Is U.S. Manufacturing on the Move? — Part 1

Stephen DeAngelis

January 23, 2013

Financial Times‘ columnist Sebastian Mallaby asserts that “manufacturers using ‘big data’ are setting the scene for a revival” in the United States. [“American industry is on the move,” 8 January 2013] To back this assertion, he cites General Electric’s Jeff Immelt, who “declared that outsourcing was ‘mostly outdated as a business model.” As most people are aware, GE is spending over a billion dollars to construct new plants in the U.S. that will build water heaters and washing machines. Mallaby continues:

“President Barack Obama has trumpeted this wave of ‘insourcing’, while Hal Sirkin of the Boston Consulting Group foretells a US ‘manufacturing renaissance’. Even as the news from Washington reeks of heedless brinkmanship, the news from the people who actually make stuff sounds refreshingly hopeful.”

Mallaby knows that there is a difference between hope and reality. He asks, “How real is this renaissance?” Since the U.S. “has experienced a steady relative decline” in manufacturing starting in 1980, Mallaby writes, “It is tempting to dismiss it out of hand.” He goes on to note, however, that things are beginning to change. For one, “in 2000 US wages were almost 22 times higher than China’s. By 2015 that multiple will have declined to four.” For another, “between 1996 and 2009 … American manufacturers piled up [a] productivity gain of 69 per cent.” Add to that the fact that “the US joined the North American Free Trade Agreement and the World Trade Organisation, and its continent-sized economy generates plenty of internal competition,” as well as “a jolt from technology,” and Mallaby sees a foundation for a U.S. manufacturing renaissance. He believes “the more important technological jolt comes under the heading of ‘big data’.”

He strengthens his arguments by citing a study written by Nick Bloom and John Van Reenen that claims “US companies were, on average, better managed than foreign rivals.” He continues:

“A striking conclusion of their study is that US manufacturers continue to get better, particularly when it comes to capturing and analysing data on everything from customer behaviour to production-line efficiencies. And there is plenty of scope to improve further. A minority of survey respondents embraced most state-of-the-art management incentives and monitored performance against clear targets. But a quarter of respondents adopted fewer than half of these practices.”

When all of these factors are considered together, Mallaby claims “the stage is at least half set for a US manufacturing revival.” He believes the stage is only half set because obstacles remain, including “poor education [and] poor infrastructure.”

A manufacturing renaissance might sound great, but Mallaby claims that a manufacturing revival doesn’t necessarily equate to improved unemployment statistics. He is not alone in this assessment. A study from the McKinsey Global Institute concludes, “Manufacturing cannot be expected to create mass employment in advanced economies on the scale that it did decades ago.” [“American manufacturing is coming back. Manufacturing jobs aren’t,” by Neil Irwin, Washington Post, 19 November 2012] The reason for this counterintuitive conclusion is that the use of robots is on the rise. As Irwin reports, “It is a story of robotics and other technologies improving at a remarkable rate, eliminating the need for factory floors crowded with workers doing manual labor.” David Wessel agrees. “Manufacturing alone,” he writes, “isn’t going to put America back to work.” [“The Factory Floor Has a Ceiling on Job Creation,” Wall Street Journal, 12 January 2012] Wessel concludes:

“There are good reasons to cheer for domestic manufacturing. Expanding factories have beneficial side effects. ‘If you get an auto-assembly plant, Wal-Mart follows,’ says Ron Bloom, … President Barack Obama’s [former] manufacturing czar. ‘If you get a Wal-Mart, an auto-assembly plant doesn’t follow.’ Modern factory jobs, many of which require more brainpower and computer know-how than muscle, often pay well and are secure. Research and development — the key to maintaining the U.S. edge in innovation — sometimes migrate abroad when production does, a good reason to strive to keep production at home. But manufacturing employment isn’t going to grow nearly enough to return the U.S. to full employment. It isn’t going to be the chief source of jobs for the next quarter-century. And, given the demands of the modern factory, it isn’t going to be the ticket to the middle class for unskilled workers who haven’t gone beyond high school. Pretending otherwise is foolish.”

