Chapter 11 Industry The Cultural Landscape An Introduction

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Industry – Refers to the manufacturing of goods in a factory – We will look at the regions where factories are located and why they are located there. – A generation ago, industry was highly clustered w/in a handful of MDCs, but industry has recently diffused to communities in many LDCs. • The US lost 1/3 of its manufacturing jobs during the first decade of the 21 st century. © 2011 Pearson Education, Inc.

Case Study: Maquiladoras in Mexico • Maquiladora – Foreign owned plants located in Mexico – Under US and Mexican laws, companies receive tax breaks if they ship materials from the US, assemble components at maquiladora plants in Mexico, and export the finished product back to the US. – By doing this, the US used the advantage of cheap labor, which makes goods bought by US consumers less expensive. • Location of Maquiladora – There are more than 1 million Mexicans employed at over 3, 000 maquiladoras. – They are located near the Mexico/US border so that they are close to major cities and so that will be closer to US to ship the finished products. © 2011 Pearson Education, Inc.

Maquiladoras in Mexico • Export-processing zones – These zones are an example of how leaders of economically developing countries have developed schemes to attract foreign investment. – These zones are officially designated for manufacturing, often have accessible distribution facilities, lack many environmental restrictions, and are attractive tax exemptions foreign corporations. – Maquiladoras are an example of an export-processing zone and are home to dozens of US firms, such as General Motors, which are able to compete better on the global market as a result. – Maquiladoras have grown tremendously in the past decade, resulting in large part from the North American Free Trade Agreement. – Although maquiladoras provide desperately needed jobs for thousands of Mexicans, they are also frequently plagued by extremely high crime rates, corrupt government agencies, and terrible pollution. – The process of moving industrial production to facilities out of the countries is called outsourcing. © 2011 Pearson Education, Inc.

Maquiladoras in Mexico • Why has Mexico emerged as an important location in the current global system of industrial organization? – Labor • Inexpensive labor costs in Mexico – Political/Economic • • NAFTA (North American Free Trade Agreement) Weak environmental regulations in Mexico Exploitation of LDCs/core-periphery model Mexico’s expanding middle class/skilled labor – Location/Infrastructure • Transportation connections between US and Mexico © 2011 Pearson Education, Inc.

Where is Industry Distributed? • Origin of industry – Prior to the Industrial Revolution, people made household tools and agricultural equipment in their own homes. • This home-based manufacturing was known as the cottage industry system. . • Industrial Revolution – Several inventions transformed the way goods were manufactured. This created an unprecedented expansion in productivity, resulting in higher standards of living. – Recall: This was the principle cause of population growth in stage 2 of demographic transition. © 2011 Pearson Education, Inc.

Steam engine Patented by James Watt, was the most important invention to the development of factories. Could supply power very efficiently Iron, Coal, Transportation, and Textile industries all benefited greatly from the use of steam power. © 2011 Pearson Education, Inc.

Diffusion of the Industrial Revolution The construction of railroads from the United Kingdom to the European continent reflects the diffusion of the Industrial Revolution. More than 50 years passed between the construction of the first railroads in Britain and the first ones in Eastern Europe. Figure 11 -2 © 2011 Pearson Education, Inc.

Where is Industry Distributed? Industrial regions—concentrated in 3 of 9 world regions – Europe • Emerged in late nineteenth and early twentieth centuries • These include several clustered in Western Europe and several in Eastern Europe, primarily in the former Soviet Union. – North America • Industry arrived later but spread much faster than in Europe. • Concentrated in northeastern quadrant of US and southeastern Canada – East Asia • Faced with isolation from world markets and a shortage of nearly all essential resources, East Asia has taken advantage of its most abundant resource—people • Japan and China rank 2 nd and 3 rd in manufacturing behind only US. © 2011 Pearson Education, Inc.

Industrial areas in Europe—In Western Europe, manufacturing is clustered on a north-south axis between the North Sea and the Mediterranean Sea. In Eastern Europe, industrial areas are dispersed on an east-west axis across the former USSR. Figure 11 -4 © 2011 Pearson Education, Inc.

