SCDigest: Can – and Should – Western Manufacturing be Saved?
By Dan Gilmore, Editor-in-Chief, SupplyChainDigest
Through a special arrangement, presented here for discussion
is a summary of a current article from Supply Chain Digest.
There is no question that in the U.S. 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 percent of U.S. GDP, does
not look any steeper over the last decade than it did in the
1960s. Again perhaps surprising to many, manufacturing represented only
about 25 percent of U.S. 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: “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? 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?
In his 2007 book, Saving American Manufacturing, Mike
Collins offers a litany of reasons why U.S. 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.
The National Association of Manufacturers (NAM) also argues
that U.S. 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. At the CSCMP Toronto Roundtable, George Stalk, a well-known
business strategy guru from Boston Consulting Group, 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.
Discussion Question: Do you think governments
should be stepping in to save U.S./Western manufacturing businesses?
Taxes are certainly an inhibitor, at least currently, while “hidden” costs of off-shoring such as freight and shrinkage are another.
However, I don’t believe that the government will need to step in to “save” manufacturing (other than potentially, tax breaks). Instead, the value of the dollar itself may decline in the coming months, making domestic manufacturing more attractive to US companies. The market itself may take care of some of this issue without government rescue packages.
Government has always had a role in fostering industries that are important to the economic well-being of a nation. In my mind, the two primary considerations on this issue are: Which industries should be saved and what are appropriate methods to save these industries? With respect to the first matter, I see limited value in propping up industries destined to disappear from the industrial landscape due to obsolescence or an inability to compete, given they do not require an educated workforce and are likely to lose out to third-world nations based on labor costs. Support needs to be channeled to industries that are emerging as new frontiers.
What are appropriate methods to support manufacturing is a particularly thorny matter. As a capitalist I endorse free trade on the grounds that it benefits the consumer and demands efficiency. Therefore, subsidies and protectionism are in my view inappropriate. For me, investment appears to be the most worthwhile means to assist a manufacturer. If government looks at a manufacturing sector and concludes that investment is not going to make a difference, any other form of assistance is not likely to prevent the inevitable. There is only one defense against cheap labour: technology. Our long-term focus should be on creating jobs that lead to minimal labor requirements in manufacturing. Those displaced should be given opportunities to contribute to creating new forms of manufacturing. Education, education, education!
One could make an argument for either side of this issue. It’s not good for a country to lose its manufacturing capabilities and subsequently a chunk of its middle class. On the other, government is not adept at mandating economic policy to the marketplace. There is no clear answer.
Our society has aggrandized–and increasingly rewarded–jobs that don’t require much use of our hands to acquire the things they want. That was a natural force and natural forces will prevail. Meanwhile marketing has focused on promoting value in clothing and household items but at a lower price; it also pushed higher quality at a higher price such as autos and luxury items. Those two phenomena sucked more manufacturing jobs overseas to cultures prepared to accommodate the insatiable wants of American consumers.
Manufacturing jobs have been characterized in many circles as union-dependent and union-controlled. The white collar folks have shunned that sector of the economy as technology and higher education have captured hearts and minds.
Now we ask should the government step in to save American manufacturing businesses? That’s in motion now in Detroit and on Wall Street but the jury is still debating the matter. Will that intrusion be successful? Let’s hope so–but history has cast a cloud over governmental productivity, innovation and efficiency.
Absolutely not. It is essential to distinguish between private action and government action. For private companies, those that invest the most intelligently at home and abroad will be in the best position to make money and grow. If BCG is right, then those who offshore less than average, or more intelligently, will win. Private decisions won’t be based on “saving western manufacturing”–they will be based, ultimately, on maximizing total profit.
For the government, this issue comes down to forcing (via outright restraints or tariffs) companies to take economically suboptimal actions. The “national security” issue is a red herring–does anyone really think the US or Western Europe won’t be able to buy steel from abroad? In a world where rogue nations can buy nuclear arms?
This is basic economics–Ricardo and Smith were and still are right!
It all depends on whether or not you really want a global economy. If the answer to that question is yes then the free market will decide where manufacturing takes place. If the answer is no, then let governments pass stimulus bills, enact tariffs, trade barriers, etc.
Too many of us suffer under the illusion that we can sometimes be globalists and other times practice economic isolationism–as it suits us. Nothing could be further from the truth.
With auto and airline bail-outs fresh in everyone’s memory, I would imagine folks are feeling very free market-ish these days. Let supply and demand drive the market without unnecessary intervention.
On the retail side, several of my clients and colleagues have sought out domestic manufacturing options in recent years, not as a replacement for their primary off-shore providers but as a hedge when quick turn-arounds or packaging re-works will keep them from missing opportunities (or under-delivering to their retail partners).
Retailers are learning the true cost of offshoring. They must absorb the cost of designers, expediters, and off-shore offices. They have to endure unexpected quality problems. They must account for high freight and insurance. They must live with long lead times and expose themselves to international disruption and piracy.
