Reviving U.S. Manufacturing

Stephen DeAngelis

July 10, 2008

In a recent post entitled “Development-in-a-Box™ at Home in America,” I focused on an op-ed piece by Thomas Friedman. In that piece, he chided U.S. politicians for not embracing policies that fostered the “next great global industry — renewable energy and clean power.” Their lack of vision and action, he lamented, meant that America was not taking advantage of an opportunity clearly ready to be exploited. In another New York Times‘ op-ed piece, former Democratic senator and presidential candidate Gary Hart called on his party’s candidate, Barack Obama, to use the campaign to outline a new chapter for American politics [“America’s Next Chapter,” 25 June 2008]. Hart argues that new political chapters are, historically, written about every three decades and that the time is ripe for a new one.

“Henry Adams believed that ‘a period of about 12 years measured the beat of the pendulum’ during the era of the founders. Schlesinger, borrowing from his historian father, estimated that the swings between eras of public action and those of private interest were nearer to 30 years. What matters more than the length of the cycles is that these swings, between what [Arthur] Schlesinger called periods of reform and periods of consolidation, clearly occur. If we somewhat arbitrarily fix the age of Franklin D. Roosevelt as 1932 to 1968 and the era of Ronald Reagan as 1968 to 2008, a new cycle of American political history — a cycle of reform — is due.”

Hart, of course, hopes that his party’s nominee wins the White House and implements a new era of reform. Never one to shy away from expressing his opinions Hart goes on to tell Obama what he believes are the themes that must form the basis of this new era.

“No individual can entirely determine the architecture of a historical cycle. But much of the next one will be defined by how we grapple with a host of new realities, ones that reach beyond jihadist terrorism. They include globalized markets; the expansion of the information revolution into places like China; the emergence of new world powers including India and China; climate deterioration; failing states; the changing nature of war; mass migrations; the proliferation of weapons of mass destruction; viral pandemics; and many more. Senator Obama’s attempt to introduce the next American cycle should include, at minimum, three elements. National security requires a new, expanded, post-cold-war definition. America must transition from a consumer economy to a producing one. And the moral obligations of our stewardship of the planet must become paramount.”

I was struck when I read that “America must transition from a consumer economy to a producing one.” Hart doesn’t make what he means entirely clear, but it sounds like he wants the U.S. to start manufacturing more things and stop buying them from overseas. One could argue, of course, that in the information age a service economy (as opposed to a manufacturing economy) does “produce” value. Nevertheless, I suspect Hart was referring to generating new manufacturing jobs — some of which, I assume, would be in the renewable energy and clean power sector supported by Friedman. Hart’s vision raises another question, however: Can the U.S. recapture its manufacturing base? Pete Engardio, writing in BusinessWeek, asks just such a question [“Can the U.S. Bring Jobs Back from China?” 30 June 2008 print edition]. His answer is “maybe.” But he warns, “American industry may not be ready to seize the opportunity” even when it presents itself. He begins his article with the story of a New England battery developer who couldn’t find a U.S. company to produce her batteries.

“Christina Lampe-Onnerud has a long-lasting, fast-charging battery for notebook computers that she believes will revolutionize the industry. Her company, Boston-Power, would like to make the batteries in the U.S., which she says is feasible despite high American wages. But Lampe-Onnerud has had trouble finding anyone in the U.S. even to make a prototype, let alone manufacture the battery in bulk. China, by contrast, is home to more than 200 battery manufacturers. On visits to the mainland, Lampe-Onnerud toured dozens of factories with ample staff and laboratories, and none wanted the millions of dollars up front that one contract manufacturer in the U.S. had demanded. She recalls a negotiating session last year that started at 9 a.m. and ended with a midnight dinner. Despite parting with 30 unresolved questions, ‘at 9:00 the next morning, the entire management team was there with pressed white shirts and a PowerPoint presentation addressing every issue,’ she says. ‘That’s how badly they wanted the business.’ In six months, Boston-Power was ramping up production in a 400-worker factory in Shenzhen.”

In the post I mentioned at the beginning of this blog, I indicated that I had observed the same thing about U.S. businesses and workers. They seem to have lost their competitive edge, especially when dealing with emerging economies. I argued that America needs to reinvigorate the culture of hard work and ambition that made it great in the first place. As Lampe-Onnerud found, there are plenty of people elsewhere in the world who still have those qualities and use them to their advantage. Engardio explains why this is a good time to consider increasing U.S. manufacturing.

“The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation. Since 2002 the dollar has plunged by 30% against major world currencies and is falling against the yuan. Wages in China are rising 10% to 15% a year. And spiking oil prices are driving up shipping rates. The cost of sending a 40-foot container from Shanghai to San Diego has soared by 150%, to $5,500, since 2000. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets. But as the experience of Boston-Power and countless companies like it shows, the map of global commerce can’t be redrawn overnight. American factories and supplier networks in many industries have withered in the era of globalization, so it will take lots of time and capital before the U.S. can become a big player again. In electronics, for instance, there has been a mass migration of component makers to China in the past decade. Ditto for suppliers to Midwest heavy-equipment makers and North Carolina’s furniture industry.”

Engardio isn’t naive enough to believe that the U.S. can recapture all of the manufacturing jobs that have gone elsewhere. He writes:

“The bulk of goods made in China—clothing, toys, small appliances, and the like—probably won’t be coming back, because they require abundant cheap labor. If anything, their manufacture will go to other low-wage nations in Asia or Latin America. And in industries from machinery to motorbikes, China’s productivity gains nearly offset rising wages and fuel prices.”

