The Challenge of a Changing China

Lower than expected growth numbers from China on Monday have raised worries that China’s economy may be losing momentum.  Forecasted to have a growth rate around 8%, China’s actual growth came in at a lesser 7.7% for the January to March quarter, compared with 7.9% in the previous three months. This slower growth is in part due to lagging recoveries in the US and Europe causing China’s exports to decline. However, it is important to note that major, if understated, structural changes within China’s own economy have also contributed to these unexpectedly low growth numbers.

Rapidly rising wages have led to a systemic shift in the way China’s economy currently operates and have caused the country to move away from its traditional reliance on low cost manufacturing. China is looking towards a transition to a more sustainable economic growth model and these numbers might be indicative of the growing pains that China is currently facing. In fact, according to Ms Yao of Societe Generale,”Given Beijing’s goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term.” While China will likely remain a manufacturing hub thanks to its relatively mature investment environment, superior infrastructure, and skilled workforce, it is the higher-knowledge industry sector and domestic consumption that will be the future drivers of Chinese growth.

Improving wages and job opportunities have created an optimistic and vibrant consumer class that has demanded both a higher standard of living and higher quality goods and services. Metaphorically speaking, Chinese citizens are emerging from the factories and entering the malls. Rather than being a mere base of production, China has become a prime market to sell into as consumption continues to increase. This massive and complex market holds huge commercial potential for those businesses that can successfully adapt and gain a foothold. Meanwhile, China itself can benefit greatly from increased foreign direct investment as its economy continues to mature.

Despite China’s economic dynamism, it is still a place that is plagued with many dilemmas that limit its potential. Some of the most infamous issues revolve around corruption, which is especially rampant at the local level leading to staggering pollution, serious quality control issues, and enormous levels of inequality. In addition, China’s educational system is stunted by its singular focus on testing and needs to be reworked to foster creativity and innovation, skills that are vital in an increasingly connected global marketplace. These concerns may limit China’s global economic potential, especially when major policy efforts are still needed to address these critical domestic problems.

Overall, China is still dealing with the disorder commonly found during major economic transition. Its switch from a primarily manufacturing economy to a consumer economy may take time as growth rates begin to rebalance. In fact, it is likely that  these declining numbers indicate not economic problems in China, but an economic changing-of-the-guard that will result in less dramatic, healthier, and more reliable economic growth.

Posted by: Matthew Goldberg

Sources: The Economist, BBC News, Bloomberg, CME Group

Photo Credit: China Pavilion courtesy of flickr user Wojtek Gurak

Is the US moving toward a future of “zero net offshoring” for manufacturing?

Increasing competition from manufacturers abroad has led many  to conclude that manufacturing industries have no place in a relatively high wage, knowledge-driven economy like that of the United States. Others contend that manufacturing will be the key to reestablishing prosperity and bringing high paying jobs back to the United States. Various plans have been put forward for cooperation between businesses, governments, and organizations that will spur investment, production, and innovation at home, while boosting exports abroad.

Experts disagree on whether America has lost its edge in manufacturing merely due to emerging foreign competitors or due to a combination of foreign competition and domestic policies that stifle manufacturing efficiency. A certain amount of outsourcing assembly or production of inputs is expected due to specialization, but the real blow to American manufacturing came as final goods production moved overseas. Benefits have accrued to consumers due to lower prices for foreign manufactured goods, although these benefits must be weighed against the costs of lower employment and income in America. Profits are often higher for offshored businesses, but these profits are often accompanied by unforeseen transaction costs. Offshoring can also ensure access in emerging markets.

The Manufacturing Institute reports that US policy towards taxing and regulating businesses has exacerbated the movement of companies overseas, and that changes could be made to promote the “re-shoring movement”. Their studies estimate that, “it is 20 percent more expensive to manufacture in the United States than it is among out major trading partners, excluding the cost of labor” and “the regulatory burden on manufacturers is equivalent to an 11 percent tax on their businesses.”  The statutory and effective corporate tax rates, at 40.0% and 34.6% respectively, are among the highest in the world. These structural costs disadvantage American manufacturers and encourage offshoring.

