First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  May 28, 2009  
  Can - and Should - Western Manufacturing be Saved?  

I am asking the question for a number of reasons.

The most immediate catalyst was the fact that I recently saw reference to a book from 2007 titled Saving American Manufacturing by Mike Collins. More on that later. That, in turn, led to a series of mental hyperlinks to a variety of somewhat conflicting inputs on this issue, which is highly contentious.

A few years ago, at the Georgia Tech Supply Chain Executive forum, Dr. John Langley broke us into small groups to discuss several topics, one of which was the rising costs of fuel and logistics and whether that might lead to some reversal of the offshore movement.

The general consensus of my table was that there would likely be some impact in terms of “nearshoring” or decisions not to pursue offshore manufacturing strategies, at least on the margin. Then Darryl Pavelka, EVP of Global Supply Chain for Payless Shoes, added a sobering perspective.

Gilmore Says:

What other manufacturing sectors are at, or near, similar levels of less-than-sustainable critical mass for domestic manufacturing?

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“The shoe manufacturing infrastructure in the United States is gone,” he said (paraphrasing from memory). “It doesn’t matter how high oil prices go. You can’t bring it back.” The machinery, supply base, and manufacturing expertise simply no longer exist here. The cost to re-create it would simply overwhelm even sky-high global logistics costs, and no one company could even think about it alone, even a giant like Payless.

Ironically, a year or so later, the Wall Street Journal ran a story about one ex-executive of a large shoe company who launched an entrepreneurial effort to build a new niche manufacturer of high-end footwear that would be made in Florida. The effort ultimately failed - in part because it could not source many components, such as eyelets, domestically. Technicians couldn’t be found to repair some production machines when they broke down. Who would train to fix shoe machinery in the US?

Which, of course, leads to a question I rarely hear asked or answered: what other manufacturing sectors are at, or near, similar levels of less-than-sustainable critical mass for domestic manufacturing?

The researchers at Global Insight made a big stir last August when they predicted that China would overtake the US as the world’s largest manufacturer as early as this year, 2009. The National Association of Manufacturers (NAM) quickly shot back saying it disagreed with the numbers. According to its data (based in part on World Bank numbers), in 2008, the US still accounted for roughly 25% of total global production, double that of China, and that it would be after 2020, at the earliest, that China would pass the US.

NAM and others rightly note that contrary to the perceptions of many, US manufacturing growth has actually been reasonably robust for many years. For example, overall manufacturing output seems to be rising about 2% per year (prior to the recession of course), even in the face of rampant offshoring.

Many ask how this could be. Business Week two years go attributed it in part to “phantom GDP” – in which accounting practices in the US government looking at import prices wind up overstating US company “value add” and, hence, actual domestic production.

Clearly, US manufacturing employment continues to shrink dramatically, and is now less than 10% of the total US workforce, down from 30% in 1950. Some say the issue is far more of automation and productivity gains than outsourcing (see Automation, Not Offshoring, Real Source of Manufacturing Job Loss); others say that understates the impact of offshoring.

There is also no question that in the US and most of Europe, manufacturing continues to shrink as a percentage of the overall economy – and that this has been occurring since the 1950s. In fact, when charted, the decline in that percentage, down now to about 11% of US GDP, does not look any particularly steeper over the last decade than it did in the 1960s. Again perhaps surprising to many, manufacturing represented only about 25% of US GDP in 1966. In fact, the countries that have the highest percentage of their GDP coming from manufacturing are not exactly economic juggernauts (e.g., Cuba, Turkmenistan).

Which reminds me of a quote from business author Jim Gilmore (no relation): “The entire history of economic progress involves paying someone to do something for you that you used to do yourself.”

If you think about it, that is clearly true. Did your Dad spend a lot of time repairing cars when you were growing up? When was the last time you replaced the brakes yourself? (Hats off to those who can actually still do it.) So, at a macro economic level, we have been doing just the same thing for the last 50 years, paying others to make things for us as our affluence has grown.

But there are concerns. Just picking on one, I think there are real and under-explored national security concerns. Would we really want to lose our steel production capabilities, as just one example? I wouldn’t think so. Ditto for many others. Do we want no Intel computer chips made in the US?

In his book, Mike Collins offers a litany of reasons why US manufacturing should be saved. Just highlighting a few: manufacturing drives most R&D, which, long term, is key to competitiveness; manufacturing offers more broad-based employment opportunities than many of the service sectors, in which only the “highly credentialed” can really thrive; the decline in manufacturing is directly related to the relative decline in standard of living for the middle class.

I also don’t see how any country can really support on-going, dramatic trade deficits, which are largely manufacturing driven even when you take out oil. China has trillions now in foreign currency reserves.

It turns out that Collins' recommendations are more focused on what specific companies can do, especially medium- and small-sized manufacturers, than big-picture policy recommendations. Get lean, get focused, really understand your costs, price smartly, cut out overhead, etc. All good ideas, but Collins basically says the large manufacturers are just going to do what they want, which is mostly go offshore. The problem is that many of the smal- and medium-size manufacturers depend on the large ones for their business.

At the CSCMP Toronto Roundtable yesterday, I had the chance to co-present with George Stalk, a well-known business strategy guru from Boston Consulting Group. In the limited time he had available, Stalk made a good case that for many manufacturers – those with high gross margin products and highly variable demand – domestic manufacturing could, in fact, be strategically “advantaged” over the offshore option, if you constructed your supply chain right to leverage information and reduce cycle times dramatically. This, in fact, is exactly what apparel retailer Zara is doing in Europe with great success, while in the US two decades ago, “Quick Response” couldn’t deliver.

I will report on this in more detail later.

NAM also argues that US manufacturers are burdened with too high tax rates and health care costs, and that if adjustments in policies were made, more goods might be made here as well.

Others have noted the potential impact of fuel and logistics costs on offshoring, and Dr. David Simchi-Levi of MIT actually put some numbers to it, and showed, at some levels, the economics did work in favor of domestic production. Then oil prices crashed, and those pressures dissipated – for now. It will be back.

Stalk also observed that companies often underestimate the costs of inventory and obsolescence and lost sales from out-of-stocks resulting from long, offshored supply chains. Hence, why companies often seem disappointed in the total bottom-line results from offshore strategies.

I am out of space, and haven’t answered the question. Would love to hear your views...

Do you think US/Western manufacturing should be saved? At what level? How can that happen? Will it take protectionism? Let us know your thoughts at the Feedback button below.

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