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7 Reasons to Expect US Manufacturing Resurgence

The US may be a service economy, but it’s still the world’s largest manufacturer. There are many reasons to remain bullish on US manufacturing and the American worker, suggests Farok Contractor, professor of management and global business at Rutgers Business School. US firms invest in high-tech equipment, and the US worker is tops in adding value per hour on products. Recent economic difficulties also help fuel a manufacturing resurgence: falling wages allow the US to compete with low-cost China; anxious Americans work long hours; high energy prices and an uptick in natural disasters could prompt multinationals to relocate factories closer to the big US market. Contractor also points to factors that could stall the resurgence: US students show little interest in science or engineering. And because American workers enjoy great mobility, US manufacturers hesitate to provide apprenticeships that provide state-of-the-art training. Tough economic conditions could usher in new serious attitudes on career and education choices. – YaleGlobal

7 Reasons to Expect US Manufacturing Resurgence

Lower wages, high productivity – despite disinterest in science – boost US manufacturing
Farok J. Contractor
YaleGlobal, 7 August 2012
Reborn under fire: The world's largest manufacturing nation has many reasons to anticipate resurgence; workers are productive at Columbus Castings in Ohio, a company that emerged from a bankruptcy in 2002

NEWARK, NJ: Some 2.8 million American jobs – 70 percent of them in manufacturing – have been lost since 2001 because of the US trade deficit with China, according to a recent Economic Policy Institute study. Indeed, consumers visiting a Wal-Mart or Macy’s are hard pressed to find much made in America.

It’s true that the share of manufacturing in the US GDP is now only 12 to15 percent, and the country is predominantly a service economy. But the nation is still the world’s biggest manufacturer, with unrivaled productivity in terms of manufacturing value-added per employee or per hour worked (Table 1). American manufacturing wages average $34 an hour, some 21 times the average in China at $1.60 an hour. But each US worker adds $145,000 in value, far more than German, French or Japanese employees, and more than 10 times that of the Chinese worker who contributes $13,700.

The predominant explanation is US manufacturers' investment in automated equipment. Also, American labor is better trained than the Chinese. Similar productivity rankings can be seen in dollar value-added per hour: The US worker is on top with $73 in value-added per hour worked; the Chinese worker adds only $7.19 of value per hour; Japanese, German and French workers contribute up to $63. China outperforms the US and Europe only in “value added per dollar wages paid” – but only because hourly wages are so low in China.

Comparisons of Manufacturing Productivity: US, Europe, Japan, China, 2010. Sources: US, Germany, France and Japan, compiled by the author from IMF, World Bank, Bureau of Labor Statistics and other sources. China, figures were compiled from a variety of sources.  Enlarge Image

Seven factors converging by 2012 suggest that US manufacturing could see a strong resurgence. Jobs once offshored are now returning in industries including automobiles and even unlikely areas like furniture and televisions.

> Wages of the bottom half of American workers have significantly declined in real terms over the past decade, as well as in comparison with other nations, while those of US manufacturing rivals, including China and Japan, have risen.

> American workers are working longer, faster, with greater anxiety, than ever before. Because of greater automation, flexibility, domestic US outsourcing and the fear of being laid-off, surviving US manufacturing workers have seen little or no increases in wages in the past eight years, and their output has increased with productivity in output per employee at an all-time high. Americans put in 1800 hours per year, about the same as Japanese workers (Table 2). Top is South Korea, with its corporate culture that prevents employees going home until the last boss has departed. The French and Germans, by comparison, put in 19 percent less time than Americans.

> The dollar has weakened against several major currencies over the past decade, making imports more expensive and producing in or exporting from the US more competitive, by comparison. The US is not just the world’s biggest importer but also the second largest exporter of merchandise goods (Table 3). In 2001 – the year China joined the World Trade Organization – the renminbi yuan, RMB, was 8.27 per dollar. By 2012 the currency had appreciated by more than 30 percent to 6.3 RMB per dollar. For many Chinese exporters, a breakeven exchange rate, when their exports to the US are no longer competitive, is between 5.5 to 5.8 yuan per dollar. As the RMB continues to appreciate against the dollar, more Chinese firms will abandon exports and focus on their domestic market, growing at 8 percent per annum.

Number of Hours Worked Per Year Per Employee. Source: Bureau of Labor Statistics (Table A-1). Enlarge Image

> China is experiencing significant wage inflation. On the eastern seaboard, where most of China’s manufacturing takes place, several companies have experienced labor shortages and wage bills have increased by 20 percent per year.

> Fuel prices have more than doubled. For products with significant transportation costs, the rise in energy costs can add significantly to the cost of imports. Shipping large appliances is expensive, so Haier, a leading white goods manufacturer based in China, opened a South Carolina plant where components, shipped across the Pacific Ocean, are assembled by American workers.