President Obama’s State of the Union address and a recent white paper outline a plan to remedy some of these issues, although the success of any proposal in today’s fiscal climate is uncertain. The plan calls for the creation of fifteen Manufacturing Innovation Institutes to attract R&D funding and speed the process from basic research to product development. It encourages states and cities to offer incentives to companies that will produce in America, lowers the corporate tax rate for manufacturers to 25%, and provides tax credits for clean energy research and production. Additionally, opening markets through trade agreements such as the Trans-Pacific Partnership and proposed talks with the European Union could either lead to a manufacturing boost, or encourage even more production to move overseas depending on the markets’ reaction and the language of the agreements.

Although offshoring is a rational choice for many businesses to cut costs, the combination of hidden costs to foreign production, rising foreign labor costs, complex supply chains, and business-friendly policy changes may serve to reverse some offshoring. The nascent re-shoring movement is a testament to this fact, and strong economic trends are making such moves more desirable. If policy does not hamper these developments the US could see “zero net offshoring” in the near future, where businesses make decisions about where to locate production facilities based on a more level assessment of costs and benefits.

Posted by: Ben Copper

Sources: Manufacturing.net, The Manufacturing Institute, White House press release, The Economist

Photo Credit: courtesy of flickr user The U.S. National Archives

American Manufacturing Starting to Make Sense Again

In the past decade, offshoring was considered an obvious business decision for companies that wanted to reduce costs and increase profits. However, this trend may soon begin to wane as many American companies, both large and small, return to the U.S.

This so called “Reshoring Movement” has been generating a large amount of buzz, especially as high profile companies such as General Electric and Apple plan to start manufacturing more products back home. This reverse course is based both in public relations and sound economic reasoning. While larger companies often leave the majority of their manufacturing abroad, they are still able to benefit from the positive publicity of selling some American-made goods. For smaller businesses, it makes clear economic sense primarily due to soaring wages in low-cost countries. For instance, the pay and benefits for the average Chinese factory worker increased by 10% a year between 2000 and 2005 and rose to 19% a year between 2005 and 2010. This increase has made offshoring only marginally cheaper, and firms still have to deal with other problems such as intellectual property theft and unwieldy supply chains.

This trend ties in nicely with the issue over consistently high US import levels and enormous trade deficits. Harry Moser, head of the Chicago-based Reshoring Initiative, states that “since the 1950s, about three million manufacturing jobs have been lost to imported goods. So to balance the deficit we’ll need to bring back three million jobs.” While “reshoring” has only brought back around 50,000 jobs in terms of offsetting trade imbalances, it is an interesting development that is worth further exploration.

Posted by: Matthew Goldberg

Sources: The Economist, MIT Technology Review, Forbes

Photo Credit: World Class Manufacturing Academy courtesy of flickr user Chrysler-Group

Wilson Center Policy Brief Series: Manufacturing Matters, Strengthening America: Inventing the Future

The Wilson Center recently released two essays by Kent Hughes, Director of the Program on America and the Global Economy, in its series of policy briefs on critical issues which will run from now until Inauguration Day.

 

Manufacturing Matters

Manufacturing plays a key role in the U.S. economy and will continue to do so. The private sector provides roughly 70 percent of total U.S. spending on research and development, and the bulk of that amount comes from manufacturing enterprises. Manufacturing generates 90 percent of U.S. patents. It also is central to the system that translates laboratory research into commercial products, thus generating jobs and creating wealth. Manufacturing also constitutes the single most important export sector of the economy and is thus critical to America’s ability to pay its way in the international economy. Finally, manufacturing generates millions of jobs, which provide pay and benefits that exceed the national average. Looking ahead, the United States needs a manufacturing strategy that can support the emergence of advanced manufacturing processes that, in conjunction with low-cost energy, can revitalize the U.S. manufacturing sector.

>> Read the Policy Brief in its Entirety

Strengthening America: Inventing the Future

The U.S. innovation system has enormous strengths, including public and private support for research and development, the world’s best university system, and an entrepreneurial risk-taking culture. But those elements of the system now face several domestic and international challenges. In the United States, cuts in federal spending could reduce support for university research. The kindergarten through 12th grade (K–12) education system struggles to keep pace with the rising demands of the 21st-century workplace. Internationally, the United States now faces competition to attract or keep advanced manufacturing firms, research facilities, and top scientific talent. The United States will need to maintain support for research and development (R&D), improve its education system, and learn from best practices around the world.

