Four long-term issues that could sink U.S. manufacturing
Published: August 21st, 2012
U.S. manufacturing is growing stronger but that expansion is in spite of four direct challenges to continued relevance in the global market: growing inadequacy of its infrastructure; a lack of qualified factory workers; a tax and regulatory regime that generally does not provide incentives for expansion projects; and the lack of a long-term national industrial policy.
Those key findings from a gathering of industry, labor, government, and academia at the U.S. Manufacturing Competitiveness Initiative: Dialogue on Next Generation Supply Networks and Logistics, held in February at the Georgia Tech Global Learning Center in Atlanta.
The conference flagged a Booz & Co. analysis of data from the U.N. and the U.S. Bureau of Labor Statistics Contrary to dispel the rumors that manufacturing is now an insignificant portion of the U.S. economy. Manufacturing currently accounts for 12% percent of U.S. GDP, down from previous decades, but in dollar terms, still representing a sector that is larger than the entire GDP of Canada or Russia.
Manufacturing is also driving a large portion of the present economic recovery, which has been growing for 30 consecutive months, and in January 2012, according to the Institute for Supply Management, nine of 18 manufacturing industries reported growth, while seven industries reported contraction.
The report stated that as the economy gains momentum, some estimates suggest that by 2020, growth in manufacturing will have increased freight volumes by 19% and increased truck tonnage by 28%.
Four types of U.S. manufacturers
The report divided U.S. industry into four broad categories:
- "Global leaders have made large-scale investments, have embedded intellectual property, and have uniquely skilled workforces and strong linkages to product and process development. Altogether, these elements provide them with a high entry barrier to potential low-cost rivals."
- "Domestic manufacturers are strongly advantaged to serve domestic markets from national factories."
- "On-the-bubble enterprises are advantaged for U.S. production but require sharp-penciled management, ongoing reinvestment, and enhanced coordination with academia, government, and labor in order to survive in the global arena."
- "Niche players are generally and significantly cost disadvantaged for the North American market relative to low-cost imports. Niche players are those U.S. plants that are truly at risk, likely surviving only in focused roles where the benefit of proximity to market or to U.S.-based R&D can overcome a significant conversion-cost disadvantage."
Given those groupings, the competiveness study found that about 50% of U.S. manufacturing jobs and value add come from what it calls on-the-bubble enterprises and niche players.
U.S. share of global manufacturing fell from 21.7% in 1980 to 20.5% in 2009, while China's share rose from 1.9% in 1980 to 18% in 2009, with most of its increase coming at the expense of Europe and Japan, according to data analyzed by Booz & Co. from the UN National Accounts Main Aggregates Database.
The report also stated that the unidirectional flow of work through outsourcing of manufacturing has started to show signs of a reversal, as many weigh the full costs of shipping work overseas and realize that production facilities located closer to their markets benefit from shorter, faster, and more reliable supply chains.
In addition to a dramatic transformation over the past two decades, which saw the emergence of advanced manufacturing techniques, the manufacturing sector is also rife with cash gleaned from productivity gains and elsewhere. The competiveness study found that companies are now holding more cash as a percentage of assets than at any point since 1963-approximately $2 trillion.
A bumpy road
That's the good news; the bad news? "From a supply chain standpoint, the most visible impediment to expanding America's global manufacturing and export capacity is the growing inadequacy of its infrastructure."
The report states that an estimated one in four of the nation's 152,000 bridges is in need of repair, with the U.S. ranking 24th in the world among trade-competitive nations in terms of infrastructure quality. So dilapidated are our roads and byways that the Society of Civil Engineers gives them a D grade.
The interstate highway system moves 97% of all consumer goods and 70% of all goods by weight, via the trucking industry, but faulty highways and bridges lead to time-wasting bottlenecks and traffic congestion, slowing the movement of raw materials and finished products, and "placing competitive restraints on manufacturing and economic growth", according to the report.
In addition to being dilapidated, the highway and rail networks are not adding capacity, despite increases in population, reflecting a larger failure to align with shifts in population and manufacturing centers.
A greying workforce
Another of manufacturing's challenges is a lack of qualified factory workers. The report cited a societal stigma around manufacturing jobs, classifying them as dirty, low-paying, and unsafe, leading a younger generation to pursue careers in other industries, despite the new reality. "However, the era of unskilled factory jobs is over," the report states. "Today's workers are highly skilled employees who operate complex equipment in safe, clean environments."
This issue becomes more urgent when you consider that 2.7 million workers, or one-fourth of all U.S. white- and blue-collar manufacturing employees, are 55 years old or more.
Intersection of industry and government
On the tax and regulation front, the study allowed that "everyone recognizes the need for taxes" but said that the tax system as a whole discourages critical expansion projects. The transportation industry deals with everything from permit process and route restrictions to environmental regulations and speed limitations. "In an industry where time is money, burdensome regulations are costing too much of both," the report stated.
On the tax front, the report found that government may be its own worst enemy in trying to increase revenues. "Complex tax codes drive investment in high-cost overhead to develop and execute tax-minimization strategies and may create negative bias in planning decisions, causing many to conservatively evaluate investments based on statutory rather than lower effective rates," the report said.
A national policy
China is currently on its 12th 5-year plan, while the U.S. lacks a coherent strategy of any kind. "All of the other major trading nations follow a blueprint of strategies, objectives, and benchmarks for coordinating and advancing their competitive positions in the world market," the report said, while the U.S. is focused on the short term, driven more "by the two-year election cycle than by long-term, sustainable economic development that plans for ten or twenty years down the road."
The conference was sponsored by Georgia Tech and the Council on Competitiveness, a nonpartisan, nongovernmental organization composed of CEOs, university presidents, and labor leaders, and the Atlanta event was the thirteenth in a series of conferences held around the country.