Manufacturing rebounds – So what’s the problem?

Several recent surveys show that manufacturing is rebounding. That's good news for processors and mold manufacturers whose business seems to be maintaining a steady pace. The August U.S. Manufacturing Technology Orders (USMTO) report, a joint effort of the Association for Manufacturing Technology (AMT) and the American Machine Tool Distributors' Association (AMTDA), shows that manufacturing technology orders are up 101% YTD from the same period a year ago.

Manufacturing technology orders totaled $460.61 million and provided the hopeful headline, however Augusts' orders were down 9.4% from July. That said, they were still up 88.5% when compared with the total of $244.35 million reported for August 2010.

It would appear that it's the "roller coaster" that has created a lot of uncertainty in the country.  We should be used to this by now - it's a way of life for most manufacturers as companies ride the ebbs and flows of demand. And it's this understanding that may be responsible for the optimism that peeks through in these studies.

Manufacturing momentum

"Despite news reports that wider economic growth may be stagnating, the manufacturing technology industry is sustaining its momentum," said Douglas Woods, AMT President. "With orders still up substantially over last year, there is clearly optimism within the industry as firms are seeing future growth opportunities that merit new capital investment."

True enough, but the USMTO's report shows that two of the strongest manufacturing regions saw a decline in manufacturing technology orders: the South (down 23.0% from July, but up 90.1% from August 2010) and the Midwest (down 9.3% from July but up a whopping 128.9% compared to August of 2010). Never a strong manufacturing region, the West nevertheless was down dramatically (-50.2) from July, but also up dramatically (90.1%) when compared to August 2010.  

The Central region saw orders increase 30.5% to $140.07 million, over July's total of $107.34 million - and 115.5% higher when compared to August 2010. The Northeast saw August's orders increase 9.5% more than the $58.72 million total for July, and 64.4% higher than August 2010.

Supply chain concerns

MFG.com, a global sourcing marketplace for the manufacturing industry, also recently released its Quarterly survey of North American manufacturers for Q2 2011, providing some interesting insights on OEMs and their supply chains. Among the survey's findings was the fact that North American product manufacturers continue to seek out new suppliers and expand their stables of supply-side resources, with 45% of companies surveyed expressing "a need for new suppliers at the same levels as they've expressed historically (compared to 46% in Q1). The consistency in these responses since the inception of the MFGWatch survey suggests an instability in the supplier markets due to fewer options, logistics costs, and economic volatility in supplier businesses.

That is most likely related to the responses to another question in the MFGWatch survey: "What are the most important factors threatening your current sourcing or supply chain strategies?" The number one answer was logistics/shipping costs (47%); second - Available Competent Suppliers (45%); third - Product Quality Compliance (37%); fourth - Fuel/Oil prices (32%, which is obviously related to logistics/shipping costs); and fifth - Supplier Financial Health (18%). 

Readers might want to note that three of the top five concerns that product manufacturers have regarding threats to their supply chain relate directly to the suppliers themselves. It would appear from the MFGWatch survey that a lack of available competent suppliers, an inability of suppliers to meet quality requirements, and supplier financial health are all related. Those figures might indicate that many suppliers do not have the confidence of their OEM customers - which has the OEMs out looking for more and better suppliers with stronger balance sheets.

How the U.S.'s structural costs add up

Of course it doesn't totally negate other factors. The Manufacturing Institute and the Manufacturers Alliance for Production and Innovation (MAPI) just released a report revealing that U.S. manufacturers face a significant disadvantage in doing business in the United States compared to global competitors. The 2011 Structural Cost of Manufacturing in the United States report, the fourth in an on-going series comparing the structural costs of the U.S. to our nine largest trading partners, found that U.S. manufacturers face a 20.0% structural cost disadvantage in the global market compared to manufacturers in those countries, up from 17.6% in 2008.

"While policymakers commend manufacturing for leading economic recovery by keeping businesses afloat and boosting exports, full recovery is made all the harder by this fundamental challenge," said Emily DeRocco, president, The Manufacturing Institute. "U.S. manufacturers face a set of structural disadvantages that erode U.S. competitiveness and offset many of the productivity gains achieved through innovation and the relentless pursuit of efficiencies."

While the report looks at many factors, the elements contributing most significantly to the increase in the structural cost are corporate tax rates and employee benefits costs. The spread in tort costs continued to fall and energy and pollution abatement costs held steady. The report's author is Jeremy A. Leonard, MAPI Economic Consultant.

Manufacturing creates great jobs, just not for junior

In another recently released report, drawn from a new survey from Deloitte and The Manufacturing Institute, shows that most Americans "maintain remarkably consistent views on the importance of manufacturing," 86% of the respondents believe "that America's manufacturing base is 'important' or 'very important' to their standard of living."

The third annual "Public Veiwpoint on Manufacturing" survey, polled a nationally representative sample of 1000 Americans in August across all 50 states. Most notably, when respondents were asked if they could create 1000 new jobs in their community with any new facility, they ranked manufacturing at the top of the list - ahead of energy production facilities, technology development centers, retail centers, banks or financial institutions and a host of others. Moreover, "79% of survey respondents say a strong manufacturing base should be a national priority."

While these respondents want a strong manufacturing sector, there is "an unfortunate disconnect between respondents wanting manufacturing jobs in their community and pursuing those very jobs for themselves," The Manufacturing Institute's DeRocco.  "Only one-third of parents would encourage their child to go into manufacturing, which translates into a major workforce pipeline issue. This, in turn, becomes a U.S. manufacturing competitiveness issue because we know that an educated and skilled 21st century workforce is the most important factor behind innovation and business success. As the industry faces major 'boomer' retirements, a shortage in the supply of new talent will directly impact a company's ability to thrive and expand in the global economy."

However, the skilled workforce shortage is leading many manufacturers to increase their productivity with technology. The MFGWatch survey revealed that when asked about their company's intentions for hiring, investment and expansion for the last half of 2011, 32% said they are "aggressively investing in new technology but not expanding our workforce." Only 20% are "aggressively investing in new technology" and expanding their workforce. A mere 13% are hiring, but not investing in new technology, while 35% are neither hiring, nor investing in new technology," which doesn't bode well for manufacturing's future in the U.S.

"American's see manufacturing weakening over the longer term, too," said the Deloitte and the Manufacturing Institute's survey report. "In rating whether U.S. manufacturing is becoming stronger or weaker from a longer-term perspective, only 7% said it will likely be stronger while 55% opted for weaker."

Craig Giffi, vice chairman and consumer & industrial products industry leader for Deloitte LLP, noted that "Americans worry" that any efforts made to strengthen manufacturing might be "undermined by the faltering economy and the nation's perceived lack of a competitiveness strategy."

Respondents view tax policy as an "important tool for improving U.S. manufacturing with 69% agreeing or strongly agreeing that tax cuts for businesses and individuals create jobs and 65% agreeing or strongly agreeing that tax incentives for manufacturing in the U.S. enhanced competitiveness," the report revealed.

The Manufacturing Institute's DeRocco, concluded, "Americans have strong perceptions on the obstacles hindering U.S. manufacturing competitiveness, especially taxes, high healthcare costs, high energy costs and a domestic education system in need of reform."