In the past three months I’ve become acquainted with something new to me – Public Private Partnerships. Many of us have pondered what we ourselves can do to get our regions moving and working again, and what I’ve found is that it really is possible to do so.
The issue of slowing economic growth in individual regions is not unique to the United States. It has been occurring throughout much of the developed world since the Great Recession of 2009. The computer age has made many industries obsolete, and Trade agreements have opened the door for developing countries to compete on a global scale. This is a very real issue that has caused entire economies to vanish. Over the last 90 days I’ve visited several locations whose economies boomed for a century, then dwindled to nothing over a 10-year period – we’re talking zero.
To give this blog a little context, I have been a foot soldier in the globalization movement from the very beginning. My personal involvement began in the 1980s when I worked as part of Toyota’s North American Production. This was a reverse case, involving a Japanese company moving to the United States to lower its cost while blunting political criticism. Little did I realize that it was a harbinger of things to come.
Following my days with Toyota I moved to John Deere, where in order to sell our tractors and combines around the world we moved our production facilities to locations including Mexico, Brazil, China and India. One funny aside – during my first trip to Brazil, I was giving a speech about “we Americans” when it dawned on me that all of the people in the room were Americans. I was from North America and they were from South America. I had a lot to learn, and I learned it quickly!
My big leap came when I moved to Honeywell. That was the environment in which I developed a fondness for people from all over this planet. My friends in China, Malaysia and Poland are no less deserving of being successful than we are here. These folks are just as smart (if not smarter) and now have the experience that they once lacked.
My view is that we all live on this giant blue marble called Earth,
and we should all celebrate each other’s successes.
The following three stories detail the adventure I’ve been on recently. I’ve been learning about distressed economies and vocations here in the United States, and how —together — we can be successful again. I’m the cash man, and this is a real cash story.
Maine
After I gave my students their final exam back in March, I left Oregon to spend Spring Break in Northern Maine, where the temperature was a frigid -5F. I’d heard that this region of Maine was a beautiful place, but it was damn cold and snowy that week! My traveling partner was Lee Khan, and part of the mission we undertook was to assist an economically-distressed community that had fallen prey to its primary industry — newsprint — becoming an outdated commodity.
Throughout the 20th century, this area prospered as a result of the paper mills that supplied newsprint for The New York Times and the Boston Globe. One of the guys we met with told me that a family culture had developed over the 20th century. Locals had long assumed that one day they’d replace their fathers on the production line, but with the arrival of the Internet age their industry had vanished in a 10-year period. When we all quit buying physical newspapers, these folks took the hit. Nothing had changed in this community for generations and suddenly they were forced into a world that changes every day.
In an attempt to remedy the situation, a public private partnership was formed. Participants included the Our Katahdin local economic development team; the town of Millinocket; local forest and logging companies; the Central Maine & Quebec Railroad; local utility and wastewater companies; Mid-South Engineering; staff members from the offices of Senators Collins and King and Representative Poliquin; the University of Maine; and three proposed business partners.
Lee organized a meeting to discuss economic development at the old mill site, inviting the town fathers, representatives of Senators Susan Collins and Angus King, and an assortment of local entrepreneurs.
My job was to assist with figuring out the trade implications of converting the old plant into:
- a data center
- a biomass fuel facility and
- a solar farm
A bit of research found that — with reference to the data center — there was no problem. In 1996 the World Trade Organization adopted the International Technology Agreement (ITA), which covers a large amount of technology products. This meant there would be no exposure to duties at the Millinocket site and the data center could land there just fine, with no tariff consequences.
The biomass fuel facility, which would make fuel out of Maine wood chips and limbs after the logs are harvested, represents a very smart approach. Like the paper mill before, this operation would make use of Maine’s renewable resource – trees. Supply is taken care of, with the added bonus that the roads and other infrastructure were built decades ago to support the mill. For the biomass company, this is a perfect supply chain.
At the end of April the owners of the biomass company notified the United States Air Force of their intent to apply for a $55 million DOD grant to develop a commercial-scale Integrated Biofuels Production Enterprise at the Our Katahdin site. All who have been involved have our fingers crossed that this gets approved and becomes the cornerstone business of a future economic renaissance.
The last business under consideration presented some very real challenges. The solar industry runs very high duties, as well as very high overall supply chain costs. Beginning in 2009, businesses that import solar panels to the United States and Canada began facing unexpectedly high tariffs on goods manufactured in China and Taiwan. This was the result of the panels becoming too sophisticated to qualify as a duty-free import. Later, in 2015, this situation grew even worse when the U.S. Commerce Department placed anti-dumping duties as high as 165% on solar panels and cells from China. This followed a preliminary finding that the products were being sold too cheaply in the U.S. market. At the same time Canada enacted specific provisional duty rates of 281%. The impact of this trade disagreement with China was that in 2013, U.S. imports of solar products from China were worth $1.5 billion, representing half of the 2011 levels. Starting at this disadvantage point, a potential remedy could be to put these solar farms inside a Foreign Trade Zone (FTZ) to avoid — or at least defer — the duties. This will need further development.