Deindustrialization • Deindustrialization—When industrial facilities leave an area and take that region’s economic base with them. – This has been particularly extreme in places like the American Midwest and central Britain, where entire regions’ economies had previously relied on heavy industry. – Deindustrialization has highly regionalized effects. The entire US did not suffer as a result of layoffs by GM in Flint, Michigan, but the Great Lakes region, now referred to as the Rust Belt for all its idle factories and aging machinery, was hurt badly. – As a result of the layoffs, thousands of people moved out of Flint to regions where job prospects were higher. When one region’s economic gain translates into another’s economic loss, it is called a back-wash effect. © 2011 Pearson Education, Inc.

From previous map • What are some changes that were shown in the geography of automobile factory construction shown by the maps? – International-based change in the geography of plant construction • There was an increase in the number of foreign-owned automobile plants – Domestic-based change in the geography of plant construction • There was an increase in the number of automobile plants in the South • There was an increase in the number of automobile plants built away from the core of the Rust Belt. • There was a decrease in American-owned automobile plants • There was a decrease in number of automobile plants west of the MS River © 2011 Pearson Education, Inc.

• What are some factors related to industrial location that may have contributed to the changes shown in the maps? – Low cost labor • More nonunionized labor in the South • Right-to-work states in the South (will be discussed later in the PP) – Market • More foreign-owned companies to minimize shipping costs • More foreign-owned companies to avoid paying federally imposed tarrifs • US is one of the largest markets for automobile consumption – Deindustrialization • Relocation of automobile plants b/c of high labor costs (unions) in the North • Obsolete infrastructure in the North • Outsourcing—domestic companies shifting from states in North to Mexico © 2011 Pearson Education, Inc.

• What are some factors related to industrial location that may have contributed to the changes shown in the maps? – Government Policies • State and local taxes are lower in the South than in the North – Cheap Land • Accessible and available sites in the South cost less than in the North – Available Infrastructure • Cost-efficient interstate highway and rail systems in the South allow for quick and inexpensive assembly of supplies for the manufacture of automobiles and efficient distribution of automobiles to car dealerships. – Cheap Energy • The South has abundant supplies of energy that is inexpensive. © 2011 Pearson Education, Inc.

Most assembly plants are located in the interior of the US, between Michigan and Alabama, centered in a corridor known as “auto alley, ” formed by north-south interstate highways 65 and 75. © 2011 Pearson Education, Inc.

Regionalization • Agglomeration Costs – This effect occurs when many companies from the same industry cluster together in a relatively small area to draw from the same set of collective resources. – For example, computer companies frequently cluster together in places like Silicon Valley, CA to take advantage of highly trained labor force or like Los Angeles or Mumbai, India to take advantage of motion picture studios. – Interestingly, as more firms from the same industry locate in particular areas, even more resources become available. This is called the multiplier effect, and it helps to cement particular regions as centers of certain types of industry. As Silicon Valley has become know for its high tech firms, it has attracted more and more computer experts. – Deglomeration occurs when firms leave an agglomerated region to start up in a distant, new place. After the dot-com bust, some high-tech firms left San Francisco b/c the costs of living were so high. © 2011 Pearson Education, Inc.

Regionalization • Agglomeration is actually a part of the larger pattern of regionalization processes that occur in every nation’s economy. • Regionalization—the process by which specific regions acquire characteristics that differentiate them from others w/in the same country. – Primary manufacturing region in the US has historically been Great Lakes, which includes Michigan, Illinois, Indiana, Ohio, New York, & PA. – Certain regions in US are known for particular economic activities. In New York, financial markets are king. Hartford, CT has a disproportionate number of insurance companies. San Francisco dominates in shipping and technology. Houston is home to a number of energy firms. – In China, industry and commerce is located on the eastern coast, while most of the west has little economic activity. In France, most activity is centered in Paris. © 2011 Pearson Education, Inc.

Regionalization • While some regions experience economic gains from regionalization, others may become economic backwaters. – As stated earlier, backwash effects occur when one region experiences economic growth while others lag behind or even recede. – This process can lead to higher levels of out-migration, exodus of investment capital, and shrinking of the local tax base. – In some economic backwater areas, governments have developed strategies to enhance local development. – Examples of strategies taken by central government are Mexico’s maquiladoras and China’s Special Economic Zones. – Examples of strategies taken by local governments include urban renewal projects. Many of these local development initiatives incorporate both public agencies and private firms. © 2011 Pearson Education, Inc.

