« Dark matter - snippets | Main | New manufacturing reports »
April 4, 2006
Growing manufacturing
What is the fate of manufacturing in the I-Cubed Economy? The answer to that question is not straightforward. Some believe that the American factory is headed the way of the dodo bird. The US can not compete with low wage manufacturing in other nations, especially with the cost of transportation of finished goods so low. The container ship changed the manufacturing calculus, forever some claim. "The world in a box" in The Economist relates the story of how containerization unleashed globalization:
Loading loose cargo, a back-breaking, laborious business, onto a medium-sized ship cost $5.83 a ton in 1956. McLean calculated that loading the Ideal-X [the first container ship] cost less than $0.16 a ton. All of a sudden, the cost of shipping products to another destination was no longer prohibitively expensive.
This opened up all sorts of possibilities. Instead of manufacturing goods locally, a company could afford to replace its overcrowded multi-storey factory in Brooklyn with one in Pennsylvania, where taxes, electricity and other costs were lower, and then ship its goods to New York in a container. Later the factory might move to Mexico; it is now probably in China.
That dynamic shows up in recent data (Wall Street Journal "U.S. 'Birthrate' For New Factories Is Steadily Falling"):
The rate of factory openings was 3.8% in the third quarter of 1992 and stayed above 3% for much of the rest of that decade. But in 1998, the rate began falling and hit 2.4% in the first quarter of 2005. Closings, meanwhile, have hovered around 3.5% for much of that period.
The net effect is fewer US factories.
Even when new manufacturing is taking place, it is at greenfield sites in the low cost south - where unionization and legacy health care costs are not an issue. (See the data in the Wall Street Journal First Shift, Second Shift... Southern Shift.)
That shift reveals a more complicated picture of US manufacturing. Transplant auto companies are thriving in America. As the Christian Science Monitor points out - America's other automakers roaring ahead:
For all the difficult news about plant closings and big quarterly losses, America's auto industry is retaining jobs better than other traditional industries.
Overall employment in domestic manufacturing is down sharply during the past 15 years, yet the automotive sector employs more people than it did in 1990.
And, the latest word on manufacturing is positive: Outlook for Domestic Manufacturing Growth Is Strong, Survey Says":
The Site Selection Network of the National Association of Manufacturers (NAM) and Deloitte's Manufacturing Industry practice released the results of the organizations' joint 2005 Manufacturing Location Survey today at National Manufacturing Week. The survey found that more than 60 percent of respondents intend to expand their facilities in the next three years, and 70 percent of these expansion plans are expected to be domestic.
In addition, the story of offshoring is not clear. While globalization and offshoring takes manufacturing jobs out of the US, it can in some cases also help US companies fight off the competition - as Business Week describes in "The Future Of Outsourcing":
For decades, PCMC's Green Bay (Wis.) factory, its oiled wooden factory floors worn smooth by work boots, thrived by making ever-more-complex equipment to weave, fold, and print packaging for everything from potato chips to baby wipes.
But PCMC has fallen on hard times. First came the 2001 recession. Then, two years ago, one of the company's biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. "All you hear about is China and all these companies closing or taking their operations overseas."
But now, Compton says, he is "probably the most optimistic I've been in five years." Hope is coming from an unusual source. As part of its turnaround strategy, Barry-Wehmiller plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explains Vasant Bennett, president of Barry-Wehmiller's engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints -- and keep production in Green Bay. Barry-Wehmiller says the strategy already has boosted profits at some of the 32 other midsize U.S. machinery makers it has bought. "We can compete and create great American jobs," vows CEO Robert Chapman. "But not without offshoring."
The management guru types are pushing this idea, as Business Week goes on to describe:
a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But its peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.
It remains unclear to me whether "transformational offshoring" is a means of saving US manufacturing or is just another piece of rhetoric for dressing-up the offshoring hunt for the lowest possible wages.
But, regardless of the rhetoric, manufacturing is undergoing a transformation. One place that transformation seems to be underway is in the birthplace of the American Industrial Revolution: New England. According to Jack Healy at the Manufacturing Advancement Center:
What seems to be counter-cyclical news is the recent announcement that New England gained 164 manufacturing plants over the past 12 months, and 1,700 over the past five years. This information was disclosed in recent data collected and issued by Manufacturers' News Inc. Howard Dubin, Chairman of Manufacturers' News, stated, "This unique region gained plants because its workers rank high in the skills, education, and technology that make up America's new advanced manufacturing."
The change represents not a return to the good-old-days, but a new strategy:
Aside from a few growing industry sectors, such as medical devices, what we are now seeing are numerous small manufacturing enterprises repositioning themselves and starting new operations to launch new technologies. As the large OEMs downsize and outsource to overseas suppliers, they are leaving a domestic supply chain of thousands of small manufacturing enterprises (SME) in search of new business.
. . .
Recognizing this change, the Manufacturing Extension Partnerships (MEP) in Maine and Massachusetts have launched an "Innovation" program. The program helps SMEs evaluate their current products and operating strengths, and develop a "technology roadmap" that will enable the companies to reposition. This roadmap includes the training of staff, both on a company-wide and an individual basis, to deal with the new technology that will be launched.