In talking with these businessmen I found that these are exactly the kinds of folks I was referring to when I wrote the blog, How Does a Small Business Plan and Effectively Operate their Supply Chain? These entrepreneurs are brilliant thinkers, designers, marketers and manufacturing people, but a lot of the things outside of their sphere of expertise are simply beyond them.
Supply chains grow around product growth, with little focus on optimizing how they actually work. As a result they become complex, messy and expensive. This brings us back to the question, “How does a business go about planning and executing this complicated equation without killing the spirit and flexibility that created its success to begin with?” The answer is through People, Process, Tools (or “People, Planet, Profit” as they call it in Vermont – which I’m perfectly agreeable with.)
I found working with the community of Millinocket, Maine to be a tremendously fulfilling collaborative experience. We all rolled up our collective sleeves and shared our knowledge with the goal of helping to drive economic development.
Ohio
When I returned home from Maine, a former colleague called needing some help with developing a business plan for disposable beer kegs. This was initially a classic routing study, but later turned into much more of an examination of The Supply Chain of a Beer Keg. With the help of my colleague, Art Clark, we completed a study for the flow of raw materials and finished goods. Together, we were able to analyze the best modes of transportation for local, regional and U.S. distribution, but as happened in Millinocket, the story didn’t stop there. Many states and regions have economic development dollars available to entice new businesses into their community. This is absolutely a win-win proposition. By locating into these communities you produce a product that has demand at a low cost while helping the local economies to rebound.
Another long-time friend, Fred Asbell, did some analysis:
There are a number of programs offered by the State of Ohio, as well as various county and regional organizations, to encourage different types of economic development and job creation. Two examples are:
- Ohio Job Creation Tax Credit – A refundable tax credit to companies generally creating at least 10 new jobs (within three years) with a minimum annual payroll of $660,000 that pay at least 150 percent of the federal minimum wage.
- Community Reinvestment Areas – Provides companies locating in a designated Community Reinvestment Area an exemption of up to 100 percent of improvement value for up to 15 years on real property taxes.
Generally, the authorities are looking for initial number of employees and skill levels, type and size of facility, and time needed for startup. Often these people can be of assistance with various permits and licenses that will be required.
The moral of this story is that if you’re a new or expanding business, in addition to understanding how your supply chain cash is spent you should also give a serious look to where you’re located. Incentives of cash and deferred taxes are readily available. Additionally, you are helping to rebuild a country.
A Biotech Fabric Start Up
My third story in this arena was involved with my responsibilities as an Adjunct Professor at Portland State. My role extends to being a mentor to students and local businesses on a project specifically aimed at helping businesses to grow. In my case, my responsibility is to teach them how to manage their working capital.
During this quarter I‘ve been working with a biotech startup that makes fabric out of silk and sugar. Go figure: my dad was a cotton man, so this is an interesting variation to me — it’s making fabric in a completely different way. This story is also a complete reversal of the ones above, because in this case, there’s no one left in the U.S. to do the production job.
As this company moves from prototype to production they’ve begun to look at where they should ultimately set up shop. They asked me months ago to look around the U.S. for an “old woolen mill” that could be converted for their purpose.
As I began this journey I initially looked for a trained labor force that could spin their yarn. My thoughts turned to New England, where wool has been spun and sewn for centuries. As a native of the South, I also looked to the Carolinas, as that’s where I thought the industry still existed. Much to my amazement, I found that there is no trained labor force left in the U.S. that could perform the duties of a seamstress on a production basis.
How the heck did this happen? How did we lose an entire industry?
I’m not sure. As I dug deeper into the subject, it really made little sense.
In the apparel industry, the process from conception to actual sale can literally take years. First, a prototype must be developed and then produced, then finally shipped back to the U.S. Lead times for production are at least 18 months, plus a distribution time of 60 days. We’re looking at a minimum of a 24-month outlay of cash for the product to get to market. In the meantime, markets demands and consumer tastes change, creating a constant concern about being saddled with obsolescence. Talk about cash flow and the cash to cash cycle! I’m not quite sure how this industry survives.
Moving your production to where you sell things would seem to be a critical feature for this industry, and creating a postponement strategy where you make orders when they are ordered with a quick response should be in their future. Otherwise everyone just spends their hard-earned cash.
In this case, I would advocate that a business in need of a skill not readily available in the market should partner with state and local educational systems to develop a vocational curriculum to fit their needs.
In Closing
A business is not just a ‘for-profit’ enterprise. A business also bears a social responsibility and relationship to its customers, employees and its community, both locally and around the world. As I mentioned above, many states and regions have economic development dollars available to entice businesses into their community. Could your company take advantage of those opportunities, thus providing an economic advantage for you and opportunity to an entire community and generations of workers? By building Public Private Partnerships, together we can get our fellow citizens back to work.