> Delivery and Flexibility Pressures. For products requiring flexibility in the face of fickle fashion changes or assembly operations that require components shipped within a few days to accommodate schedules, such pressures have driven component producers to co-locate near US assembly operations.

> Natural disasters and disruptions in recent years have spooked global supply chains: Volcanoes in Iceland, overflowing rivers in Thailand and tsunamis in the Pacific Ocean idled assembly plants in the US and Europe because parts from affected regions could not be shipped. Years of cost savings at Toyota, from sourcing components from faraway locations, were wiped out by a few weeks of losses from assembly operations idled by 2011 floods in Thailand.

Of course, all indicators are not positive. Three factors could inhibit the US resurgence:

> The culture devalues science or engineering education. “Nerds,” “geeks” or “wonks” are at the bottom of the social totem pole compared to sports, film and media celebrities. A culture that emphasizes quick results and instant gratification deters students from tackling math, engineering and other challenging subjects.

World’s Top Merchandise Exporters, 2011. Source: The World Trade Organization (WTO) & The World Factbook. Enlarge Image

> Too many students pursue a general college degree. According to a survey released by the Manpower Group in May 2012, talent shortages persist in skilled trades, engineers and IT staff, with “nearly half of U.S. employers struggling to fill mission-critical positions.” In OECD countries an average 23 percent of college degrees are in engineering, science or mathematics. But in the US such degrees comprise only 15 percent – and of these, foreign students earn a quarter of the degrees at the undergraduate level and some two-thirds at the doctoral level.

> US companies lack an apprenticeship system. In other OECD nations like Germany, alternative paths in education lead to diplomas or certificates in technical areas, with  employees trained by the company in a particular technology and then retained in well-paying careers. Some US companies are trying this approach, highlighted by G. Bussey in an April Wall Street Journal article. For example, General Electric is sending new employees for crash courses in hands-on manufacturing or sponsoring two-week summer camps at universities on lean manufacturing for high-school students.

But don’t hold your breath. Few American companies are providing apprenticeships and only in selected areas of the country. Unlike Germany, the US is a very mobile society. The average household moves every five years. In an environment where companies can easily sack workers and where workers leave for better opportunities, firms are loath to invest in worker training, only to see skilled workers leave for competing companies. The current economic slowdown, which is reducing such churn in American society and jobs, could lead to a better appreciation for the benefits of apprenticeship programs for both companies and workers.

The time is propitious for a resurgence of manufacturing in the US. Unlike the exuberance of the bubble years, new economic conditions, which may persist for years to come, suggest more sober social attitudes, more career-focused college majors, more buckling down to learn harder subjects, less churn in jobs, and  greater willingness to settle for somewhat lower wages in return for company investment in worker training and greater job security. In short, some aspects of the future may look like the old days when Detroit was king and skilled technical jobs meant reasonably secure careers with a moderate middle-class living standard.

 

Farok J. Contractor is a professor of management and global business with Rutgers Business School. The author will field readers' questions for a week after the publication date.

Rights:Copyright © 2012 Yale Center for the Study of Globalization

Comments on this Article

12 August 2012
Jolie Bensen's comment about value (added) is very appropriate.
As I report above, Germany's merchandise exports total almost the same at those of the US, despite wages averaging $ 47 per hour compared to the US $ 34 per hour, and despite the fact that their economy is less than a third the size of the US. How do they do it?
We do not have to mimic European practices wholesale, but perhaps identify what some of them do best. An apprenticeships system based on more cooperative relationships between companies and workers, companies proving training to skilled workers in return for greater job security and promotions, these are some elements in Germany's engineering sector that could be emulated -- at least beginning in a few regions of the US where population mobility is traditionally lower. One reason American companies do not invest in worker training is because after receiving the expensive training, a worker can leave for another firm.( In general, Americans are also very mobile. The US Census reports that the average household moves every five years. By contrast, 47 percent of Italians live within 5 kilometers of their mamas). But this can be partially addressed by employment schemes whereby salary increments and promotions are promised "x" number of years after receiving the training. What this requires is a less adversarial, and more cooperative, long term relationship between companies and their employees who would be treated as significant stakeholders, whose importance is lower only compared to that of shareholders.
-Response from the author: Prof. farok J. Contractor , New Jersey
8 August 2012
Excellent points, very neutral. Thank you.
"US companies lack an apprenticeship system..." - This is where
change needs to happen. The sooner we begin integrating manufacturing back
into several sectors (auto, consumer products, apparel),
technology will be needed to innovate outdated processes, creating jobs to the
industries that seem to be growing organically- tech, engineering, etc.
There are existing factories in these sectors, put money into those factories so
they can expand and grow.
Cheaper isnt always better, its the value and what it stands for.
-Jolie Bensen , New Orleans, LA
8 August 2012
Informative article. I work for McGladrey and there's a annual report on the State of Manufacturing on the website " http://bit.ly/IzVhuU " with insights from industry experts.
-Manmohan , Las Vegas