Despite Slow Growth, US Manufacturers Hold the Aces
Upon first glance, performance has been shaky at best for American manufacturing of late. The most recent figures show US manufacturers at their lowest rate of production in over four years.
The Institute for Supply Management’s (ISM) manufacturing index, widely considered to be the standard for gauging American manufacturing, dropped to 49 in May. March and April this year weren’t much better, rating at 51.3 and 50.7, respectively. A rating below 50 shows industry reduction.
But if you believe the country is in complete manufacturing disarray, think again. Although US productivity has been underwhelming, the global picture is looking downright bleak at best. Four of the US’ main global manufacturing regions – China, Japan, Canada and Europe – have all fallen on tough times recently.
Weak Demand Stifles China
China’s manufacturing index, the HSBC PMI, illustrates below how their productivity has suffered since the beginning of 2012. (Image and quote below courtesy of The Wall Street Journal)
As the graphic indicates, a small period of gains starting at the end of 2012 kept their PMI above 50 until May of this year. Aside from that, China’s manufacturing industry has been reeling since the beginning of 2012. HSBC economist Qu Hongbin offers a glimpse as to why, “The manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures.” Destocking is the practice of using up already-created goods that would otherwise create a sizable surplus. A lack of new production is the end result.
Cost Advantage for American Production
Manufacturing costs have swung in the US’ favor the past few years, compared to most other countries. As John F. Floyd of the Gadsden Times reports from a Wall Street Journal piece in early June, US manufacturing costs are currently 7% lower than the United Kingdom, 18% lower than Germany, 17% lower than France, 19% lower than Italy, 13% lower than Japan and 3% lower than Canada. For European countries, Floyd notes “high wages, very restrictive labor contracts and more expensive energy costs for Europeans have all accounted for the [manufacturing cost] disparity.”
In addition, research consultants AlixPartners stated in April that within the next two years, the costs for an American company to outsource operations to China would equal the amount of money to maintain operations domestically. Mark Miller, CEO of Prince Industries expressed his surprise for how fast the gap has closed, “It’s something that we anticipated when we went to China, we just didn’t know how quick it would happen.”
Manufacturing Executives Take Notice
The same study from AlixPartners also illustrated how an emerging competitive manufacturing advantage has not fallen on deaf ears. A set of manufacturing executives were asked various questions about the current climate in their industry. When asked if the decision to ‘reshore,’ or bring manufacturing back to the United States, was ‘very important’ or ‘important,’ 84% answered yes to one of those choices in 2013 – versus only 53% last year. On a related note, every participant stated reshoring is either as important, or is more important than last year.
But as the old adage goes, actions speak louder than words – and reputable companies have already begun to return or expand operations in the States –
- Toyota Motors announced last week they are expanding their workforces at three US facilities, investing an additional $200 million to bolster operations. The car company has expanded American operations nine times the past two years, spending over $2 billion in the process.
- Apple computers spent over $100 million to shift one of its Mac product lines from China to Texas at the end of 2012.
- After shifting much of the manufacturing to China by 2006, Whirlpool opened a state-of-the-art $200 million, 1-million-square-foot manufacturing facility in Cleveland, Tennessee in April 2012 as part of a reshoring initiative.
- In February, Ford Motors brought 450 manufacturing jobs back to Ohio from a facility in Spain. The company also has added over 2,200 white-collar jobs in the US this year, and intends to add 800 more by year’s end.
Technology Reigns Supreme
One of the most important realizations when it comes to manufacturing today is that technological ideology is not the same as it was 10, 20, 30 years ago. Engineers and facility managers can be updated instantaneously on power outages or equipment malfunctions, allowing them to enact contingency plans at a moment’s notice. Companies have the access to be more energy efficient than ever due to devices like variable frequency drives and services like demand response and cool roof technology. Emerging industries, like three-dimensional printing, are in their infancy in terms of development. Smaller, more nimble facilities that can churn out high-quality products appear to be the next wave.
Michael Idelchik, head of advanced technologies at General Electric’s global research facility, explains his interpretation of what new technology encompasses –
Manufacturing is undergoing a change that is every bit as significant as the introduction of interchangeable parts of the production line, maybe even more so. The future is not going to be about stretched-out global supply chains connected to a web of distant giant factories. It’s about small, nimble manufacturing operations using highly sophisticated new tools and new materials.
Furthermore, at a time in history when work efficiency is at a premium, American workers are among the most efficient across the globe – three times more productive than Chinese workers in fact, CEO and president of Siemens Eric Spiegel says. He contributed to another great piece from the Wall Street Journal this month about the future of manufacturing –
Manufacturing has become knowledge work. The resurgence of manufacturing is being driven by a software revolution: that is the complete collapse between the boundaries separating the real and virtual world that are leading to historic gains in efficiency and productivity. This gives the US, the world leader in software development, a leg up in the global manufacturing race.
American manufacturing has the technology, knowledge, executive attention and cost advantages to ensure its stability for an extended period of time. Although the probability of restoring all ten million manufacturing jobs lost between 2000-2010 remains low and the current PMI is reeling, the vitality of American manufacturing does have many factors working to its advantage.
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