Worse, most retailers have placed big bets on private label fueled by off-shoring economics. In a fashion or seasonal business they are typically immobilized when they quickly sell out of a hot item. No foreign supplier will be able to quickly respond.
In the face of these realities and the low dollar, it seems that domestic manufacturing might be in for a resurgence.
The best way to save manufacturing in the USA is to first stop taxing it. Next, loosen up the borders so we can import cheap labor to work in the plants. Low taxes and cheap labor countries seem to be able to do the best job when attracting manufacturers.
The decline in manufacturing to 11 or 12% has been accompanied by an increase in the relative size of the FIRE sector (Finance, Insurance, Real Estate) to about a quarter of GDP. Per Kevin Phillips’ recent work (“Bad Money” particularly, as well as “American Theocracy”), this is characteristic of an empire that has passed its economic peak. He points to Britain in the decades leading up to World War I, to Holland at about the time it lost New Amsterdam, and to Spain in the period of the Spanish Armada and afterward. All of those empires were world-dominant economically until the financiers gained out-sized prominence (and for the record, Phillips is no wide-eyed socialist–he worked for Nixon). There is not much that any government can do to reverse the decline in importance of the manufacturing sector that began in the early 1970s, although as the last two years have shown, we as a country have not been wise to allow the FIRE sector to become so important relative to manufacturing and other segments of our economy.
Why should the US or any other western country want to attract low-wage, unskilled jobs back? However, the US and western countries should be thinking about how to create the next generation of more efficient manufacturing and educating people to be prepared for these jobs.
The analysis above from Camille Schuster and Bill Robinson is very strong.
‘historymystery’ is very savvy to point out the wisdom of Kevin Phillips’ analysis in his recent book. Again, Phillips makes the point that civilizations and economies tend to decline when the financial section (FIRE or Finance, Insurance and Real Estate) become too dominant at the expense of more socially productive sectors (agriculture and manufacturing, for example).
We see this pattern today in the current recession. In Europe, the German economy (with relatively higher levels of industrial production by Western European standards) has done relatively well when compared to the UK, where manufacturing is a much smaller portion of the economy and the FIRE sector concentrated in London is outsized.
Here in North America it’s interesting to see how much better the Canadian economy is doing right now compared to the USA. In Canada, also, the FIRE sector is not so dominant as it is here in the USA, partly because the financial markets are more regulated (and small) and the private health-insurance industry is miniscule compared to that of the USA.
Also, when manufacturers (especially the Japanese) are looking to build large new factories and R&D facilities in North America, they often choose Ontario over nearby U.S. states because they do not face the burden of feeding this private health-insurance edifice (again, the bloated FIRE sector). These big manufacturers, such as Toyota, say that locating in Canada saves them 25% or more on costs, compared to Ohio, Indiana, Pennsylvania, etc.
So, in summary, there are very sound reasons for a sound social policy to encourage the growth of manufacturing in the USA and the shrinkage of the often non-productive FIRE sector. Of course, there is plenty of room for disagreements re: which government policies should be used to pursue this goal.
But, for me, the bottom line here is that it would be a very good thing if our government policies over the next few years reduced the size (and power) of the FIRE sector, and encouraged the growth of manufacturing along with all the R&D and technological development which always accompanies manufacturing.
For those of us who were raised on a “don’t put all your eggs in one basket” philosophy, and understand its implications to cultural sustainability and national security, the idea of permanently losing so much of our country’s manufacturing capability is troublesome and worrisome. Of course, the government’s current tendency to pick winners and losers and to cripple entrepreneurship while attempting to “save” manufacturing is also troublesome and worrisome.
Maybe a la Darwin, some US manufacturing spirit and know how will survive both the recession and the government insanity and will be able to reassert itself a few years down the road with new and better products. I hope so.
The loss of manufacturing inside this country is not necessarily a source of concern. Guess what? VW has “lost” the majority of its domestic production to its own production in China. And they’re doing just fine. Also, manufacturing has to evolve into a sustainable model. Coal and petroleum are two examples of ancient technology that should be moving much faster towards other fuels, like hydrogen…that’s a whole other discussion. However, it could be done, just by redirecting the most recent $105B bump Congress just approved for the wars.
So we have to look at CPG manufacturing the same way. Make the stuff here that has an honest future in our economy. But also drive service/research/development jobs at a faster pace. It’s still very profitable to have ICap being the major contributor to GDP, rather than heavy industries. It’s a new century. Let’s act like we learned something from the last one.
All it will take to bring back manufacturing is the reinstatement of the investment tax credit. We have had a tax structure for the last 25 years that has penalized people who invest in hard assets and rewarded people who invest in soft assets.
