Rationalization is the Word of the Year for 2011 | Plante Moran
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Global Trends: Why Rationalization is the Word of the Year for 2011

JEJUNE. MELLIFLUOUS. DIDACTIC. These are all words that can be found within the 2011 word-of-the-day calendar in our office. If they were to develop a special word-of-the-day calendar for internationally active businesses (you can thank us later, Webster), only one word would appear, day after day, week after week, month after month: “rationalization.”

Rationalization is the organization of a business according to scientific principles of management in order to increase efficiency. More and more, businesses are applying these principles to their global strategy. One result of this trend toward rationalization is that businesses are now looking at the major markets in which they operate and asking, “Based on these locations, where should I be manufacturing?”

This is a far cry from the philosophy that permeated the marketplace a decade ago, when China received the short-lived designation of “Manufacturing Location of the World.” The draw of low-cost labor and the attractiveness of China’s significant domestic market slowly gave way to concerns surrounding transportation costs, inventory invested in transit, and the challenges of managing a supply chain thousands of miles away. Today, China is viewed more rationally, as its own market. Plenty of organizations do business in China; many, however, no longer choose to only export goods out of China and back into the United States.

Why? Because rationalization means analyzing more than just cheap labor. It means tracking currency and expected trends and having the flexibility to spread risk by market sector versus a one-size-fits-all investment in a single market.

All of this is good news for the United States. The U.S. dollar is weak and is expected to stay that way for the near term. This allows organizations to justify manufacturing in the United States. It also attracts foreign investors who want to capture market share now to secure purchasing power for businesses and real estate.

This is especially true of Asian investors. Many Asian companies have stopped exporting goods to the United States because of the weak dollar. Instead, they’re looking into licensing technology with U.S. companies, manufacturing within the United States, and entering into joint ventures. These types of cooperative relationships are expected to become more and more common, especially within the energy, automotive, and mining industries.

There’s no question that doing business internationally has evolved greatly over the past decades. The late ‘80s through the mid-‘90s was characterized by Japan buying U.S. companies. Then the trend became European investments, then manufacturing in China, and finally U.S. companies moving out of China and back into the United States. Today, we’re seeing a combination of these practices. The international business front is multidimensional with more players and bilateral movement than across the last two decades. For businesses interested in taking part in a larger, more dynamic market, opportunities abound.

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Lou Longo