>> Read the Policy Brief in its Entirety

Bringing Veterans and their Skills to the Manufacturing Sector

Four companies- Boeing, Lockheed-Martin, Alcoa Inc., and General Electric- are taking on the issue of veteran unemployment in a creative way. On October 15^th, this group of industry mammoths unveiled an innovative program designed to train and hire veterans to work in the manufacturing sector. Building upon the substantive skills veterans have already acquired from their military training, these programs will work with local community and technical colleges to help veterans learn new skills and earn additional certifications. This training will enable veterans to begin to fulfill the industry’s need for 600,000 highly-skilled employees which companies say they cannot find in the United States.

This initiative represents a remarkable opportunity for our veterans who are currently experiencing an unemployment rate of 9.8%, two percentage points higher than the national average. According to Jess Immelt, the Chairman and CEO of GE, “we have an opportunity to help veterans with extraordinary leadership capabilities better compete for good paying jobs with a long-term future.” Together, GE, Boeing, Lockheed-Martin, and Alcoa Inc. currently employ 64,000 veterans.

The program is designed to train 15,000 veterans in 10 cities across the United States and with an endowment of $6 million it provides many soldiers with the opportunity to participate free of charge. This program compliments a national effort by the U.S. Chamber of Commerce and the White House to help 100,000 veterans and their spouses find employment by 2014. These efforts, coordinated by the Manufacturing Alliance trade organization, also find partnership in the non-profit sector: San Diego-based Workshops for Warriors seeks to provide veterans with similar opportunities.

With a combination of strong efforts from all sides- private, public, and governmental- the objective of increasing veteran employment in manufacturing is certain to be achieved. In the words of Bob Stevens, Lockheed Martin Chairman and CEO, “America’s veterans want and deserve the opportunity to contribute to our society and provide for their families. There is no greater way to say ‘thanks’ for all their service and sacrifice, which enable all of us to live safe and secure lives, and pursue our dreams every day [than this].”

 

Posted by Sophia Higgins

Sources: Reuters, Department of Defense, DailyFinance, Workshops for Warriors, The Manufacturing Institute

Photo source: 2010 Entrepreneurship Bootcamp for Veterans @ Mays Business Schools’s photostream courtesy of Flickr user Mays Business School

September Reveals First Manufacturing Expansion Since May

In the words of Adam Sarhan, the chief executive of New York’s Sarhan Capital, “We’re not quite at the point where things are good, but this indicates strongly that things are not so bad.”

According to the Institute for Supply Management’s September 2012 Manufacturing Report on Business, the Purchasing Manager’s Index (PMI) is 51.5 percent, a statistic 1.9 percentage points higher than August.  This is welcome news for the U.S. economy which has suffered protracted decline for the past three months in domestic manufacturing.  The Institute’s system is based on a deviation scale beginning at 50 percent, with readings below 50 percent signifying economic contraction and readings above 50 percent signifying expansion. 50 percent itself indicates no change.

This positive news extends into several different subsectors of the national economy, registering improvement measured on ISM’s Employment, Price, and New Orders Indices. Additionally, Bradley J. Holcomb, chief of the ISM Manufacturing Business Survey Committee states that despite three months of contraction, “the past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through September (52.1 percent) corresponds to a 3.2 percent increase in real gross domestic product (GDP). In addition, if the PMI™ for September (51.5 percent) is annualized, it corresponds to a 3 percent increase in real GDP annually.”

Apparently, the previous decline in US manufacturing from May through August, reported by PAGE earlier, has proven to be more volatile a pattern than previously thought. Chairman of the Federal Reserve Ben Bernanke has pointed to a nationally “flagging recovery” as a sign that more action must be taken, such as the third bond-buying program enacted last month. The U.S. dollar and treasuries prices have also experienced recent decline.

Although there are still many related obstacles to overcome, particularly within the weakening international trade and fiscal sector, this ISM report highlights examples of revitalization in the American economy. Looking to the future, the U.S. can hopefully continue a trend upward by strengthening domestic manufacturing and encouraging consumer activity to boost business new orders and production. Perhaps current increases can help to solidify growth and begin a new, positive pattern for American manufacturing.

