Tuesday, March 06, 2012

New Manufacturing Math Starts to Favor the U.S.

From the Harvard Business Review blog, "New Math Will Drive a U.S. Manufacturing Comeback" by Harold Sirkin and Michael Zinser of the Boston Consulting Group:

"Making the United States an even more attractive location for factories and investments is critical for the health of our nation. More domestic factories would help create more balanced trade flows and a more stable global economy. But company decisions on what and where to place production facilities, while influenced by many factors, ultimately depend on the math.
Thankfully, the math these days is starting to work in America's favor again. 

Assuming the trend continues, as we expect it to, the economic impact could be substantial, resulting in as many as 2 million, and possibly up to 3 million, U.S. jobs between now and the end of the decade. An estimated 600,000 to 1 million of these jobs would be directly in manufacturing, with the remainder in construction, orders for new equipment, supporting services, transportation and retail sales. This could increase U.S. gross domestic product by $100 billion, lower the non-oil U.S. trade deficit by 20% to 35%, and reduce unemployment by 1 to 1.5 percentage points."

HT: Robert Kuehl

24 Comments:

At 3/06/2012 10:42 PM, Blogger PeakTrader said...

New math for the new normal:

When you can't buy goods that are cheap to produce, then you can buy goods that are expensive to produce.

 
At 3/06/2012 11:02 PM, Blogger Buddy R Pacifico said...

Make baby, make.

High productivity, intellectual property protection, lower energy input costs, competitive wage structures and trade secret innovation rewards.

It's a new normal, with an ascending domestic calculus for American manufacturing.

 
At 3/07/2012 12:51 AM, Blogger PeakTrader said...

Of course, some people will blame the Fed for accelerating inflation or decelerating growth instead of the new normal real economy.

 
At 3/07/2012 6:01 AM, Blogger Larry G said...

I continue to worry that "new" manufacturing plants are high tech automated affairs - not places where a barely literate high school graduate can find a minimally-skilled job to live a low-end middle class life.

We have yet to agree on what we need to do about (non 4-year degree) technical education in this country.

We're still on a "get a degree" or be unemployed mentality.

automated plants are more efficient than low-skill, labor intensive manufacturing but at the same time - there are LESS jobs and the jobs that ARE available required a much better level of education than the average high school graduate receives in this country.

Right now, Community Colleges are filling the gap and perhaps that's the right solution... since many Community Colleges actually specialize in workforce training.

 
At 3/07/2012 7:11 AM, OpenID moneyjihad said...

New math? Isn't that how U.S. students fell behind the world's math & science curriculum?

 
At 3/07/2012 9:39 AM, Blogger morganovich said...

this seems like a pretty rosy assessment.

so long as the US has the highest corporate taxes in the developed world, there will be a big tax arb for offshore manufacturing.

bcg love to hype any kind of "paradigm shift" to try and drum up business.

keep in mind that the piece they produced is marketing collateral, not an academic study.

no question, some manufacturing will be added in the US, but i think they overstate the magnitude.

using the phrase "return" makes it sound like plants are getting shut down in china and being reopened here. that's also not the case for the most part. it's predominantly just marginal capacity additions.

their use of autos as an example seems very puzzling. we never offshored that. furniture, perhaps, but i go to the highpoint furniture show frequently. NC has been making it all along. it was never offshored much. the value to weight ratio is not great for most kinds of furniture (save the cheapest assemble it yourself stuff).

i can;t tell if they are being deliberately misleading or just picked some bad examples, but i lean toward the former as even a little work shows that this is just expansion, not reshoring.

further, based on what i saw in highpoint (the biggest furniture show in the country) in the fall, the furniture biz is still pretty dire in the US. traffic was down and sales were pretty weak.

traffic and or

 
At 3/07/2012 9:41 AM, Blogger morganovich said...

the other question is this:

why do we want to go back to manufacturing?

they are not particularly good jobs for the most part. they pay less than services and far less then knowledge work.

this seems like wishing we could all go back to farming.

 
At 3/07/2012 10:01 AM, Blogger Jon Murphy said...

why do we want to go back to manufacturing?

they are not particularly good jobs for the most part. they pay less than services and far less then knowledge work.

this seems like wishing we could all go back to farming.


If you'll forgive me, Morganovich, I think you may be laboring under a stereotype. Many of the jobs that are returning are high skilled jobs. One of the good things about machinery becoming prevalent in manufacturing is that it has increased wages. The starting wage for many machine operators is about 60k (give or take. It ranges from about 40k to 80k, depending).

I believe you are correct that as long as he keep a high tax rate, we'll still see overseas manufacturing. But the jobs we have over here are not assembly line jobs (for the most part).

 
At 3/07/2012 10:22 AM, Blogger PeakTrader said...

Jon, how does a higher cost to produce a unit of output improve living standards?

 
At 3/07/2012 10:43 AM, Blogger Jon Murphy said...

Jon, how does a higher cost to produce a unit of output improve living standards?

Per unit cost is down. I don't have exact numbers, but which costs less: have 4 people getting paid 40k make 100 widgets a day or 1 person getting paid 60k making 1,000 widgets per day?

If it were still cheaper to manufacture overseas, companies would be doing so. This is obviously not the case anymore (at least for some items).

Remember, businesses look to produce the highest quality of good possible at the lowest cost possible.

The key takeaway here is not that all manufacturing is coming back. Many widgets and labor intensive goods will still be produced overseas. But many capital intensive goods are being brought back to the United States.

