We generated quite a bit of discussion from my piece earlier this year on Can - and Should - Western Manufacturing be Saved?, and at the time I promised we would keep looking at this issue. That’s, in part, because I am personally of several minds over this topic, and am trying to get my mixed opinions better organized.
With that backdrop, a couple of things this week got me back on this subject: an interesting plane conversation with a small manufacturer, and an excellent – and worrisome – article I just read on this subject in BusinessWeek magazine.
This week, on a long flight to Salt Lake City, I sat next to the owner of a small (something like $40 million) manufacturer of auto parts (clamps, gaskets and such, sold mostly through repair shop channels). It is has been a family-owned business for two generations.
Over the last few years, the company has gradually started to offshore some of its highest movers to both India and China – regretfully, in fact, but the economics were compelling. One gasket cost his company 70 cents to make; the China price: just 15 cents.
I asked him how much labor cost was in that product domestically. The answer – about 35 cents, meaning there was another 35 cents in materials and other costs. If that’s the case, I asked him, how could a low-cost country possibly sell it for just 15 cents?
He wasn’t sure. Has heard the Chinese government pays a 15% export bonus to manufacturers. Maybe they are selling below cost to gain market share?
I then asked him how a small business such as his finds suppliers in China and India. No problem, he said – they find him. He exhibits at many trade shows each year, and at those events he is besieged by representatives from offshore companies. Those discussions lead to price quotes, and after samples, quality provisions, etc., the deal gets done.
But to this owner, his business still is those 50-60 people making products in his domestic factory. One salvation in that regard – a huge chunk of his business comes from thousands of relatively low-demand products that don’t lend themselves to offshoring for both volume and responsiveness reasons.
As I peppered him in a friendly way for about two hours with questions about both his business and the larger questions about the future of Western manufacturing, he ended by saying, “You are asking me questions for which I do not have answers. We are just doing what we can to survive, and with the pricing available on some items, that means China.” He had never heard of SCDigest, but added, “I think it is really important for publications like yours to keep asking these questions.”
BusinessWeek is thinking the same thing. A couple of weeks ago, it ran a major story that asked “Can the Future be Built in America?” that added some interesting data points to this debate.
As we too have noted before, BW says the US is in danger of simply losing its ability to support large-scale manufacturing. The infrastructure, the talent, the supply base – the country is rapidly falling behind in its ability to scale-up large manufacturing facilities.
The impact, it says, is that the US many not even be able to continue the cycle where new, innovative products are still mostly made domestically until later in their lifecycles. And this capability is doubly critical right now, because from robotics to nanotechnology, to “green” technologies, an exciting new generation of products is coming to market – but where will they be made?
“Unless the U.S. can magically resurrect its manufacturing base, the good-paying jobs from these breakthroughs will be offshore” BW says. And here is the kicker: “Cheap Asian labor has little to do with it. Unlike other industries that fled to low-cost offshore havens, these emerging tech goods are made on highly automated production lines. The problem is, the U.S. is losing its lead in large-scale high-tech manufacturing.”
Taxes and other costs are also a factor. The BW article starts by noting the dilemma of a company called Bridgelux, a Sunnyvale, CA company that has developed tiny, light-emitting chips that blaze as bright as some incandescent bulbs, but consume a fraction of the energy.
The market potential could be huge – and it needs to build a new factory to make these chips.
Business Week says that “For a host of strategic reasons, Bridgelux would like to keep manufacturing in the U.S., but financial realities point to Asia. Not only are taxes far lower and government incentives more generous in such nations as Malaysia, China, and Singapore, but it's easier to raise cheap funding offshore than in the U.S., where private investors frown on manufacturing and bank lending is nearly frozen.”
The article also pointed out a startling statistic, which I had not seen before. In every recession recovery period until the 2000s, manufacturing capacity during a growth phase of the economy has always outpaced overall economic growth. From 1994-1999, for example, US GDP grew 26% - while manufacturing capacity grew even faster, at 44%.
Not so in this decade. From 2001-2007, US GDP rose 17%, but manufacturing capacity grew just 5% (see Supply Chain Graphic of the Week).
BW frets that we have entered a perhaps permanent “invented here, industrialized elsewhere” syndrome.
Bridgelux, for example, looked to perhaps ramp up some production by converting existing cleanroom facilities in California, which it assumed would be abundant. Not so.
"We were shocked that we found nothing," the company’s CEO says. "All of the cleanroom space was torn out and property owners converted these labs to offices."
The BW article (available here: Can the Future Be Built in America?) also quotes Bill Watkins, the former CEO of disk drive maker Seagate, as saying "Other countries actually pay you to create jobs. The rest of the world is chewing us up alive,” referring to taxes and a number of other barriers manufacturers find in the US.
How’s that for a cheery thought?
The BW article, as well the National Association of Manufacturers in several of its policy recommendations, calls for the US to relook at some of these tax and other policies to make it more attractive to set up shop here. The recognition seems to be that the lower-value added manufacturing in many sectors is gone and perhaps should be, but that the US is also in serious danger of losing both its ability to make innovative products here, and maintaining the skills sets and related capabilities to do so in more and more industries.
As we’ve noted before, when you fall below a certain level of critical mass in a manufacturing sector, the decline becomes rapid, until there is nothing left (e.g., US shoe production). At that point, even bringing it back becomes impossible.
Not sure what the answers are yet, but I am asking the questions. We’ll keep taking a look.
Is the US in danger of losing its ability to create large-scale manufacturing operations versus the rest of the world? Is it important or not that Western countries retain this ability, especially in the face of developments in many new technology areas? What, if anything, can be done? Let us know your thoughts at the Feedback button below.