Hope for American Manufacturing—and Maybe Jobs

Some factory work is returning to the U.S., thanks to a narrowing wage gap with low-cost countries and to the rising risks posed by long supply lines

By Chris Farrell

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. 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 decided to move production of its ATMs from overseas factories to Columbus, Ga., creating some 870 jobs. Ashland, 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 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.