Global Economics

The Case for Making It in the USA


Do factory workers have a future in the U.S.? David Laws thinks so. The muscular, tattooed South Carolinian has a prized job with General Electric's (GE) Greenville Airfoils Facility in Piedmont, S.C. One of his tasks is to use a computer-controlled machine tool to burn tiny cooling holes electrically in 3-inch-long turbine blades for aircraft jet engines. The 300 holes in each blade, most of them thinner than a human hair, are engineered to spread a coat of cool air over the spinning blades so they aren't melted by 3,000F exhaust gases.

The pay is good—$31 an hour—but what Laws really likes is the sense of empowerment at the non-union plant. Hourly team members like Laws are responsible for choosing new colleagues. Before deciding who gets hired, they interview job candidates and observe them in a game that involves cooperatively building a toy helicopter from LEGO blocks. Teams can adjust the line operation as they see fit to remove bottlenecks and maximize productivity. Recently, two teams came up with different ways to speed up the washing of turbine blades. The plant leader, rather than picking one way as the winner, approved buying equipment for each team to wash the blades its own way.

"At other jobs I've had, it was just a paycheck. Here, you actually feel like you have a say-so. Out of all the places I've worked, I'd say this is by far the best one," says Laws, 34, who is married with four children.

Manufacturing still contributes 11.7 percent of U.S. gross domestic product. Yet when footloose corporations can choose to locate factories wherever in the world they want, the only hope for American factory workers to save their jobs is to be so skilled and productive that they can justify the pay multiple they earn vs. their counterparts in South Korea or China or Mexico. (Roughly half of GE's manufacturing jobs, as well as overall revenues, are outside the U.S.) For Americans, earning premium wages will require focusing on sophisticated products that can't be made in lower-wage nations—and outsmarting foreign rivals with the kind of ingenuity and teamwork that are on display at the South Carolina airfoil plant.

A study scheduled to be released on May 5 by Boston Consulting Group argues that the U.S. is headed for a "manufacturing renaissance" over the next five years. The mainland's pay advantage over the U.S. is eroding because Chinese wages are rising about 17 percent a year and the yuan is gaining in value, according to BCG. And an "increasingly flexible" U.S. workforce is willing to accept non-union wages and benefits, and state and local governments are raising incentives to attract factories, the firm says.

BCG calculates that once wages are adjusted for superior U.S. productivity, China's average wage was 31 percent of the U.S. average in 2010 and will reach 44 percent in 2015. The gap is narrower when one compares wages in China's Yangtze River Delta region, which includes Shanghai, with those in Mississippi, one of the cheapest places for manufacturing in the U.S. The Chinese coastal region's wages were 48 percent of Mississippi's in 2010 and will reach an estimated 69 percent in 2015. And wages aren't everything: China suffers from distance from the U.S. market, communications difficulties, and weaker intellectual property protection. "It's no longer going to be a no-brainer" to shift manufacturing from the U.S. to China, says Hal Sirkin, a senior partner of the consulting firm and lead author of the paper. Mexico will also benefit as China's wage advantage declines, BCG predicts. It cautions that China "will continue to be a major global player," tilting toward serving its domestic market as well as Western Europe.

Early signs for the U.S. are good: Blue chips such as Caterpillar (CAT), Ford (F), and NCR (NCR) have all announced that they are returning some manufacturing from abroad, even as they continue to expand abroad. A renaissance in U.S. manufacturing output does not necessarily imply a hiring binge; efficient companies might just do more with fewer people. In fact, manufacturing employment has risen only 2 percent from its recent low, while the Federal Reserve's index of manufacturing production is up 13 percent. That's unfortunate because factory jobs pay better than most careers that are open to people without college degrees.

Even without hiring, gains in factory output would help the economy. The U.S. needs to export more manufactured products to shrink the trade deficit and pay its debts to the rest of the world. In the best-case scenario, once the economy recovers, the workers who are displaced from manufacturing will land in sectors where employment is growing. The role model is agriculture, where efficiency improvements freed up farmers' children to choose other fields of work. Data from the Commerce Dept.'s Bureau of Economic Analysis show that manufacturing has maintained its share of total output despite a 41 percent decline in employment from the 1979 peak of 19.7 million.

Skeptics say that it's not just manufacturing employment that's been falling. It's output, too. An Apr. 26 report by the Information Technology & Innovation Foundation, called "The Case for a National Manufacturing Strategy," argues that the Commerce Dept. has overstated the output of two industries, petroleum refining and computers and electronics. Without those two, it says, manufacturing would have declined significantly as a share of gross domestic product from 2000 to 2009. Says Robert D. Atkinson, the foundation's president: "We're not going to have a renaissance. That's just not going to happen. The best we can do is stabilize real output."

In a May 3 interview, two economists in Commerce's Bureau of Economic Analysis, Erich Strassner and Nicole Mayerhauser, say the bureau's data is solid. Julian L. Alssid, executive director of the nonprofit Workforce Strategy Center, says the debate is beside the point: "Whether manufacturing is in decline or poised for a rebound, it's still really big. It's important in any case."

Back in Piedmont, plant leader Brad C. Brougher is busy hosting contingents of curious visitors from other GE plants and planning for growth. Several layers above him, GE Chief Executive Jeffrey Immelt said in a Mar. 31 speech in Washington that "we wanted to make sure that we had a great manufacturing footprint." Brougher recently persuaded GE Aviation headquarters in Cincinnati to give him $30 million for machines to apply coatings to turbine blades, a job now done by another company. That will mean more jobs for David Laws and others to fill. "When we moved into this facility we thought we'd grow into it after about five years," Brougher says. "We're almost out of room after the first year."

The bottom line: Rising wages in China and high productivity in the U.S. may prompt more companies to keep manufacturing in America.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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