Locating a Business • Why would a small customer service call center choose to locate in small southern towns? – Low wage and tax structure, low land/building/rent costs, large labor pool (from deindustrialization). • What are some disadvantages in the use of call centers as a local economic development strategy? – Low wages—Adds little to the economy through disposable income – Short term/Unstable—Not a long-term contributor to economic development, future technological advancements. – Low multiplier effect—Not a provider of goods, so a minimal need for associated services, or supplies. – Amount of labor required is minimal—Small addition of capital to local economy (highly automated). – Skill level requirements minimal—Upward mobility/promotions restricted, limited benefits, limited improvements on education system. © 2011 Pearson Education, Inc.

Why are Situation Factors Important? • A company faces two geographical costs—situation and site. – Situation factors involve transporting materials to and from a factory. A firm seeks a location that minimizes the cost of transporting inputs to the factory and finished goods to consumers. • Proximity to inputs – Manufacturers try to minimize the cost of transporting inputs (resources) to their factories and transporting finished products from their plants to consumers. – Every industry uses some inputs. An industry in which inputs weigh more than final products is a bulk-reducing industry. – Copper: Bulk-Reducing industry—Copper is mined, concentrated, smelted, and refined to reduce the heavy, bulky ore from it. To reduce input costs, copper is mined in Arizona. However, once its weight is reduced, is manufactured near markets on the east and west coasts. © 2011 Pearson Education, Inc.

Bulk Reducing Industries Copper mining and smelting are examples of bulk reducing industries. In US, most plants that smelt, concentrate, and refine copper are in or near Arizona, where most copper mines are located. In contrast, most foundries, where copper products are manufactured, are located near markets in the east and west coasts. © 2011 Pearson Education, Inc.

Why Are Situation Factors Important? Steel • The two principal inputs in steel production are iron ore and coal. • This is an example of a bulk-reducing industry that has located to minimize the cost of transporting these two inputs. • Steel was considered a luxury item until Henry Bessemer patented an efficient process for casting steel in 1855. • In the US, the distribution of steel production has changed several times b/c of changing inputs. Figure 11 -8 © 2011 Pearson Education, Inc.

Mid 19 th Century—Concentrated around Pittsburg. This area no longer has steel mills, but remains center for research and administration. Late 19 th Century—Built around Ohio and Detroit. Locational shift was influenced by the discovery of rich iron ore in Mesabi. Early 20 th Century—New mills located near southern end of Lake Michigan and Chicago. Changes in steelmaking required more iron ore than coal, so new mills were built near Mesabi Range. Late 20 th Century—Most steel mills in US closed. Surviving mills were around Lake Michigan and along East Coast Mid 20 th Century—Located near east and west coasts. Iron ore increasingly came from other countries, especially Canada and Venezuela. © 2011 Pearson Education, Inc.

Why Are Situation Factors Important? • Proximity to markets – For many firms, the optimal location is close to consumers. Proximity to market is critical for 3 types of industries: bulk-gaining, single market, and perishable. – Bulk-gaining industries • Industries that make something that gains volume or weight during production. To minimize costs, they need to locate near where the product is sold. • Example: Fabricated metals—Factory that brings together metals such as steel and previously manufactured parts as the main inputs and transforms them into a more complex product. – B/c fabricated products occupy a larger volume than the sum of their individual parts, the cost of shipping is usually the most critical factor. – Steelmakers traditionally locate near raw materials whereas steel fabricators traditionally locate near markets. Figure 11 -10 © 2011 Pearson Education, Inc.

Bulk-Gaining Industries • Fabricated Metals (continued) – The largest market for fabricated metal and machinery manufacturers is motor vehicles. – As a bulk-gaining industry, the critical location factor is minimizing transportation to the market. • Beverage Production – Empty cans or bottles are brought to the bottler, filled with the soft drink or beer, and shipped to the consumers. – The principal input in a beverage container is water, which is relatively bulky and expensive to transport. Since water is readily available, the companies do not need to locate near that source. – Rather, bottlers will minimize costs by producing beverages near their consumers instead of shipping water long distances. © 2011 Pearson Education, Inc.

Bulk-gaining industry: beer-making The two best-selling brewing companies locate their plants near major population concentrations. Most breweries are clustered in the heavily populated Northeast. © 2011 Pearson Education, Inc.