So where does Engardio see opportunities?

“In areas where the U.S. is at the forefront of innovation—renewable energy, nano materials, solid-state lighting—the U.S. must compete with Asian and European nations willing to lavish entrepreneurs with start-up capital, cash grants, and cheap loans. Similar help may be needed to persuade U.S. companies to build capacity. The global industrial landscape certainly appears to be in the early stages of a realignment. The euro’s breathtaking rise against the dollar has spurred European makers of cars, steel, aircraft, and more to shift production to the U.S. Now the soaring cost of fuel is making it pricier to send goods across the Pacific. Consider Japan’s steel industry, which depends on imported iron ore and coal to create high-end metal for Japanese automakers in the U.S. In 2003 it cost $15 to ship a ton of iron ore costing $30 from Brazil to Japan. By last fall, while the ore had jumped to $80 per ton, shipping costs had risen to $90. Shipping of raw materials now accounts for 13% of the price of rolled steel used in car bodies, estimates CLSA Asia-Pacific Markets. The finished steel must then be sent to factories in the U.S., pumping up the price even further. Rising costs are starting to eat into what American managers fearfully call the China Price, the once-formidable 40% to 50% cost advantage enjoyed by Chinese manufacturers—and demanded by customers.”

In another post [Looking for Jobs that Last], I wrote: “Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, ‘Globalization integrates trade by disintegrating production chains and dispersing them across economies.’ … The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade — meaning trade within industry sectors or within the multinational companies themselves. … Understanding the supply chain is critical for understanding what types of job will last.” Engardio is basically making the same point. As transportation costs rise, supply chain routes are likely to change and that provides companies with new opportunities.

“Examples of production shifts abound. Chinese steel exports to America are down 20% in the past year, notes CIBC, while U.S. steel output has jumped 10% despite the slowdown in construction. Big electronics manufacturers are expanding assembly of high-end telecommunications, computer, and medical equipment in Mexico and some parts of the U.S. for greater proximity to corporate buyers.”

Engardio reports, however, that many U.S. industrial sectors have downsized so dramatically that they cannot easily gear back up for increased production.

“Look behind these examples, though, and obstacles to a broad manufacturing migration become clear. Iron castings maker Donsco, on the banks of the Susquehanna River in eastern Pennsylvania, illustrates the dilemma. In recent years, Donsco has laid off hundreds of workers as customers shifted production of gear boxes, oil rig parts, and much more to Chinese competitors. Now, Donsco says it’s flooded with order inquiries from U.S.-based clients. ‘All of a sudden our customers are saying, Whoops, it’s cheaper to buy in our backyard,’ says Donsco Chairman Art Mann Sr. While Donsco managed to keep its doors open, many of its U.S. rivals shut down, so there’s now a shortage of capacity.”

Engardio goes on to report that industries like Donsco are not rushing to increase capacity because the costs are high and so are the risks. The story, he writes, is same in industry after industry — furniture, lighting fixtures, heavy equipment, and so on. The risks are high because increased capacity doesn’t guarantee clients. Companies that have spent millions to move production to China and elsewhere aren’t eager to spend millions more relocating back to the U.S. For its part, the Chinese are working hard to keep manufacturing jobs they have attracted.

“How has China been able to keep its edge in the face of soaring costs? One factor that’s widely overlooked is rising productivity. For the past decade, U.S. manufacturing productivity growth has averaged 4.8%. That’s impressive for an industrialized nation, and bodes well for U.S. industry when the economy recovers. But productivity at medium and large Chinese manufacturers—the backbone of country’s export boom—has averaged nearly 19% over the same period, says Bart van Ark, chief economist at the Conference Board, a business research group. While American manufacturers have been tightening their belts, producers in China have been plowing money into bigger and more advanced facilities that are ahead of their U.S. counterparts. Douglas Bartlett, chairman of Bartlett Manufacturing, a Cary (Ill.) maker of high-end circuit boards used in defense and medical systems, doesn’t see a big reversal in store. A decade ago the U.S. accounted for one-third of global circuit-board output. Today that’s down to 10%, with China making 80%. Chinese boards are still 40% to 50% cheaper than the ones Bartlett makes in the U.S., in part because producers there have superior technology.”

That is why any increase in U.S. manufacturing jobs is likely to come in emerging economic sectors rather than in more traditional sectors. Engardio concludes:

“The new cost equation likely will influence many decisions about where to locate production in the future. America remains the world’s biggest manufacturer, after all, because it’s still the largest market for everything from drugs and packaged foods to high-end medical equipment. The U.S. may have as good a chance as anyone of being a strong player in nascent industries, whether next-generation wind turbines, medical devices with nano-scale sensors, or electric cars. The challenge will be to persuade reluctant venture capitalists and corporations to invest again in modern U.S. production facilities.”

He believes that government agencies can also play a role by providing seed capital to promising startups and by building industrial parks with low-cost facilities and services that rival those found in China. Friedman called that “nation-building at home” and I referred to it as Development-in-a-Box™ at home. Whatever you call it, America needs to build world-class facilities to support emerging economic sectors as well as reinvigorate the pioneer spirit that made American workers the most productive in the world.