Us Manufacturing may never return to its heyday, but substantial growth is still possible

Why can’t things be the way it was 30 – 40 years ago?   Manufacturing jobs were abundant, wages and benefits were great!   Unions had long term, safe contracts and layoffs were minimal.   There seem to be many ideas floating around out there blaming corporate greed, poor taxation policies, NAFTA etc, but let’s examine the real issue.

Back in the 1970’s, 80’s and even into the 90’s America was the king of manufacturing.  While there was competition from other parts of the worlds such as Japan and Europe, the US was often the lower cost producer of quality products.  The US had a great infrastructure of transport and suppliers to support any manufacturing company, the US workforce had the skill set and work ethic that made it a desirable asset.   There was very little serious global competition.

The United States was also the major consumer of manufactured goods and services.  Whatever small advantage a foreign producer had could easily be offset by logistics cost.  The US had the lowest average wage when compared to Japan and most of Europe.   Other parts of the world may have had much lower wages but they clearly lacked the skill, infrastructure and resources to pose any serious manufacturing competition.  30 years ago, China’s and India’s economic structure could best be classified as 3rd world.

Then things started to change.   China, with its strategic 5 year plans began to emerge in manufacturing sophistication.  South Korea started to penetrate the US with its own automobiles.  Suddenly US companies found themselves competing against foreign built products that were cheaper and with comparable quality.

Soon many US companies started to outsource parts of production to Asia.  While many people believe the primary motivator was “corporate greed”, survival was probably a stronger motivator for most companies.

China continued to grow its infrastructure by incentivizing companies that were located in China to insist that its suppliers also located to China.  China economic growth has been substantial and they are continuing to invest heavily in its infrastructure.  The one consequence of Chinas’ rapid growth and success has been a very high wage inflation rate.   China’s wage rate has been growing at 12-20 % per year.  The wage gap between the US and China has narrowed considerably, but it is still substantial with average Chinese labor being just below $4.00 per hour.  US lower cost regions have average wages in the $9.00 to $12.00 per hour.  For products that have high labor content, this wage difference can make quite a difference in product cost.  But for some products the narrowing wage gap makes it less attractive to use China.

Since the late 1990’s the US has lost over 16 million jobs to overseas sources.  Lately there has been some press about the resurgence of US manufacturing and indeed, some manufacturing has come back.  Some estimates show that in the last 3 years over 150,000 jobs have returned.   A nice number, but a drop in the bucket when compared to the 16,000,000 jobs lost.   How far this resurgence will continue is yet to be seen, but it would be unrealistic to assume that a major part of that chunk of lost jobs will return.

In order to continue the manufacturing resurgence, the United States needs to rely on capabilities that it has always had; innovation, a strong work ethic and a cultural infrastructure that helps promote growth.   Despite apparent dysfunctions of the US Federal government, state and local governments have been active in supporting manufacturing initiatives.   While many leaders are concerned that the recent increases in entitlements will cause the US to lose its edge, the American worker still has one of the strongest work ethics in the world.   US manufacturing has historically been more productive than its foreign competition.   The US will need to continue productivity improvements by adapting some of the latest lean manufacturing techniques and continue to invest in automation.

Going back to the question asked at the beginning, the correct question should not be how do we return to the past, but what can we do to re-invent ourselves for a more prosperous future.