Weber’s Least Cost Theory • Least-Cost Theory (developed by Alfred Weber) – According to this theory, three factors determine the location of a manufacturing plant: Location of Raw Materials, Location of the Market, and Transportation Costs. • Companies must take into account the cost of transporting both raw materials and finished products. • Recall: If raw materials way more than finished products, then facilities should be closer to the materials (bulk-reducing industry). • An exception to this theory is that some industries have no real inclination to be located close to either raw materials or primary markets, since their products are so lightweight and valuable. These companies are called footloose firms—the diamond and computer chip market are good examples. © 2011 Pearson Education, Inc.

Ethanol Manufacturing • Explain under what conditions an industry would locate near the market. – Soft-drink bottling and bread products both are bulk-gaining industries that would locate close to the market in order to minimize transportation costs. • Other than corn industry, explain under what conditions an industry would locate near raw materials. – Copper smelting and paper mill industries are both bulk-reducing industries that will locate close to the source of raw materials in order to minimize transportation costs. • Using the Weberian theory, explain the geography of ethanol plants in the US. – Plants are located near raw material of corn to minimize transportation costs. Since corn is a bulky plant and ethanol has less bulk and weight, ethanol is a bulk-reducing industry. © 2011 Pearson Education, Inc.

Proximity to Markets: Situational Factor • Single-Market Manufacturers – Specialized manufacturers with only one or two customers. – The optimal location is often in close proximity to the customer. – Example: Producer of parts for motor vehicles • The total value of the parts attached to new vehicles produced annually in the US is more than $200 billion. • Most parts makers have only a handful of customers—the major motor-vehicle producers such as Ford and Toyota. • Ford does not want to waste valuable space in its assembly plants by piling up an inventory of seats, engines, transmissions, etc. These bulky parts need to be produced within an hour of the final assembly plant. On the other hand, smaller parts do not need to be produced close to the customer. Site factors such as the low labor costs in Mexico may be more important for these. © 2011 Pearson Education, Inc.

Proximity to Markets: Situational Factor • Perishable Products – Because few people want stale bread or sour milk, food producers such as bakers and milk bottlers must located near their customers to assure rapid delivery. – The daily newspaper is another example of a perishable product b/c it contains dated information. – Processors of fresh food into frozen canned, and preserved products can locate far from their customers. Cheese and butter, for example are manufactured in Wisconsin b/c rapid delivery is not critical for products with a long shelf life, and the area is well suited agriculturally for raising dairy cows (site factor). © 2011 Pearson Education, Inc.

During the first decade of the 21 st century, print publishing jobs declined from 1 million to 800, 000 in the US, whereas Internet publishing jobs increased from 70, 000 to 80, 000. © 2011 Pearson Education, Inc.

Why Are Situation Factors Important? • Inputs and products are transported in one of four ways: ship, rail, truck, or air – Firms seek the lowest-cost mode of transport, but which of the four alternatives is cheapest changes with the distance that goods are being sent. – Cost decreases at different rates for each of the four modes • • Truck = most often for short-distance travel Train = used to ship longer distances (1 day +) Ship = slow, but very low cost per km/mile Air = most expensive, but very fast – Modes of delivery are often mixed between the different modes of transportation. Many companies that use multiple transport modes locate at a break-of-bulk point, which is a location where transfer among transportation modes is possible. • Important break-of-bulk points include seaports and airports. © 2011 Pearson Education, Inc.

Why Are Site Factors Important? • Site factors result from the unique characteristics of a location. – Land, labor, and capital are three traditional production factors that vary among locations. • Labor – The most important site factor – Labor-intensive industries—Industries in which wages and other compensation paid to employees constitute a high percentage of expenses. – The average wage paid to manufacturing workers exceeds $20 per hour in North America, Western Europe, and other MDCs. Health care and other benefits add substantially to the compensation. – In LDCs, average wages are less than $5 per hour © 2011 Pearson Education, Inc.

Textile Industry: Labor Intensive • Production of apparel and textiles, which are woven fabrics, is a prominent example of an industry that generally requires lessskilled, low-cost workers. • Textile and apparel industry account for 6% of the dollar value of world manufacturing but a much higher 14% of world manufacturing employment. • Fibers can be spun from natural or synthetic elements. – The principal natural fiber in textile and apparel spinning is cotton. – Synthetics now account for three-fourths and natural fibers only onefourth of world thread production. – B/c it is a labor-intensive industry, spinning is done primarily in low-wage countries. China produces two-thirds of the world’s cotton thread. © 2011 Pearson Education, Inc.

