Are We in a Manufacturing Renaissance?
Since the last article there have been even more optimistic articles about American manufacturing with titles like:
“Comeback: Why the U.S. Sits at the Brink of a New Boom”- PBS NEWSHOUR
“Made in the USA: Is America Making a Manufacturing Comeback? Huffington Post
“Made in the USA” -TIME MAGAZINE
“U.S. Manufacturing Jobs Begin the Long March Back From China” Business News
The media has jumped on the American Manufacturing story because it is a good story and it projects hope in a poor economy. But one must look deeper into the critical factors that drive manufacturing to see a realistic picture.
1. Manufacturing jobs and secondary jobs – If job creation is a good measurement of success then we have barely turned the corner. Since the recession began we have only created 500,000 jobs as of the end of 2012. We have lost almost 6 million jobs since year 2000, so we need to create millions not thousands of jobs.
The latest press release from the Boston Consulting Group is that reshoring will bring back 2.5 to 5 million jobs by year 2020. Their projection is based on a survey of the future intentions of manufacturers larger then $1 billion in sales. But there is a big “catch”. According to many other surveys these manufacturers don’t want any of the low skilled employees that were laid off – they want multi-skilled workers which require a big training investment, which so far they have avoided.
A second problem is that they may bring the product line or the production operation back but it doesn’t necessarily mean jobs. These large manufacturers have done very well in lowering labor costs and eliminating jobs with automation such as 3-d printing, robots, advanced software and a host of other labor saving devices and machines.
A third problem is that the large companies may decide to bring jobs back but they will want lower wages. A good example is General Electric who decided to bring back their water heaters from China and make them in their appliance park in Louisville Kentucky
But they have implemented a two tier wage system with the union and 70% of the workers make $13.50 and hour - $8 per hour less then the original wage.
And another problem is that large corporations continue to offshore jobs. In 2012 General Electric, Honeywell, Delphi Automotive, Eaton Corp, IBM, Hewlett Packard Eli Lilly, Motorola, and Boeing were only some of the manufacturers sending jobs overseas. You can trace many of the lost jobs through the Trade Adjustment Assistance program where these companies must make applications for training for the displaced workers. There is a summary of trade Adjustment applications on the Labor Department database-www.doleta.gov. A summary of these applications this year shows 77 different companies applying for TAA assistance. The records for 46 of these companies showed 7,883 jobs were off shored.
The BCG projection of jobs is about the potential of reshoring jobs. But there are many reasons why reshoring won’t happen in the numbers projected.
2. Manufacturing locations – Since year 2000 we have lost 58,000 manufacturing locations in the U.S. If we are about to see a huge reshoring initiative that will bring back millions of jobs then America will have to immediately expand the supply chain of small and midsize manufacturers to manufacture the parts. Also if the strategy is all about innovation then one would think there would be an accommodating trend of start-up companies. The numbers on locations for 2012 have not been released but as of 2011 the number of locations is still declining.
3. Manufacturing R&D – If the primary strategy of American Manufacturing is innovation through expanded R&D investments, then the total public/private investment in R&D should be increased from its stable position of 2.5% of GDP per year. To do this the government must increase its contribution to basic research and direct it more to the physical sciences rather then health care. But there is a little chance this could happen with the current Congress.
Second the trend for the huge manufacturers over $1 billion in sales has been to increase spending of part of their R &D budgets overseas (about 20%).I don’t believe the big manufacturers will reverse these trends in foreign investment of R&D as long as they have production plants serving foreign markets. I see the chances of increasing overall R&D spending in the U.S. as very slim.
4. Trade Deficit – I view the ongoing trade deficit problem as the most important factor in creating manufacturing jobs. A new study by the “Economic Policy Institute finds that the growing trade deficit with China has cost the U.S. billions of dollars in lost wages. In 2011 alone, unbalanced trade with the People’s Republic resulted in lost wages of $37 billion. The EPI study cites 2.7 million jobs lost between 2001 and 2011 due to the trade gap with China, and over 2.1 million of those jobs were in the manufacturing sector
Most people do not understand that the trade deficit is directly connected to manufacturing jobs. The author of the report Robert E Scott says,”Allowing the U.S. China trade deficit to continue growing would eliminate many more jobs in manufacturing bedrock of the U.S. economy – and further erode wages of U.S. workers.” But as critical as the trade deficit problem is, it is largely ignored by the government, media, and big business.
5. Manufacturing Exports - The solution to the problems of increasing exports is clearly a reliance on manufacturing, because manufactured products have always been 70% of all exports. President Obama’s goal of doubling exports from $1.56 trillion December 2009 to $3.12 trillion in December 2014. At the end of 2012 we reached $2.2 trillion in exports which is 29% growth, but the problem is that imports are growing faster then exports.
