Manufacturing at the Crossroads

Engineerblogger
Jan 12, 2012

U.S. manufacturers have taken a beating this past decade. As the economy pulls itself out of the recession, they are approaching a crossroads. What happens as the United States climbs out of the recession? Does production move overseas or return home? Does American manufacturing muscle bulk up or atrophy? Job losses in manufacturing have been staggering. From 17-18 million manufacturing workers for 20 years prior to the 2001 recession, employment has plummeted, down to 12 million workers in 2009.

In contrast, a combination of low wages, good technology, and undervalued currency gives Chinese manufacturers a huge cost advantage on U.S. shores. China has vaulted past Germany, Japan, and the United States to become the world’s largest manufactured goods exporter.

Unlike most other developing nations, China has an enormous internal market. In exchange for market access, China demands that foreign businesses build factories in China using the latest technology—and take on Chinese partners. The combination of economies of scale, a growing class of engineers and managers weaned on Western technology, low-cost labor, and government incentives has turned China into a manufacturing juggernaut.

China also undervalues its currency. This makes Chinese exports significantly cheaper and it erodes manufacturing margins in the United States. Companies need high margins to invest in equipment to stay ahead of the competition. Yet American manufacturing remains strong in many ways. Employment has fallen sharply but output has not. Some gains were achieved by applying R&D, lean manufacturing, and factory automation. Other gains came by sending labor-intensive manufacturing offshore.

Since 1986, U.S. manufacturers’ labor costs have declined 40 percent when compared to 14 developed countries in Europe and Asia that are major competitors in international markets.

 U.S. manufacturers have survived a fearsome onslaught from Chinese manufacturers, fueled by low wages, undervalued currency, and good-enough technology. The survivors emerged leaner and in many ways more competitive. American manufacturers need to build on that competitiveness.

"We import 66 percent more than we export. That says something about relative cost competitiveness," says Harry Moser, chairman emeritus of machinery manufacturer GF AgieCharmilles. "We have pretty good anecdotal evidence that purchasing agents and supply chain managers just compare prices, and if they’re 20 to 30 percent lower, they buy from China." Moser recommends looking at total cost of ownership instead. This includes such factors as packaging, shipping, duties, inventory carrying costs, additional quality management, additional prototypes, and end-of-life obsolete inventory. He estimates that this gives U.S. factories a 24 percent home field advantage.

"We can’t reshore products that are low quality, rely on cheap labor, or have no regulatory or safety issues," Moser said. "But if you need high quality, a short pipeline that can handle volatile demand that fluctuates month to month, or a reduced carbon footprint, we’re competitive."

Some manufacturing has already come home. "Companies want their plants where their customers are, and make sourcing decisions based on that," Steve Lyman, a Grant Thornton partner, explained. "They’re rethinking whether it makes sense to produce something in China and then incur the logistics costs to bring it to the United States."

Undoubtedly, work will continue to flow to China. For certain types of labor-intensive, mass-produced products, China’s cost advantages will remain attractive. And Chinese manufacturers are by no means standing still. Many have invested in the best technology the West and Japan have to offer.

U.S. manufacturers, however, will emerge from this recession leaner. Most of the jobs lost are unlikely to return. They will be replaced by outsourced production that will make U.S. factories more productive and competitive than ever. The United States retains a reputation for quality, and exports are likely to grow if the dollar remains weak.

What comes after the recession? U.S. manufacturers will continue to do what they have always done: keep changing. Some will send manufacturing and engineering offshore, where less buys more. Others will bring work closer to home to reduce risk. Manufacturers will vote with their money, just as they did when they embraced assembly lines, factory automation, lean production, and the migration of factories from the North to the South and West. The individual decisions of thousands of manufacturers will create a new paradigm that will serve until the next great challenge.

Source:  ASME