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  • A Manufacturing Renaissance?

    Posted by David Foster on May 4th, 2011 (All posts by )

    The value of the dollar (shown here measured against a basket of currencies) continues to fall–this of course makes imports more expensive to American consumers. There is inflation in China:

    That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere. In some cases, retailers are bidding for goods at prices the exporters consider too low.

    “I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers,” Mr. Tao said. “I’ve been covering the Chinese economy for a long time, and I’ve never heard that before.”

    …which has the same effect of making U.S. manufacturing generally more competitive.

    The natural effect of these phenomena is that manufacturing in the U.S., for export and for domestic consumption, becomes more competitive and hence factories operate at higher capacity, new ones are built, and employment increases along with economic growth. There are other factors that seem to point in this direction.

    The greatly increased availability of U.S. natural gas, driven by new drilling technologies, offers potential advantages both to companies using gas as a feedstock and to those which are heavy energy consumers. Dow Chemical, for example, is increasing its production of ethane and of ethane’s downstream products: Dow’s plastics business has led earnings growth this year after lower natural-gas prices made U.S. production cheaper than oil-based resins made in Europe and Asia.

    And in the broader manufacturing realm, quite a few companies are realizing that the “offshoring” boom was in some cases based on superficial analysis, ignoring the logistical realities of a 6000-mile-long supply chain and the consequent inventory, forecasting, and human communications problems. Our friends at Evolving Excellence cover this topic frequently. Note also that rising oil prices directly increase the costs of bunker fuel (for ships) and jet fuel (for planes) and hence have a significant negative effect on the economics of offshoring for many kinds of products.

    So, can we expect a manufacturing renaissance in the U.S.? There are certainly indications of at least a temporary uptrend, and there are structural factors, as discussed above, which have the potential of creating growth over the long term.

    I am afraid, though, that we are likely to snatch defeat from the jaws of victory. Multiple political and social factors will, unless they are reversed, make it difficult for U.S. manufacturing to live up to its full potential.


    Over-regulation and irrational regulation continue to be serious problems for American business in general and for manufacturing enterprises in particular. The industrial boiler regulations which the EPA is now attempting to perpetrate would seem to offer a good example. This petition summarizes the impact on several industries, ranging from sugarcane to coke ovens to to biomass power producers to pulp and paper companies. Another example of regulatory overreach can be seen in the “Consumer Products Safety Improvement Act,” which I’ve written about several times (here, for example, see also this) and which has ben particularly devastating to small businesses.

    Rising electricity costs are a threat to many kinds of manufacturing. Although, as noted above, increased natural gas production offers considerable potential assistance in keeping electricity costs low, it is not clear that this will actually be the outcome. Environmentalists are already attacking the “fracking” process which is key to reaching the expanded reserves of natural gas: Although there may be some legitimate needs for additional regulation in this area, does anyone really think–based on history–that environmental groups will avoid regulatory overreach and demonization of the entire industry?

    Furthermore, coal is currently a key element of low-cost electricity production, and Barack Obama has made very clear his loathing for that fuel:

    So, if somebody wants to build a coal plant, they can — it’s just that it will bankrupt them, because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.

    Apparently the idea that bankrupting coal plants has as impact not only on the shareholders and employees of those companies, but also on businesses that need large quantities of electricity, either is beyond Obama’s comprehension or he plain just doesn’t care.

    The willingness of the Obama administration to attack businesses in deference to its political supporters, as demonstrated in the NLRB’s command to Boeing that it must move production from South Carolina back to Washington State–an astonishing act of government intrusiveness and micromanagement, which could fairly be called corporatism or economic fascism–is a huge disincentive for any company considering new or expanded manufacturing in this country.. Bill Waddell has observed that the present admninistration seems far more offended by a company moving production from Washington to South Carolina than by a company moving production out of the United States altogether, and he provides several examples.

    A tax code that discriminates against tangible-asset intensive businesses is a long-standing problem, not resolved by special incentives allowing expensing on a temporary basis.

    Finally, there is a general cultural prejudice against manufacturing within many influential segments of our society, resulting in a whole range of malign effects. I discuss this point at length in Faux Manufacturing Nostalgia..see also this related post from Stuart Schneiderman.

    I think U.S. manufacturing will most likely do considerably better over the next 10 years than it did over the previous decade, as a result of the factors identified at the beginning of this post. And some companies will do very well indeed, with key determinants being management quality and vision plus product mix. But the manufacturing industry as a whole will never reach the level of success in the U.S. that it can and should achieve until the negative factors discussed above are resolved or at least significantly addressed.

     

    10 Responses to “A Manufacturing Renaissance?”

    1. David Foster Says:

      CEO of Jarden: “As we continue to expand sales internationally, on the manufacturing front we have for the first time in a long while brought manufacturing of two of our product lines back from Asia to the United States. I believe that we are witnessing the end of a 30-year trend of relocating manufacturing (and therefore jobs) from the Americas to Asia…”

      See commentary at Evolving Excellence

    2. David Foster Says:

      Accenture: “Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers’ expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs”

      Accenture has of course been a major proponent of offshore outsourcing.

      Via this Evolving Excellence post

    3. Robert Schwartz Says:

      When the last lawyer is strangled with the entrails of the last environmentalist.

    4. Dan from Madison Says:

      I think you should probably clarify a bit – I think that we could have a bit of an uptick in manufacturing in the south and possibly some of the western states like Wyoming where you can actually operate a business rather than states like around the Great Lakes where unions, graft, and patronage are still crushing manufacturing – and have been since WW2.

    5. Anonymous Says:

      There are other factors that seem to point in this direction.

      I hope so – I work in manufacturing.

      One problem I have observed is that when a company has manufacturing in Asia and NA, and they need to expand .. it’s been easier to expand in Asia than at home. By easier I mean, quicker, less expensive, cheaper.

      Nothing against my peers on the other side of the Pacific – they’re good guys. But I want to see more employment here _and_ there.

    6. David Foster Says:

      Related article in today’s WSJ.

    7. David Foster Says:

      Dan from Madison…yes, some areas in the U.S. will be much better than others. It’s hard to see much hope for a place like Detroit. Data presented in this post, for example, indicates that 47% of Detroiters are “functionally illiterate”..meaning that they are “”Not able to fill out basic forms, for getting a job — those types of basic everyday (things). Reading a prescription; what’s on the bottle, how many you should take… just your basic everyday tasks”

      I doubt if too many manufacturers are eager to have people with this level of illiteracy working in their factories. In many situations, it would be outright dangerous.

    8. Dan from Madison Says:

      Yikes, 47%!

    9. Tatyana Says:

      …and yet, as my sister noted to me, when on the road around Detroit at about 6pm, there is tremendous traffic -so all those people must be working somewhere, to be returning home in rush hour.

    10. Whitehall Says:

      Taxing assets that are difficult to move is the easiest way to tax. Your victims are rooted and have high transition costs to escape to better tax climates.

      Railroads have long been targets, for example. Plus they often have few options on routes. Current governments are just doing what the barons along the Rhine River did – find the choke points and squeeze.

      Yes, regulations can kill manufacturing. Just consider what one has to go through to apply commercial coatings. You need booths, hazmat equipment and training, vapor recovery systems, ad nasium. One of the headaches I’ve had was just shipping a can of touchup paint with a final product. It had to be crated separately with full paperwork. It would have been cheaper to just provide a formula to buy locally at the site.

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