Posted by: Sophia Higgins

Sources: Institute for Supply Management, Reuters, Financial Post

Photo credit: untitled @ j o s h’s photostream courtesy of Flickr user j o s h

US Manufacturing Decline

The month of August showed further signs of a struggling US economy with a decrease in manufacturing.  This was the third month in a row that overall manufacturing in the US has been in decline. A total of 15,000 manufacturing jobs were lost during the month of August with a loss of 8,000 jobs in vehicle parts manufacturing. The US has lost 3.5 million manufacturing jobs since 2002, and as of August, the total number of jobs in manufacturing stands at 11,967,000. With the August jobs report released by the Bureau of Labor Statistics showing an increase of only 96,000 jobs, many questions about the state of the US economy linger on.

The weak performance of the US manufacturing sector mirrors manufacturing developments around the world. With the global economy still in a recession, other countries are experiencing similar economic woes. Chinese manufacturing in the last month was at a nine month low, and its GDP growth of 7.6% in the second quarter of this year compared to a year before was its lowest increase in three years. The Chinese purchasing managers index (PMI), an indicator of financial activity, fell to 49.2, while the American index for August stood at 51.5. A PMI of 50 indicates no change.  The Eurozone showed even greater signs of decline as its composite PMI for all 17 states stood at 46.3 in August.

What does the continual struggle of the US economy tell us about American competitiveness? It is far from clear that it is an indicator of America’s decline relative to other countries. As the numbers above show, the other two major economies in the world, China and the Eurozone, went through similar contractions in the manufacturing sector. What the evidence points to, however, is that we are still in a worldwide economic recession. It should not come as a surprise to anyone that the US economy is still stagnant. With the global economy so integrated, hopes of a stronger US manufacturing sector depends on other countries as well.  With stagnant growth rates affecting a majority of countries in the developed world, these latest numbers on American manufacturing shouldn’t be interpreted as evidence that America is falling behind. The problem with manufacturing jobs will not be alleviated until the global recession comes to an end.  As of right now, there are few signs that an end to the recession is in sight.

Posted by: Samuel Benka

Sources: ReutersThe Wall Street Journal, The Huffington Post

 Photo Credit:  Polar-Polar Tank Trailer ManufacturingCourtesy of Flickr user TruckPR

You are invited to: The New Advanced Manufacturing Partnership Report

 You are invited to: 

The Program on America and the Global Economy (PAGE) presents:

The New Advanced Manufacturing Partnership Report

Thursday, September 20, 2012

1:00 p.m. – 2:30 p.m.

5^th floor Conference Room, Woodrow Wilson Center

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Martin A. Schmidt, Co-Technical Lead, Advanced Manufacturing Partnership Report; Associate Provost; Professor of Electrical Engineering at MIT

 

Theresa Kotanchek, Co-Technical Lead, Advanced Manufacturing Partnership Report,

Vice President, Sustainable Technologies and Innovation Sourcing, Dow Chemical Company

 

Introduction:

Thomas Kurfess, Prof., Georgia Tech, Assistant Director for Advanced Manufacturing, Office of Science and Technology

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The recently released Advanced Manufacturing Partnership report, Capturing Domestic Competitive Advantage in Advanced Manufacturing, details the unique role that manufacturing plays in the broader U.S. economy-as a direct source of jobs, as a spur to additional job growth across the economy, and as an important force for addressing the nation’s trade deficit.  Most importantly, the report reveals that the nation’s continued strength in innovation depends on sustaining a close, two-way connection between the innovation and manufacturing processes.  “Proximity to the manufacturing process creates innovation spillovers across firms and industries leading to the ideas and capabilities that support the next generation of products and processes,” the report notes.  “In this way, a vibrant manufacturing sector is inextricably linked to our capacity as a nation to innovate.”  At this forum the two technical co-leads for the AMP report will discuss its findings.

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RSVP here or to receive further information, send an email to PAGE@wilsoncenter.org

Directions to the Wilson Center: www.wilsoncenter.org/directions

What Went Wrong with A123?

China’s largest producer of automotive parts is poised to purchase a controlling share of a US company, A123 Systems, which develops and manufactures advanced lithium-ion batteries and battery systems.  China’s Wanxiang Group Corp said on Wednesday they intend to invest up to $450 million in A123 Systems, taking an 80 percent stake in the company.

