on the first option.
(In a
late-breaking development just before publication,
the Warner administration announced the decision
by AT&T Wireless to invest $5.4 million and
hire 300
employees in Russell County to provide billing and
support. Clearly, this investment is
good news for Southwest Virginia. But it also
required $700,000 in state subsidies. And given
the momentum of investment in India, it's not
clear how many more such investments are
forthcoming or how long Virginia can count on
retaining the facilities that are here.)
For
a glimpse of a more optimistic future, take a look
at Ironman Wetsuits, a Richmond-area company that
designs and sells high-performance apparel for
athletic competition. CEO Keith Simmons, a
triathlete, produces the most
technologically advanced wetsuits in the world.
Breaking free from a surfer-wetsuit industry which
had changed little in decades but the colors of
the suits, Simmons relentlessly seeks ways to
enhance the quality of his products. He scours the
world for advanced materials that will make his
suits more hydrodynamic, provide a freer range of
motion and do a better job of regulating the
athlete’s body temperature.
Simmons
also out-sources manufacturing
to
Asia. He has found a number of companies in Taiwan, Thailand
and mainland China
with experience in producing diving suits. The
quality of their work is excellent, and they
relish the challenge of meeting his rigorous
specifications. “We’re always pushing the
limits of their R&D departments,” Simmons
says. “We continually present them with
scenarios they’ve never been presented with.”
His company also has developed a relationship with
the Human Performance Lab in Calgary,
Canada, where R&D has yielded proprietary
technology.
The
Richmond
office takes over the function of product design,
brand management and
coordination of global manufacturing and
distribution. The strategy has worked: Ironman has
become the No.
1 designer of high-performance wetsuits in the
world. “We have a very lean business model,”
Simmons says. “We can react very quickly to
changes in the marketplace.”
The
U.S.
competitive advantage in the global economy
resides in those activities requiring the highest
level of knowledge input: R&D, product design,
brand building, finance and the integration of
complex systems. As other regions in the U.S.
have discovered, the only lasting source of
regional prosperity comes from continual
innovation and the migration of workers into more
creative, more productive, and higher value-added occupations.
“Economic
development” in the most successful regions of
the U.S.
has moved far beyond the building of industrial
parks and recruiting out-of-state prospects. The
critical infrastructure of the globally integrated
Knowledge Economy extends to schools and
universities, research centers, cooperative groups
and networking organizations – all institutions that stimulate innovation and enable
companies and individuals to perform higher
value-added work.
If
Virginia
hopes to prosper in the coming decades, it needs
to move beyond its traditional, real estate-driven
approach to economic development. We must focus on
what it develop human capital by attracting
members of what Richard Florida terms the
"creative class." We must create
the conditions that will enable Albert Prillaman
to keep the highest value-added manufacturing
operations in Virginia. We must foster an entrepreneurial climate that
gives rise to more companies like Techbooks and
Ironman Wetsuits. If we build our own successful
companies, we won’t need to recruit them.
Finally, we must ensure that all Virginians
acquire the education and skills they need to
create and participate in globally
competitive enterprises.
--
July 22, 2002
|
