East West CEO: U.S. Needs to Bolster Comparative Advantages for Manufacturing to Flourish at Home
While still in his early 20s, Scott Ellyson learned two lessons as a global strategy consultant for the accounting and professional services firm Price WaterhouseCoopers LLP.
The first was that companies had to expand and globalize to be competitive, and secondly, certain regions around the world have competitive advantages over others.
Currently a co-founder and CEO of East West Manufacturing LLC, Mr. Ellyson provided during a luncheon of the Kiwanis Club of Atlantadowntown Jan. 12, an overview of his company’s origins and his outlook for the future of global investment.
An avowed “free-trade capitalist,” he completed his presentation with insights about how the U.S. could become more competitive while adopting a willingness to put in place policies that would provide competitive advantages.
“It’s not just about labor … but it’s really about raw materials, taxes, know-how, engineering capabilities — all this matrix of things that makes certain regions advantageous for producing certain products.”
Putting all his research into the “matrix of things” in perspective, he said that at the top of his list is a country’s political stability.
More than 20 years later, Mr. Ellyson still holds his two lessons to heart, but there’s no question that for him and East West Manufacturing the world has changed.
With his experience at PwC at age 26, he founded a company in Hong Kong that produced electronic assemblies for the auto industry.
While much of manufacturing in China at the time was involved in making toys, his company’s cruise controls were destined for Toyota Camrys and Corollas and its circuit boards for Buicks and Cadillacs.
Once he sold the company, he moved on to Atlanta-based DiversiTech Corp., which manufacturers a large number of components including A/C shutoff switches, thermostats, refrigerant and safety caps and a wide array of other components.
As an international technician, he decided where “the most strategically advantageous” regions were to manufacture these products in terms of quality and reliability at the lowest cost.
At this point, he launched East West in 2001 with co-founder Jeff Sweeney, which now has 750 employees in facilities located in the U.S., Vietnam, China, India and New Zealand.
China was the first destination to manufacture the company’s highly engineered products. To fulfill his vision of providing the highest quality components and the lowest cost, he has hired many engineers because none of the products are “off the shelf.”
And over the years, East West has developed the capabilities of providing the original designs for products and then distributing their manufacture through a highly evolved supply chain.
Despite the problems now faced by China’s economy and its rising cost of labor, Mr. Ellyson remains awed by the country’s fast-growth development since he first visited in 1993.
The industrial city of Shenzhen in Guangdong Province, where East West maintains a facility, the city had 3-to-4 million inhabitants when he first visited in the early 1990s. Now it has more than 10 million by some estimates.
Reflecting back on his early visits, he said he usually lost 10 pounds when he first went due to the stress of travel and doing business there. “But now I generally gain about 10 pounds.”
He also said that he read somewhere that China has used more concrete in three years than the U.S. has in 100 years as it has expanded dramatically its housing stock and the number of highways. He also cited being impressed with the 90 miles of subway track that Shenzhen has added in six years.
China’s phenomenal growth, however, has been accompanied by a steep rise in wages with average incomes rising from $400-500 per year to $7,000-8,000 per year, he said.
Consequently, the return on foreign direct investment has plunged, and keeping to his mantra of lowest cost and highest quality, East West has been looking elsewhere to manufacture its engineered, electronic, motor and medical products.
Mr. Ellyson isn’t completely disillusioned with China, citing the work ethic of the Chinese and their enormous market, but he turned to Vietnam in search of an alternative location to manufacture quality products reliably at the lowest cost for major international customers.
He can’t forget, however, that while the average value of a home to income in the U.S. is about three to one, in China it is at 16 to one. From his perspective, the economy won’t be able to sustain imbalances of this magnitude and inevitably will slow down.
“It’s just a question of how serious the landing is going to be,” he said.
Meanwhile, his company’s experience in Vietnam, where East West has some 500 employees in three buildings has been positive, according to Mr. Ellyson.
“The government has been supportive,” he added, citing a corporate tax rate of 7.5 percent for 15 years with no corporate tax for the first several years. East West also has received research and development credits and the labor force has been quick to learn what it needs to do and is reliable, he said.
Yet given his matrix, Mr. Ellyson also is constantly comparing the advantages and disadvantages of different markets and India has been especially appealing because of the low cost of steel there.
“We want to get India right,” he told Global Atlanta following his presentation. But India did provide a hurdle. It took him two years to get a business license even though he hired some of the country’s most outstanding attorneys, revealing its entrenched bureaucratic systems.
“India is the toughest place where we have ever operated,” he added. “We have the labor costs and the pricing, but we haven’t been able to get a solid supply line.”
He also has been pleased with the company’s experience in New Zealand because of the large supply of electrical engineers, who are difficult to find in the U.S.
So where does Mr. Ellyson believe the U.S. stands in terms of its comparative advantages?
Companies should only return their manufacturing facilities to the U.S. if a business case can be made for them to do so, he said.
The U.S., in his view, has many advantages: size of the market, the increasing automation of industrial processes, highly trained workers, innovation and entrepreneurship.
“We have the systems,” he said pointing to the professional service firms and the rule of law. “We can get this right. We just need to get our policies right.”
As an example of U.S. capabilities, he cited the components East West makes for robots, which help some of the world’s largest retailers move product in warehouses on the ground. While the components are made abroad, the assembly is done in Boston.
The lower price of oil also has been a plus in his mind, he said, enabling East West to buy PCB resin in the U.S. for its facility in India.
But U.S. corporate tax policies have forced the company to use a Dutch holding company to take advantage of a foreign tax structure “to protect ourselves,” and to enable the company to maintain its 25 percent annual growth to satisfy its investors.
He criticized the U.S. policy of taxing worldwide income because it keeps companies from investing in the infrastructure and personnel that they need to grow.
He also said that companies dependent on transportation in the U.S. would return their overseas manufacturing capabilities. And he thinks that high-tech and final-assembly processes will take hold in the U.S.
But the U.S. health care system is becoming unsupportable for a company such as his which has seen its health care costs escalate 20 percent a year.
He also is concerned about the “brain drain” with foreign students who make up a majority of the students receiving advanced degrees leaving the U.S. for their home countries.
In addition, he would like to see more investment incentives and reduced complian