Will the Fischer Administration Make it ‘Snow’ in Louisville?

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When economist Clyde Presotwitz was promoting his book about the developing economies of Asia, Three Billion New Capitalists, he liked to recount a conversation he had with his 20-something son during the early part of the last decade. The topic of that father-son talk focused on the son’s future career ambitions.  The younger Prestowitz, armed with an MBA from one of the leading business schools in the U.S., promptly announced that he was eschewing an expected career in Silicon Valley in order to buy into a Californian ski resort.  The befuddled father demanded to know why.  Back came a very logical answer, “Dad, they can’t move the snow to India.”

The point was well taken as the off-shoring of IT jobs to India was in full swing by mid-decade.  While the young Indian IT engineers willing to work cheaply have displaced some jobs, California still remains the undisputed epicenter of the world’s IT industry thanks to a combination of effective regional governance, higher education and top-notch requisite professional services—a different kind of ‘snow’ that India has been unable to duplicate.

Unfortunately, the U.S. manufacturing sector has not fared as well.  Cheap Chinese labor has decimated what remains of many traditional manufacturing industries, which is of big concern to Louisville as the region has historically maintained a robust manufacturing base.

As the U.S. trade deficit with China grows, manufacturing jobs continue to shrink.  An estimated 5.5 million since 2000, including 35,000+ in the Louisville area alone—more than 36% of all local manufacturing jobs.  With these job losses here and elsewhere come cries of unfair trade practices and currency manipulation.   While the U.S. and Chinese governments battle over these issues, it’s up to the people to figure out how to make globalization work for them.  Folks can either stop buying the cheap goods at Wal-mart that helps fuel the trade deficit, or figure out ways to become more competitive and sell into China.

According to the most recent 2010 GDP data, Americans appear to be choosing the latter.  U.S. exports to China totaled $86 billion last year, a year-on-year increase of almost 30%.  Even as the trade deficit with China approaches $300 billion, this export figure is still a very positive trend.  Led by microchips, computer components and airplanes from California, Texas and Washington, American companies are figuring out how to penetrate the Chinese market.  While these numbers are riddled with subjectivity and contradictions, there is nonetheless money to be made exporting to China.   Unfortunately, the U.S. trails Japan, the European Union, South Korea and Taiwan in terms of market share with only a 7% share of all exports to China. If these other economies—none of whom are traditional commodity exporters—can figure out how to sell into China, there is no reason the U.S. can’t do the same.

Locally, UPS and Yum! Brands have been successfully exploiting China’s growth, but those are individual success stories while Metro Louisville, on the whole, has not done a good job of integrating into the global economy.   As a state, Kentucky exported $838 million in goods and services to China in 2010, an increase of 14% over 2009, but still less than 1% of total U.S. exports to China.  Additionally, China was only Kentucky’s eight-largest export market last year, versus the third-largest export market for the U.S. as a whole.   Obviously, opportunities exist to improve local exports to China.

Mayor Fischer has been vocal about Louisville’s need to globalize and re-invent the local economy away from its traditional manufacturing base and into a more modern services economy.  His administration has identified logistics and aged medical care as foundations for future growth.   The challenge for Louisville’s business leaders is to determine if these industry clusters are Louisville’s ‘snow’ that can be leveraged to further integrate the metro economy into the global one.   Or can they be easily duplicated and replaced by cheaper alternatives elsewhere in the world?