In the meantime, US companies are warning of a worker shortage. According to a survey late last year (as reported in the Wall Street Journal - "Firms' New Grail: Skilled Workers":
Difficulty in finding enough skilled workers is hampering the ability of many U.S. manufacturers to serve their customers.
Eighty-one percent say they face "moderate" or "severe" shortages of qualified workers, according to a survey by the National Association of Manufacturers and Deloitte Consulting LLP. More than half of manufacturers surveyed said 10% or more of their positions are empty for lack of the right candidates.
The shortfall is especially acute in skilled trades, for positions such as welders and specialized machinists. Gaps on the factory floor can make it harder for manufacturers to move quickly to exploit new market opportunities and could hasten the exodus of jobs as more employers hunt for skilled workers outside the U.S.
Not everyone has the same take on this skill shortage - as David Wessel relates in "Behind the Labor Shortage-Layoff Paradox: Lack of Skilled Workers":
Frank Levy, a Massachusetts Institute of Technology economist, likes to ask executives who talk of worker shortages: "Have you had to stop production because you couldn't get somebody?" And the usual answer is, "Well, no." His interpretation: The complaining is really about the prospect of having to offer higher pay. "What they'd really like is to have lots of people to choose from without having to raise wages."
But there's more to this. The issue isn't filling factory jobs that rely entirely on muscle and a willingness to show up for work on time; those jobs are going, either overseas or to automation. The issue is jobs like this one advertised by Pneumatic Scale Corp., which makes high-speed packaging equipment in Cuyahoga Falls, Ohio: "Experienced assembler capable of performing diversified electrical and mechanical assembly of intricate machines. ... The successful candidate will have an understanding of PLC/PC-based (hardware/software) systems, utilizing Real Time Process Control applications (using C++, Visual Basic, and Windows NT) and instrumentation." Few laid-off GM assembly-line workers need apply.
The NAM study also notes a disturbing trend within companies themselves:
Although the surveyed companies are spending more for training, on average, than companies responding to previous Skills Gap surveys, the majority of companies (64 percent) surveyed formally train less than 60 percent of their workforces. The decision whether or not to provide training to all employees may be driven by short-term cost pressures that companies are facing or by a lack of recognition by some regarding the beneficial performance, retention and attraction impacts of training and development investments.
The study recommends that companies increase their training budget to at least 3% of payroll.
The study also recognizes the need to transform the workplace:
The key message for U.S. manufacturers is that competitive wages and benefits are important in attracting and retaining employees, but these are just the starting points for developing a differentiated value proposition for employees. People want more from their work experience than a paycheck. They want transferable skills and experiences that make them valuable to their current employer as well as to the broader market. This comes in the form of challenging work assignments, training and development, advancement and promotion, and rotational assignments. Employees also want respect, recognition, and connection in the workplace, specifically relevant performance management processes and incentives (monetary and non-monetary), formal and informal networks, formal and informal mentoring, and a general sense of community within the workplace.
This movement to high-performance work organizations has been going on for decades (see my piece "Time to Get Serious About Workplace Change"). The battle for greater worker "empowerment" is likely to continue to go on for a long time - as long as management styles remain stuck in the 19th and 20th Centuries (see also the recent posting on The Business Innovation Insider: The rise of Manager 2.0).
Ultimately, it is the change in organizational and managerial focus and style that will re-invigorate US manufacturing. As US companies and workers discovered a long time ago, we can't necessarily compete on cheap, we have to compete on better, smarter, and faster.
And what can we do to see this future come about? More on that next.
Posted by Ken Jarboe at April 4, 2006 1:18 PM
Trackback Pings
TrackBack URL for this entry:
http://www.athenaalliance.org/mt/mt-tb.cgi/594
Comments
You look at the United States and the growth of the manufacturing industry due to lowered transportation costs. It seems that you can apply this relationship to every sector of the economy. With technology, the world has had the ability to increase the speed and reduce the cost of transportation for many highly demanded goods, including information which is very valuable. Through the process of implementing globalization, a global market is being created. Assuming that this market is fairly free and has fairly low barriers to entry overall, then the trend of outsourcing is simply created by market forces. The United States is a capitalistic country. Why in their right mind would they manufacture a good for US$8 when they can get it for $US1. It seems that the large decrease in transportation costs has played a large role in allowing this to happen. As it always happens, when competition becomes tighter, prices decrease, and innovation increases. This is now happening on a World stage and no longer within many separate sectors. Comparative advantage is no longer comparing the resources in Kentucky to the resources in Boston. Comparative advantage has become comparing the resources in China with those of the United States, with those of the EU, with those of Japan, with those of Taiwan, etc (I could go on for a long time but I will stop.) Ultimately localization of economies on the world stage begins to lose its influence as distance loses its value. Because transportation costs are diminishing at a fast pace, exports and imports will move towards dependence strictly on cost, quality and of course demand. Location value is diminishing towards a fixed low cost rather than a variable cost that was once extremely sensitive to distance.
Posted by: Steve Hashim at April 4, 2006 7:13 PM