It is time to bury the dead and let manufacturing rest in peace. The world is changing at a more rapid rate then ever before and I would focus on power sources, sustainable drinking water, robotics, agriculture and the human mind and body.
Western manufacturing will make a huge comeback in the next 5 years and I will give you one reason – oil. If one considers that the current manufacturing haven requires an average shipment of over 5,000 miles to get to market, you quickly see the vulnerability of long distance manufacturing. Recently, when gasoline prices rose over $4.00 a gallon, ocean freight became prohibitive. Product I was considering from China rose in delivered cost by $75 a unit. This was enough of a difference that (if it stabilized over time) the possibility of manufacturing in the USA would become a reality.
Systems like casting and forming that used to require heavy equipment can now be handled with much less capital investment. The availability of recyclable material in the USA will also provide raw materials at very reasonable prices. Where we were shipping scrap iron to the Far East, new freight cost will make it more economical to buy and use those resources at home.
One thing we must be wary of is the establishment of even more Far East-owned production in the USA. Toyota, Honda, Hundai, and Mercedes will be joined by Yamaha, Suzuki, BMW and other offshore manufacturers who traditionally have exported to the USA. We could see the second half of the 21st century acknowledge the USA as the largest manufacturing economy in the world.
Well, there doesn’t seem to be a shortage of opinions on this question. I would only say that it is critical to the success of our society that every individual be able to find work that enables them to support themselves and their family. Does this mean they have to be in manufacturing? Certainly not, but the truth is that just as I will never break 90 on a golf course, not everyone has the skills to program a computer, administer medicine, or prepare a financial statement. The challenge is that we must recognize that the total value of a business to society is not merely its profit and loss statement.
I still don’t understand how outsourcing pays off with all the automation and improvements in productivity that we have achieved in this country. Over and over again we have heard the horror stories of tainted products produced overseas which have resulted in huge financial losses and personal tragedies. When we look at all the legal, quality, and transportation issues surrounding overseas production, it no longer seems the panacea many claim. Maybe this is a new role for the financial wizards. Instead of dreaming up exotic financial instruments, they could go to work figuring out how to finance the capital investment in US manufacturing plants that would bring some of those jobs back into the country. They would document the true cost of saving on production costs while increasing the expenses associated with returns or liability issues.
Some will site the constraints on pollution and the cost of properly disposing of waste in this country. But does just moving manufacturing to countries where either they don’t care or don’t understand the impact of pollution make it right? Here again, I would argue it’s a case of not properly allocating the costs. Is it right for a company to simply pollute someone else’s backyard? We need the jobs here so why do we encourage companies to go somewhere else to manufacture? This doesn’t mean we should start polluting here, but again we must find a way to understand the total cost of overseas production and perhaps levy pollution taxes on imports.
Health benefits are a big factor. Maybe this could be handled like pollution costs and a “health tax” put on imports that reflects the cost of ensuring someone’s health benefits. The only alternative is the single payer health care in this country like exists overseas. With the government footing the bill, individual companies will be able to stop paying the premiums or at least pay a smaller premium to ensure full coverage for their employees.
Manufacturing is essential. Free trade is essential. These two things do not have to be contradictory, but they require all countries to play by the same set of guidelines. We need to be able to allocate all the costs of production to the products which are created, no matter where the production occurs.
Governments trying to “save manufacturing” would be like trying to hold back the tides. There is still an enormous manufacturing base in this country, despite all the recent job losses and dislocation. But we are challenged to continue to develop new technologies to stay ahead of the effects of globalization, and the constant flow of lower-tech manufacturing to lower cost countries. This is a challenge not for government, but for the innovative, entrepreneurial spirit of our free-market system.
The major problem facing facing western manufacturers is not taxes or government but the culture in their businesses. Until boards and senior executives see their role as creating wealth for the total community and not just for themselves, effective long term decisions–especially the hard ones–will not be made.
Sadly, bonuses are based on short term performance and so companies maximise short term ROI.
The US car industry deserved to fail–all the companies refused to take a lead in developing the vehicles for the future and they should have paid the consequences. So, to save jobs, they have been nationalised but no attempt is being made to change the culture or ALL the top personnel. The Chinese might be making mistakes now, but the decision to essentially allow the same culture to continue in the US will allow the rest of the world to gallop past in the next few years. I am glad that I am not a US taxpayer!
Western manufacturing is a misnomer here, since most manufacturing is done elsewhere. However, some of the author’s concern’s over losing our steel producing capabilities as a matter of national security are absurd, considering the ability to purchase, store and use steel from anywhere in the world. We not only have great access to this, but also ample supply. The same can be said regarding innovation. The domestic auto manufacturers have not been innovating for years, compared to their Asian and European brothers, who have superior quality and produce products that consumers want. The same is true in many other sectors, from televisions to computers to MP3s where almost all of the manufacturing is done off-shore, but the innovation, design and initial concepts are created here in the USA.