American manufacturing to the rescue? Who could have imagined that? It wasn't so long ago that this sector was said to be on its deathbed. Now we're hearing that manufacturing is the "key driver" of what's passing for an economic recovery in this country.
Those are the words of a new report from TD Economics on the American industrial "revival." The report notes a marked slowdown in offshoring, especially in computers and electronics, machinery, fabricated metals, and plastics and rubber. Together these areas accounted for about a quarter of the 200,000 U.S. manufacturing jobs added over the last 12 months, according to TD Economics. "Even though [U.S.] manufacturing has shed jobs in the past two months, it does not detract from the remarkable upswing that has been underway since the Great Recession ended," says economist Michael Dolega, author of the report.
There's no mystery why. Wages in China are rising, the yuan is slowly appreciating, and American businesses are realizing the hidden costs of sourcing goods overseas, chief among them the magnified impact of supply-chain disruptions and the need for buffer stock close to end markets.
Another report, this one from the Boston Consulting Group, says that "reshoring," in tandem with rising U.S. exports, could help to create up to 5 million American jobs by the end of this decade. BCG senior partner and managing director Hal Sirkin even goes so far as to claim that the U.S. "is becoming one of the lowest-cost producers of the developed world, and companies in Europe and Japan are taking notice."
Sirkin made his case at the Supply Chain Council's 2012 Executive Summit in Indian Wells, Calif. He touted the productivity of the American worker, and the ability of the U.S. economy "to respond quickly to threats." At the same time, he said, the resurgence of U.S. manufacturing at the expense of China and other low-cost Asian countries is far from guaranteed. Government and industry need to act in at least seven areas to ensure that this revival sticks. They are:
- Adjust tax policies to favor continued reshoring, including a reduction in corporate tax rates and the elimination of loopholes. (The latter is a favorite promise of politicians, but it never seems to happen, does it?) In addition, provide targeted tax credits for U.S. job creation, as well as a "dollar-for-dollar" tax credit for the repatriation of funds - as long as all of the money is used to create jobs. (Good luck with that. Corporations used the last repatriation tax holiday to build up cash reserves, buy back stock, acquire other companies and lay off thousands of workers.)
- "Level the playing field with China" by treating it as a developed economy. Address China's subsidizing of state-owned companies, which has contributed to the hollowing out of U.S. industry. (Although a new breed of Chinese companies doesn't necessarily fit into this category.) Press for the enforcement of intellectual property protection. (This one might well be the most important factor of all.) Increase the use of dumping penalties in cases where China is under-pricing its exports.
- Focus on building and keeping "the world's best talent." We've heard a lot during this presidential campaign season about the idea of stapling green cards to the diplomas of foreigners who study here, so that they can remain in the U.S. and hire Americans. For the longer term, create a network of vocational colleges, offering two years of liberal arts and two years of training in practical areas such as welding, plumbing and electrical work.
- Rethink regulation, with an eye toward balancing the need for a clean environment and safe products with concerns over U.S. competitiveness. "Many regulations on the books from the past are no longer needed," claimed Sirkin. (Much easier said than done. Who wants to explain how relaxed regulation, in the interest of "competitiveness," led to the next outbreak of tainted food?)
- Take a page from China's playbook, and promote the formation of industry clusters. These initiatives group manufacturers, their suppliers, training facilities and infrastructure within one geographic location, providing everything that's needed to produce and export key products. (It's worth noting, I suppose, that the clusters concept has been called "modern-day snake oil" by at least one pundit.)
- Focus on foreign manufacturers that want to produce in the U.S., or use the country as a platform for their global exports. Here's where the notion of the U.S. as a relatively low-cost market comes strongly into play.
- Boost awareness of changes taking place in China's economy, and the resulting opportunities in the U.S. China, said Sirkin, "should not be the default location. 2015 is different from 2010." Companies should be encouraged to "do the math" before they make the decision to offshore production.
A couple more caveats. As a source for low-cost manufacturing, China isn't going away anytime soon. On the contrary, it will become even more attractive as the nation's emerging middle class creates a vibrant market for domestically produced goods. Meanwhile, U.S. industries that are labor-intensive will continue to manufacture offshore. The TD Economics report stresses that the current onshoring trend isn't likely to replace "the nearly six million jobs lost to offshoring since the peak in the mid-2000s." Even Sirkin is only predicting that 20 to 30 percent of the goods produced in China will be shifting back to the U.S.
Finally, there's the option of Mexico, which combines cheap manufacturing with proximity to U.S. consumers. Sirkin said the country's drug wars and lack of skilled workers are major obstacles, but others aren't so sure. James Hill, senior vice president of operations with Targus Group International, Inc., cited a 2007 study which predicted that the total cost of making product in Mexico - including freight, duty and inventory-carrying expense - would equal that of China within five years. "The lines actually crossed sooner than that," he said at the SCC Summit, "with the unexpected weakening of the peso against the dollar."
So doubts and qualifications abound. Reshoring won't take hold without a proactive response by government and the private sector. Still, Sirkin was adamant that change is in the air. "We're at the beginning," he proclaimed, "of a new manufacturing renaissance in the U.S."
- Robert J. Bowman, SupplyChainBrain
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