Why Re-Localization is the Only Sustainable Business Model

<p>Over the last 15 years a dramatic shift has been made in our economic structure toward a global model of production.&nbsp; Of course, the idea is that each country focuses on what it can do best, and we will all be more efficient, productive, and richer.&nbsp; China is good at industrial production.&nbsp; Germany is good at engineering.&nbsp; The U.S. is good at branding.&nbsp; We have something designed in Germany (with assistance from Indian engineers via the Internet), produce it in China, and sell it under a logo in the United States. <br /> <br /> All of this makes sense on paper.&nbsp; However, it also assumes something we have taken for granted for the last 100 years: almost-free energy.&nbsp; It is estimated that a barrel of oil contains about 25,000 man hours worth of labor energy.&nbsp; Or, about 12 employees working full-time for a year.&nbsp; At $30,000 per year per employee, that's $360,000 worth of work (probably more like $500,000 once you add on taxes and benefits).&nbsp; Even at $140 per barrel, that makes oil an enormous bargain.&nbsp; Almost free.<br /> <br /> For most of these 15 years wages in southeast Asia have been substantially lower, which has effectively absorbed transportation costs (still tremendously low with cheap oil), costs of reduced productivity, and the cost inefficiencies of inter-lingual and inter-cultural communication.&nbsp; This is changing quickly.&nbsp; Wages are increasing exponentially; salaries for Indian engineers, for example, are growing in the double-digits annually, even semi-annually.&nbsp; In the meantime, oil prices have risen dramatically.&nbsp; As recently as 2002 a barrel was less than $20.&nbsp; So even recent pull-backs to $110 per barrel are still a strong upward trend.<br /> <br /> Ultimately, it will no longer be economically smarter or viable to produce products around the globe.&nbsp; Even if wages remain lower in other nations they will not be able to absorb all the added costs.&nbsp; In particular, transportation costs will grow.<br /> <br /> To efficiently manufacture goods and get them to market, companies will need to start producing goods in local regions.&nbsp; Logistics will need to change.&nbsp; Instead of a single point of production and a complex distribution network, businesses will need to have a complex production network with simple, local distribution.&nbsp; Rising Asian wages for professional services like engineering will make the inter-cultural trade-off less attractive; it will be economically more reasonable to bring things like product and process design back in-house.<br /> <br /> Re-localization is coming.&nbsp; The smart companies will start planning now.</p>