The purchase is an almost textbook example of the kind of issues America currently faces in an ever more competitive and global economy.  A123 is a startup company that was founded in 2001 based on the research of a duo of scientists at MIT.  The company’s unique nanophosphate technology is built on novel nanoscale materials initially developed at MIT and, according to the company, “enables customers to commercialize innovative products for the transportation, electric grid, commercial and government markets”.  The company has received tens of millions of dollars in grants from Chrysler, General Motors, Ford, GE, and defense contractors to develop lithium-ion batteries using their technology for hybrid cars, commercial trucks and buses, and components to electric grids.  A123 received more than $200 million from venture investors before raising $378 million in a 2009 initial public offering.  The company had also received frequent grants and investments from the Department of Energy and in 2009 was awarded over $200 million as part of the Stimulus Act, specifically under the Electric Drive Battery and Component Manufacturing Initiative.

Apparently all this was not enough to keep the company afloat.  It reported a second-quarter loss this year of $82.9 million, or 56 cents per share, and a 53 percent drop in revenue to $17 million.  Its cash pile was more than halved to $47.7 million at the end of the quarter, down from $113.1 million at the end of the first quarter.  The battery industry as a whole has suffered in the US, with some pointing to too much capacity and not enough demand for hybrid vehicles.  Essentially, A123 and companies like it invested heavily in the ability to churn out their batteries on a large scale, and then found a painful lack of consumers.

A123 Systems is exactly the kind of company Americans hear so much about as the way forward in this global economy.  Researchers at one of the country’s top universities developed cutting edge technology, were able to successfully commercialize it, created manufacturing capacity here in the US, and received both private and government support that is so often considered a necessity for innovative startups.  Energy Secretary Steven Chu said of A123, “It’s a perfect example of what’s possible when the private sector, government, and academia work together”.  And yet, that company is now owned by a private Chinese company.  It remains to be seen what kind of tangible effects this will actually have.  The company will most likely still allow for manufacturing jobs in the US and will still have domestic factories; in fact the bailout from Wanxiang might actually save some American jobs.  Of course, it is unlikely that any future expansion will occur in the US.  More generally speaking, the case of A123 Systems shows that there is no easy fix when it comes to creating high-tech manufacturing in the United States and that further discussion, research, and methods need to be explored if the US hopes to be the home of companies like A123 Systems in the future.

Posted by: Sean Norris

Sources: CNNMoney, Reuters, The New York Times, BusinessWeek, Fortune

Photo Credit: Energy Secretary Steven Chu and Michigan Governor Jennifer Granholm at the grand opening of an A123 Systems plant in Michigan entitled A123 Systems Grand Opening in Livonia courtesy of flickr user graham.davis

Offshoring to the United States

Offshoring and re-shoring have been staples of the U.S. manufacturing vocabulary for the past decade, but there hasn’t been a lot of discussion about other countries offshoring to the United States. Chinese conglomerates have begun to shift their production and manufacturing to the United States. The incentive is this: in China, companies that export products to the United States at ridiculously low prices are subject to anti-dumping tariffs because the U.S. believes that the products are being sold at a price lower than what it cost to make them, which creates an unfair advantage in the marketplace. If a Chinese company manufactures their product here in the United States, it is a domestic product and is not subject to the same regulations. Raymond Cheng, CEO of one Hong-Kong consulting firms, noted that “it’s a tactical advantage to be next door to your biggest client,” which is just what the Chinese companies are looking for. In addition to avoiding tariffs, opening a plant in the United States saves money on transportation and fuel. Cheng continued to point out that “it’s a natural evolution that as Chinese companies grow into global brands, they will come to the U.S., the largest consumer in the world.”

Chinese manufacturers have been launching U.S. facilities for the past five years, which has been a relief for some states that are desperate for revenue and jobs. The China-based Golden Dragon Precise Copper Tube Group Inc., the world’s largest producer of copper tubing (used in air conditioning, refrigeration, and automobiles), has begun work on a $100 million plant in Alabama. The facility is expected to create 300 jobs upon opening in 2014. The facility’s location is strategic, since Golden Dragon’s largest customer is Houston-based Goodman Manufacturing.

Daniel Rosen, a China expert and partner at Rhodium Group, cites past examples of overseas companies setting up shop in the United States. Specifically, Japanese companies in the 1980s – for some of the same reasons. “Today, there are more than 700,000 Americans working for Japanese affiliates in the United States.” Offshoring to the United States might be an unexpected move, but Chinese companies will be creating local jobs and saving themselves money.

Posted by: Devon Thorsell

Source: CNN Money

Photo credit Factory in Inner Mongolia courtesy of flickr user Bert van Dijk