Mallaby agrees with Wessel that, despite the fact that a return of manufacturing doesn’t mean a lot of new jobs, “a manufacturing turnaround is clearly desirable.” I’m assuming he is also looking at the tail of support that manufacturing creates. He concludes:

“A US manufacturing renaissance is possible, not certain. But Americans are right to celebrate the early indicators – from Siemens, which has just begun shipping US-made turbines to Saudi Arabia; from Toyota, which exports US-made cars to 21 countries; and of course from that chief insourcer, GE’s Mr Immelt.”

Robert J. Bowman, managing editor of SupplyChainBrain, agrees that a manufacturing revival is possible but not certain. However, he believes that there are seven steps that can be taken to make it more of a certainty. [“U.S. Manufacturing Revival: Seven Steps to Locking It,” 22 October 2012] The seven steps were discussed by Hal Sirkin, a senior partner at Boston Consulting Group, during the Supply Chain Council’s 2012 Executive Summit in Indian Wells, Calif. They are:

“- Adjust tax policies to favor continued reshoring, including a reduction in corporate tax rates and the elimination of loopholes. (The latter is a favorite promise of politicians, but it never seems to happen, does it?) In addition, provide targeted tax credits for U.S. job creation, as well as a ‘dollar-for-dollar’ tax credit for the repatriation of funds – as long as all of the money is used to create jobs. (Good luck with that. Corporations used the last repatriation tax holiday to build up cash reserves, buy back stock, acquire other companies and lay off thousands of workers

“- ‘Level the playing field with China’ by treating it as a developed economy. Address China’s subsidizing of state-owned companies, which has contributed to the hollowing out of U.S. industry. (Although a new breed of Chinese companies doesn’t necessarily fit into this category.) Press for the enforcement of intellectual property protection. (This one might well be the most important
factor of all.) Increase the use of dumping penalties in cases where China is under-pricing its exports.

“- Focus on building and keeping ‘the world’s best talent.’ We’ve heard a lot during this presidential campaign season about the idea of stapling green cards to the diplomas of foreigners who study here, so that they can remain in the U.S. and hire Americans. For the longer term, create a network of vocational colleges, offering two years of liberal arts and two years of training in practical areas such as welding, plumbing and electrical work.

“- Rethink regulation, with an eye toward balancing the need for a clean environment and safe products with concerns over U.S. competitiveness. ‘Many regulations on the books from the past are no longer needed,’ claimed Sirkin. (Much easier said than done. Who wants to explain how relaxed regulation, in the interest of ‘competitiveness,’ led to the next outbreak of tainted food?)

“- Take a page from China’s playbook, and promote the formation of industry clusters. These initiatives group manufacturers, their suppliers, training facilities and infrastructure within one geographic location, providing everything that’s needed to produce and export key products. (It’s worth noting, I suppose, that the clusters concept has been called ‘modern-day snake oil’ by at least one pundit.)

“- Focus on foreign manufacturers that want to produce in the U.S., or use the country as a platform for their global exports. Here’s where the notion of the U.S. as a relatively low-cost market comes strongly into play.

“- Boost awareness of changes taking place in China’s economy, and the resulting opportunities in the U.S. China, said Sirkin, ‘should not be the default location. 2015 is different from 2010.’ Companies should be encouraged to ‘do the math’ before they make the decision to offshore production.”

Bowman believes that labor-intensive industries will continue to produce products offshore. He writes that “even Sirkin is only predicting that 20 to 30 percent of the goods produced in China will be shifting back to the U.S.” He concludes:

“So doubts and qualifications abound. Reshoring won’t take hold without a proactive response by government and the private sector. Still, Sirkin was adamant that change is in the air. ‘We’re at the beginning,’ he proclaimed, ‘of a new manufacturing renaissance in the U.S.'”

Bill McBeath of ChainLink Research agrees with Bowman that China isn’t going away and insists that the decision to reshore manufacturing is a complex decision. [“Reversal of the Offshoring Tide,” 8 January 2013] He concludes, “A shift of manufacturing back to the US will certainly be welcome here. But it can’t be just because ‘it would be nice.’ It has to make good business sense for each business that makes that decision.” You can read his article to learn about what considerations he believes need to be taken into account. Overall pundits appear to be more optimistic than pessimistic about the revival of manufacturing in the United States. That’s good news for the economy. Tomorrow we’ll see what other pundits think about the future of American manufacturing and see if that optimism is widespread.