Production of women’s blouses—sewing of fabric into blouses is more likely to take place in MDCs. Clothing producers must balance the need for low wage workers against the need for proximity to customers. Figure 11 -18 © 2011 Pearson Education, Inc.

Why Are Site Factors Important? • Land – Rural sites • Early factories located inside cities due to a combination of situation and site factors. Cities offered attractive situation, proximity to a large local market and convenience in shipping to a national market by rail. The site factor that cities have lacked is abundant land. • Contemporary factories operate more efficiently when laid out in onestory buildings. Raw materials are typically delivered at one end and moved through the factory on conveyors or forklift trucks. • The land needed to build one-story factories is now more likely to be available in suburban or rural locations. Also, land is much cheaper in rural locations than near the center of a city. • Locations outside cities are also attractive b/c they facilitate delivery of inputs and shipment of products. With trucks now responsible for transporting most products, proximity to major highways is more important than rail lines. © 2011 Pearson Education, Inc.

Why Are Site Factors Important? • Capital – Manufacturers typically borrow funds to establish new factories or expand existing ones. – The US motor-vehicle industry concentrated in Michigan early in the 20 th century largely b/c this region’s financial institutions were more willing than eastern banks to lend money to the industry’s pioneers. – The most important factor in the clustering of high-tech industries in California’s Silicon Valley—even more than skilled labor—was the availability of capital. Banks in Silicon Valley have long been willing to provide money for new software and communication firms. © 2011 Pearson Education, Inc.

Why Are Location Factors Changing? • Attraction of new industrial regions – Labor is the site factor that is changing especially dramatically in the 21 st century. To minimize labor costs, some manufacturers are locating in places where prevailing wage rates are lower. • Changing Industrial Distribution Within MDCs – Industry is shifting away from the traditional industrial areas of northwestern Europe and northeastern US. – In the US, industry has shifted from the northeast toward the south and west. – In Europe, government policies have encouraged relocation toward economically distressed peripheral areas. © 2011 Pearson Education, Inc.

Why Are Location Factors Changing? • Northeastern US has lost 6 million jobs in manufacturing between 1950 and 2009. – Meanwhile 2 million manufacturing jobs were added in the South and West. • Right-to-work laws – These laws require a factory to maintain a so-called “open shop” and prohibits a “closed shop” in which a company and a union agree that everyone must join the union to work in the factory. – These laws made this region more attractive for companies working hard to keep out a union altogether. • Textile Production – The US textile industry was heavily concentrated in the northeast during the early 20 th century then shifted to the south and west to open production in lower-wage locations. © 2011 Pearson Education, Inc.

Socks Manufacturers To support their labor-intensive industry, sock manufacturers locate where a low-cost workforce exists. In the US, the lowest-cost labor is concentrated in the Southeast. © 2011 Pearson Education, Inc.

Why Are Location Factors Changing? • International shifts in industry • In 1970, nearly one-half of world industry was in Europe and nearly one-third in North America; now these two regions account for only one-fourth each. – Increasingly, important industrial areas outside of Europe and North America include: • East Asia—rapid industrial growth in China means that East Asia likely will pull ahead of Europe and North America. The main industrial countries are China, Japan, and South Korea. • South Asia—Led by India • Latin America—Nearest low-wage region to US (recall the maquiladora plants). Brazil is the leading industrial country in Latin America. © 2011 Pearson Education, Inc.

Why Are Location Factors Changing? • International Shifts in Industry – Outsourcing • Despite greater transportation cost, transnational corporations can profitably transfer some work to LDCs, given the substantial difference in wages between MDCs and LDCs. • Operations that require highly skilled workers remain in factories in MDCs. This selective transfer of some jobs to LDCs is known as the new international division of labor. • Transnational corporations allocate production to low-wage countries through outsourcing, which is turning over much of the responsibility for production to independent suppliers. • As a result of outsourcing, carmakers account for only 30% of the value of vehicles that bear their names. The rest of the value is tied up in the thousands of parts that go into the vehicles. © 2011 Pearson Education, Inc.

