A Manufacturing Renaissance?

manufacturing2On May 29th, 2013, Motorola announced the opening of a manufacturing plant in Fort Worth, Texas to produce its new product, the Moto X. Motorola estimates that the plant will generate roughly 2,000 American jobs. Texas Governor Rick Perry supports Motorola’s initiative, stating, “Motorola Mobility’s decision to manufacture its new smartphone and create thousands of new jobs in Texas is great news for our growing state.”

Motorola’s decision is especially significant in the modern age of dominant overseas outsourcing. Moto X will be the first smartphone manufactured entirely in the United States. Will Moss, a spokesman for Motorola Mobility, explains that producing the Moto X in the United States will engender “much leaner, more efficient operations” by moving Motorola’s manufacturing operations “much closer to our key customers and partners as well as our end users.” Other technology firms have been following this same trend. For example, in December, Apple CEO Tim Cook announced plans to move the manufacturing of an existing line of Mac computers to the United States within the coming year.

Although some experts believe that these companies’ efforts are primarily politically motivated, other reasoning may exist to explain recent attempts to bring manufacturing opportunities back to the United States. A recent Gallup poll determined that 64% of Americans are willing to pay more for a product produced in the U.S. as opposed to overseas. Additionally, wage increases have led to rising production costs for companies located in East Asia. Economist Dan North predicts that the difference in labor costs between China and the United States could decrease to only $7 per hour by 2015 (as opposed to the $17 difference reported in 2006), as the Chinese economy strengthens and Chinese workers push for higher salaries.

It is still unclear if the “Manufacturing Renaissance” will generate enduring consequences for the U.S. economy—an increase in U.S. industrial production has yet to occur. According to the Federal Reserve, industrial production fell by 0.5 percent in April. Furthermore, although the total number of manufacturing jobs in the United States has increased by 520,000 since January 2010, only 50,000 of those jobs are due to re-shoring. It is therefore disputable as to whether efforts to bring manufacturing back to the U.S. will contribute to profound and lasting benefits for the U.S. economy, or if companies’ current efforts in this capacity will merely amount to a short-lived phase.

Posted by: Marjorie Baker

Sources: The Washington Post, CBS News, Businessweek, the Federal Reserve, Gallup, Huffington Post

Photo Credit: Big Industry of America courtesy of flickr user Canon in 2D

The Challenge of a Changing China

chinaLower 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?

manufacturingIncreasing 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

reshoringIn 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 15th, 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