Economy

Hope for American Manufacturing—and Maybe Jobs


America’s manufacturing industry is in terminal decline, right? Smokestack America has been battered for decades by low-cost foreign competitors. Steel furnaces went cold, assembly lines shut down, and factory production moved overseas–especially to China, the world’s epicenter for mass production. A common refrain on the political stump and the nation’s op-ed pages is that “America doesn’t make things anymore.”

To paraphrase Mark Twain, the demise of U.S. manufacturing has been greatly exaggerated. The country remains a global manufacturing powerhouse, accounting for one-fifth of the world’s manufacturing output in real terms. U.S. manufacturers exported $1.3 trillion in goods in 2010–a sum about equal to the size of Australia’s economy. If current trends through August hold, 2011 will be an even better year.

The problem is that all this activity doesn’t create as many jobs as it used to. Far from it: American manufacturers have been producing much more with many fewer workers. U.S. manufacturing output has grown by 2.5 times since 1970, even as employment shrank by 30 percent. Manufacturing jobs were decimated during the Great Recession and the anemic recovery that followed, plunging by 2 million positions, to 11.7 million jobs, from December 2007 to August 2011. (Manufacturing employment is up 2.5 percent, or 285,000, from its 2009 nadir; in keeping with the productivity story, however, manufacturing production has risen 13.2 percent from its 2009 low.)

Still, there are intriguing signs that the manufacturing job picture could stabilize or perhaps improve in the coming years, thanks to a combination of forces unleashed by the Great Recession and by globalization. Specifically, the impact of rising labor costs in key emerging markets, higher logistics costs, and a greater appreciation of the risks embedded in extended supply chains is driving management to reconsider the benefits and costs of keeping–and adding to–onshore production. “Taken altogether, the global manufacturing strategy is shifting to more of a regional strategy to sell to local markets,” says David Simchi-Levi, professor of civil and environmental engineering at the Massachusetts Institute of Technology.

Productive Jobs are Repatriating

Take Ford Motor (F). The tentative agreement reached with the United Auto Workers on Oct. 4 would have the automaker adding 12,000 hourly jobs in its U.S. manufacturing facilities by 2015, including moving work to its U.S. manufacturing facilities from Mexico, China, and Japan. (This is 5,750 jobs, in addition to a previously announced addition of 7,000 U.S. positions by yearend 2012.) Ford will also invest $16 billion in the U.S., including $6.2 billion for retooling and upgrading American plants.

It isn’t just Ford. In October 2009, NCR (NCR) decided to move production of its ATMs from overseas factories to Columbus, Ga., creating some 870 jobs. Ashland (ASH), a specialty chemical company, plans to invest $39 million to expand its Hopewell, Va., plant after having considered investments in China and Europe. Procter & Gamble (PG) held the grand opening of it 600,000-square-foot Box Elder Family Care plant in Utah with approximately 200 employees on Mar. 16–the first plant it has built in the U.S. in 40 years. Charmin toilet paper is rolling off the line there.

The lure of cheap labor persuaded many U.S. companies to move production offshore. Now managers have to take into consideration rising labor costs in many key emerging markets. For instance, average annual wage gains in Brazil from 2003 to 2008 were 21 percent, according to Simchi-Levi. The comparable figures for Malaysia and Mexico were 8 percent and 5 percent, respectively Most important, China’s wage rates have been growing at a 15 percent to 20 percent yearly clip. In 2010, China’s average productivity-adjusted production wage rate in U.S. dollars was $7 an hour, 31 percent of the U.S. average manufacturing wage, according to Boston Consulting Group. That’s up from $3.80 an hour, or 23 percent of U.S. manufacturing wages, in 2000. BCG expects the wage gap to narrow to 43 percent by 2015. The bottom line: “All of a sudden, the costs in the U.S. don’t look as high,” says Harold L. Sirkin, senior partner at BCG.

For all the attention paid to wage competition between countries, managers locate factories according to many further factors, some of which are also moving in the U.S.’s favor. The risks inherent in relying on far-flung factories to supply key components became all-too apparent in the aftermath of Japan’s earthquake and nuclear accident in April. Supply chains were disrupted, especially for the automotive and electronic-equipment industries. For example, a dearth of Japanese-made parts after the earthquake caused General Motors (GM) to temporarily shut down its Louisiana truck plant. Oil prices have pulled back from their near-$100 high of last July on fears of a global double-dip recession and are fluctuating around $86 a barrel. Still, shipping costs over long distances are likely to rise sharply, along with oil prices, once the global economy regains its vigor.

Can ‘Made in America’ Make Jobs?

How many jobs might a “Made in America” movement create? Taking into account this country’s high manufacturing productivity, scholars at the Georgetown University Center on Education & the Workforce expect a marginal shrinking, from 13.6 million jobs in 2008 to 13 million in 2018. This projection isn’t as gloomy as it initially appears because it accounts for roughly 2 million manufacturing job openings resulting from the projected retirement of Baby-Boom-era factory workers.

The consultants at BCG paint an even-more-optimistic picture in a recent report, “Made in America, Again.” They project that a less-competitive China will in itself translate to 600,000 to 800,000 additional U.S. manufacturing jobs. What’s more, they estimate that the trend will produce a further 1.7 million to 2.4 million jobs in related businesses. (A wide range of studies suggest that each domestic manufacturing position supports about three additional workers.)

Not everyone buys the notion of a brighter future for manufacturing, measured by job growth. American companies aren’t about give up their hard-won battles to produce more with fewer workers. Skeptics also point out that there are still many low-cost production regions to expand into, such as Mexico, Vietnam, parts of Africa, and elsewhere. The search for cheaper places to make things is eternal, from industry’s mass movement from expensive northern states to cheaper southern ones in the 1960s and ’70s to the massive shift toward factory work in China in the 1990s and 2000s. “It has been a worldwide movement to the lowest-cost location,” says Uday Karmarkar, professor of technology and strategy at UCLA’s Anderson School of Business. “So it it’s not a simple picture.”

Simple or not, for the first time in decades, it seems that a number of underlying economic trends favor American manufacturers keeping more production business at home. That could be a relatively bright spot in a gloomy U.S. jobs picture.

Chris_farrell
Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace.

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Companies Mentioned

  • F
    (Ford Motor Co)
    • $17.84 USD
    • 0.06
    • 0.34%
  • NCR
    (NCR Corp)
    • $32.26 USD
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