New International Division of Labor • What are the key features of the new int’l division of labor? – Definition—This describes the reorganization/relocation of economic activities from a national to a global scale. – Economic Interdependence/Globalization—Dependence of the core (MDC) on lower-cost production from LDCs for mass-produced goods. – Transportation/Communications—Time-space compression via communications and transportation efficiencies leads to separation of production and consumption. – Comparative Advantage—Advantages to locations that combine lower operating costs (labor, taxes, specialization efficiencies) resulting in trade/sale opportunities. – Outsourcing—Specialized jobs contracted to companies/locations in order to achieve comparative advantages. © 2011 Pearson Education, Inc.

New International Division of Labor • Key features of the new international division of labor (cont’d): – Profit Drive—Transnational corporations need to reduce costs – Trade Agreements—Formal agreements such as NAFTA and company/country pacts that reduce trade barriers (i. e. tariffs) – Foreign management—Upper management is from MDCs and not the local economy. © 2011 Pearson Education, Inc.

New International Division of Labor • What is the impact of the new int’l division of labor on the socioeconomic structure of the US? – Unemployment—Job losses affect the middle class. The remaining management and service jobs increase the income gap. – Deindustrialization—Regional unemployment requires retooling/reeducation into tertiary sector jobs. – Profit—Drive for profits via division to LDCs has combined with consumerism to swell retail jobs. However, these jobs are largely at the part time/nonbenefit level. – Internal Migration—Migration from areas of unemployment to areas of employment (Rust Belt to Sun Belt) – Labor Relations—Decrease in membership and influence of labor unions – Consumption—Availability of less-expensive goods changes the standard of living. © 2011 Pearson Education, Inc.

• What is the impact of the new int’l division of labor on the socioeconomic structure of developing countries such as Mexico, China, and India? – Added Job Opportunities—Positive addition to personal and national income that raises societal status, family income, etc. – Gender—Entry of women into work force means improves the standard of living and lowers the population growth rate. – Child Labor—Use of child labor discourages further education – Wage Gap—Increased wage gap between local “haves” and “have nots” – Migration—Migration of nationals to specialized manufacturing areas improves personal economic positions but weakens family and traditional cultural ties. – Environmental—Lax enforcement invites new health problems – Cultures change—Westernization of production and management changes the social and cultural relationships (i. e. women in workplace, language) © 2011 Pearson Education, Inc.

Why Are Location Factors Changing? • Renewed attraction of traditional industrial regions – With low-cost labor, why would any industry locate in one of the traditional regions (i. e. Europe or the US)? • 2 location factors influence industries to remain in these regions— availability of skilled labor and rapid delivery to market. – Proximity to Skilled Labor • Computer manufacturing is an example of an industry that has concentrated in relatively high-wage communities of the US. • Traditionally, factories assigned each worker one specific task to perform repeatedly, the Fordist approach (assembly line). Most of the workers under Henry Ford did not need education or skills to do their jobs, and many were immigrants from Europe or from the South. © 2011 Pearson Education, Inc.

Post-Fordist Approach • Many industries now follow a lean production approach, called post-Fordist. • Toyota is best known for pioneering lean production • 3 types of work rules distinguish this: – Workers are placed in teams to figure out how to perform a task – A problem is addressed through consensus after consulting all affected parties rather than through filing a complaint – Factory workers are treated alike and managers do not get special treatment. Everybody eats in the same cafeteria and parks in the same lot. © 2011 Pearson Education, Inc.

(Top) Motor vehicles sold in the US by the Detroit 3 contain a higher percentage of US made parts than do vehicles sold by internationals. (Bottom) Mexico is the leading source of imported motor vehicle parts. © 2011 Pearson Education, Inc.

Location factors influencing industries to stay in US and Europe • Just-In-Time Delivery – This type of delivery is important for delivery of inputs, such as parts and raw materials, to manufacturers of fabricated products, such as cars and computers. – Suppliers of the parts and materials are told a few days in advance how much will be needed over the next week. To meet a tight timetable, a supplier must locate factories near its customers. – This delivery reduces the money a manufacturer must tie up in wasteful inventory. • Leading computer manufacturers have eliminated inventory altogether. They build computers only in response to customer orders. © 2011 Pearson Education, Inc.