 
At 3/07/2012 10:52 AM, Blogger PeakTrader said...

Jon, "reshoring" is a result of substantially higher costs offshore.

So, which way are costs going?

 
At 3/07/2012 10:55 AM, Blogger morganovich said...

jon-

i understand your point about productivity tools upping manufacturing wages, but if you think the furniture jobs in NC are "good" jobs, we may have different definitions of good.

the manufacturing jobs at GM now have what, a $16/hr start rate?

is that a "good" job?

that's $32k a year assuming 50 weeks at 40 hours, well under the $39k average for a US full time worker.

NC furniture is even lower. one of my best friends has a plant there.

we may just be differing over what "good" is, and sure, there are a few manufacturing jobs that pay well, but most do not.

consider the contradictory nature of the arguments you are making.

1. jobs are coming back to the US due to cost convergence.

2. machine operators are making $40-80k.

in china, they make 1/10th that.

our capital equipment is not any better.

at $80k vs 4-8k, we are not going to onshore many jobs.

i think you are vastly overstating the wages of manufacturing employees.

http://www.bls.gov/oes/current/oes_nat.htm#00-0000

scroll down to "production occupations".

very few even hit the low end of your range.

most are in the 20k's and low 30k's and that includes all levels of experience meaning starting salaries are likely much lower.

 
At 3/07/2012 10:58 AM, Blogger morganovich said...

jon-

"If it were still cheaper to manufacture overseas, companies would be doing so. This is obviously not the case anymore (at least for some items"

it is still cheaper. i think you greatly overestimate the re shoring trend.

your notions of efficiency are a bit parochial. their plants are better than ours in may cases. their workers are just as efficient.

the only thing that's really driving this is transport costs and the logistics of slammed chinese ports which may be the biggest driver of all.

if shipments take longer and get delayed because the ports are at capacity, that drives you home. it's more about getting it when you need it, not about price.

i have yet to hear a single firm tell me they moved production back to the US for cost reasons.

it's all supply chain related.

these BCG guys really do not seem to understand this trend.

 
At 3/07/2012 11:01 AM, Blogger morganovich said...

peak-

""reshoring" is a result of substantially higher costs offshore."

as i said to jon, this is not actually the case.

sure, costs are up, but they are still way below ours. the real issue is logistics. ports are at capacity, as is rail and road in china.

it's the longer and less predictable delivery times driving manufacture back here, not cost.

if it costs $1 there and $2 here, why would you move back if the cost jumped to $1.05? you wouldn't unless there was some other reason.

 
At 3/07/2012 11:19 AM, Blogger PeakTrader said...

Morganovich says: "it's the longer and less predictable delivery times driving manufacture back here, not cost."

And yet, manufacturers compete on price:

Officials say manufacturers in southern China moving to Philippines due to rising costs
March 6, 2012

Philippine officials say rising labor costs in China’s southern coast are driving big foreign manufacturers to relocate to the country.

They include electronics, ship building and steel companies...investors relocating to the country include foreign garments factories closing in China.

 
At 3/07/2012 11:30 AM, Blogger morganovich said...

peak-

but the phillipines is not a good proxy for the US.

they may well have cheaper labor than china now (as well as less jammed ports) but the US does not.

id a chinese laborer makes $200/month that may make $160 in the phillipines relatively attractive, but the $2800 in the US is still much higher, and that's the relative differential that matters for reshoring.

 
At 3/07/2012 11:37 AM, Blogger PeakTrader said...

Morganovich, I was responding to your assumption that cost of production is less important than Chinese shipping capacity.

 
At 3/07/2012 11:52 AM, Blogger morganovich said...

p-

yeah, i got that. my point was that labor cost was not the issue driving manufacturing from china to the US. i was speaking only of onshoring.

i thin it is an issue with places like the phillipines and other east asian nations. but that trend (cheapshoring?) seems counter to the onshoring trend that the BCG guys are pointing at.

 
At 3/07/2012 3:36 PM, Blogger kmg said...

There is a type in the title.

'favors' should drop the 's'.

 
At 3/07/2012 3:48 PM, Blogger Mark J. Perry said...

kmg: Thanks for catching that typo and letting me know, it's fixed now.

 
At 3/07/2012 5:46 PM, Blogger VangelV said...

the only thing that's really driving this is transport costs and the logistics of slammed chinese ports which may be the biggest driver of all.

I agree. From what I saw in China the factories and machines were just as good as what we have at home while the workers are as productive. It was not cost that was the problem. With some of the new rules and all of the new production goods have a harder time getting out on time.

 
At 3/07/2012 6:49 PM, Blogger PeakTrader said...

VangelV, so production costs don't matter and the Philippines can transport the goods faster (I guess before they spoil or become obsolete).

And you believe Chinese workers are just as productive as American workers, but just can't get the products out fast enough.

 
At 3/08/2012 12:29 AM, Blogger juandos said...

"I continue to worry that "new" manufacturing plants are high tech automated affairs - not places where a barely literate high school graduate can find a minimally-skilled job to live a low-end middle class life"...

Well the punk should've paid attention in school, after all someone else was paying for it larry g...

 
At 3/08/2012 2:04 AM, Blogger Ron H. said...

"We have yet to agree on what we need to do about (non 4-year degree) technical education in this country."

There is nothing for "we" to agree on, or for "we" to do about it.

"We're still on a "get a degree" or be unemployed mentality."

Who is "we"? Who do you imagine, besides you, has this mentality?

 

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