Rather than doubling exports, a more practical goal would be to reduce the trade deficit of $534 billion in 2012 and move toward a surplus. This would require convincing China and Japan to quit manipulating their currencies, which is a political problem that the administration carefully avoids. Reducing currency manipulation would not only reduce the trade deficit but would increase manufacturing costs in China and other Asian countries. This could lead to the projected big increase in reshoring and new jobs in America. But increasing exports, reshoring and job creation are based on political decisions and have a low probability of success at this time.
6. Advanced Technology products -If innovation is the strategy that will allow America to compete in a globalized world, then advanced technology products are the point of our competitive spear. America has always led the world in innovation with products like robots, semiconductors, personal computers, the internet and hundreds more. But the idea of invent it here but make it overseas is simply not working to our advantage. We went from a $30 billion surplus of electronics products to a $56 billion deficit in 10 years.
Offshoring both technology products and R&D as well as the Asian ability to copy, steal, or learn our new technologies by building the products for U.S. manufacturers is killing our advantage in innovation and advanced technology products. The only way I see us having an innovation advantage is to convince America’s flagship manufacturers to bring back their overseas R&D and for government to step up enforcement and protection of our technologies.
7. Reshoring vs. offshoring – According to the Hackett Consulting Group, “the number of firms who have actually “reshored” their manufacturing operation to America is less than 100 so far.” At the Reshoring Summit in Cleveland in March 2013, the leaders said that 50,000 jobs returned to the United States from 2009 to 2012.” This is approximately 20% of the 500,000 new jobs that have been created. If more than ½ of manufacturers over $1 billion are planning to bring back production to the U.S. from China to create 5 million new jobs, then reshoring is getting a very slow start.
I think that Boston Consulting Group’s fundamental assumption that reshoring may happen because of rising Chinese labor costs is a marginal assumption at best. To really get Chinese labor costs up to the point that would get the large American companies to reshore product lines will probably require forcing the Chinese to quit manipulating their currency by filing a claim with the WTO. But neither the government nor the large companies are willing to do it.
8. Training and Education – If we assume that millions of new manufacturing jobs could be created and manufacturers want multi-skilled employees- the big question is how the new employees will be trained? The community college system does a good job of teaching the basics, but I think what manufacturers really need are journeyman skills that come from long apprentice programs. With few exceptions this kind of training doesn’t exist in the big companies, and there are 3 big obstacles to create it.
- The Obama administration has committed to revitalize manufacturing by suggesting the development of a $7 billion system of innovation hubs which includes 25 manufacturing innovation institutes and lowering the tax rates for manufacturers to 25%. But the reality is that Congress is not in the mood to fund any programs suggested by Obama.
- The same large companies that were surveyed about reshoring and bringing back production, have so far been unwilling to invest in long term training like apprenticeship training. It is difficult to see how they are going to get the multi-skilled employees they will need unless they just steal them from their suppliers.
- An even bigger problem is that most surveys I have seen show that young people are not interested in manufacturing. They are interested in the journeyman electrician program where they train for hundreds of hours but can make $38 per hour as a journeyman. I think to get bright people into large manufacturing companies is going to take a lengthy apprentice program that pays them for skills completed and guarantees their employment during the training program. I don’t see this happening because the large American companies are still in the labor cost reduction mode.
9. Manufacturing is the key to our defense – This is a very critical issue, particularly with the build up of the Chinese Communist military budget and their goals of being a force in the Pacific. But the problems of espionage, stealing technologies and sourcing critical components from China can only be addressed by our government. Based on government’s response to these problems in the last decade, I am not encouraged that anything will change.
I enjoy the happy talk about the future of manufacturing as much as anyone and would consider it a victory if only 1 million manufacturing jobs were created in the U.S. from reshoring. But the headlines are about creating 5 million of jobs, doubling exports, continuing to be the innovation leader, and the re-industrialization of America. Jobs are one measure of manufacturing growth. But, if you look at what is happening with the trade deficit, imports, training, investment in R&D, loss of advanced technologies, and the protection of our national defense it is a sobering but more realistic assessment.
I certainly hope we get a break and reshoring brings millions of jobs, but hope is not a plan or strategy. I think we must begin making progress in the other important factors to re-industrialize America. What do you think?
 Majority of Large Manufacturers Are Now Planning ‘Reshoring’ from China to the U.S., Press Release, The Boston Consulting Group, September 24, 2013
 Manufacturing and Technology News, Richard McCormack, editor, Volume 20, No.10, July 31,2013
 $37 Billion in Annual Wages Lost To China, Alliance for American Manufacturing , September 30,2013
 Is Re-Industrialization the Key?, Tom McNamara, Manufacturing Business Technology, April 5, 2013