Can Made in America make a comeback?

For years it seemed only a matter of time before China’s meteoric rise as the workshop of the world killed off American aspirations to reign supreme as a production powerhouse. But with Beijing’s economic engine now spluttering, could domestic manufacturers be about to hit back?

“People talk about a doomsday scenario for manufacturing, but that's not the case. The best US manufacturers have become more competitive, no doubt about it”
-Vinod Singhal, Georgia Institute of Technology’s College of Management

In the once booming industrial city of Zhengzhou in China’s manufacturing heartland, a throng of jobseekers stretches around the block and down the busy street. A small cordon of security staff are fighting a losing battle to maintain order and hold back the 40,000 people swarming through the entrance to the already heaving employment fair. Cars honk and tempers flare. A fight breaks out. Pandemonium reigns. Welcome to job hunting, Chinese-style.

If you thought times were tough for US workers, consider this: in the first half of last year alone, official statistics show that 67,000 factories of various sizes were shuttered in China with more than 100,000 plants predicted to close by the end of the year. Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold – prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories – many operations were pushed over the edge.

Stories of bosses burning company books and skipping town – leaving a mountain of debts behind them – are rife. Vendors and customers are left with neither reimbursement nor product. Disaffected staff are rioting. And more than 20 million Chinese workers have lost their jobs in recent months as the slowdown makes ghost towns of once thriving industrial zones. In the worst-case scenario, unemployment is projected to reach as high as 50 million by the end of 2009.

The bottom line is that China’s manufacturing industry may not be the unstoppable economic juggernaut everyone assumed it was. Only last year, respected economists spoke of how China’s financial system had become ‘decoupled’ from that of the West and would escape the affects of a US-led recession, possibly even helping the rest of the world through the slump. Not any more. Today, even the most optimistic has switched from asking whether China would have a hard landing at all to how hard that now-inevitable landing will be.

In addition, and aside from the problems caused by the global economic slowdown, questions are increasingly being asked as to the wisdom of outsourcing that much production to a location so far from key markets. Volatile energy and commodities prices, rising transportation costs and the sheer distances involved in shipping goods from the Far East to Europe and the US have led many to increasingly consider China as something of a risk. “What it comes down to for the supply chain professional is that today’s environment is unpredictable, and they don’t like that,” says Kevin O’Marah, Chief Strategy Officer at analyst firm AMR Research. “It’s extremely volatile, which makes it harder to manage.”

Throw in doubts as to the country’s ability to effectively police issues such as intellectual property protection and it becomes clear that low labor costs, for so long the primary reason for relocating manufacturing operations to China, no longer hold the attraction they once did for Western executives making strategic sourcing decisions. In an unpredictable operating environment, risk mitigation plays an increasingly important role – which is why a growing number of companies are showing a renewed interest in the advantages provided by US-based manufacturing.

A changing market
On the face of it, domestic manufacturing is hardly in much better shape than that of the Asian superpower – decidedly worse, if you believe the headlines. Factory activity is hovering at a 28-year low. Firms are hemorrhaging work to cheaper offshore competitors. Many more are moving operations overseas themselves. And a staggering 200,000 US manufacturing jobs were lost in January alone, the largest single-month drop since 1982.

But such grim statistics don’t necessarily paint the full picture. For instance, the value of goods produced in the US is higher than ever, hitting a record $1.6 trillion in 2007. This figure is nearly double the $811 billion produced 20 years earlier. And for every $1 of value produced in the factories and workshops of China, America generates $2.50. In the last 40 years, manufacturing output in real dollars has more than doubled while manufacturing employment has dropped by more than 26 percent – resulting in a tripling of the amount of manufacturing output per manufacturing worker in the US from less than $80,000 in 1972 to almost $240,000 per worker today. Not bad for a sector supposedly on its last legs.

Indeed, to paraphrase Mark Twain, reports of the death of American manufacturing have been greatly exaggerated. “People talk about a doomsday scenario for manufacturing, but that’s not the case,” says Vinod Singhal, a professor at the Georgia Institute of Technology’s College of Management. “The best US manufacturers have become more competitive, no doubt about it.”

In fact, there are dozens of US companies that are successfully competing in markets dominated by low-wage countries. America Apparel, for example, excels in cut-and-sewn goods, paying its workers wages far above the minimum and providing generous benefits as well. Mag Instruments, home to the Mag-Lite, does exceptionally well competing against cheaper, imported flashlights that have nowhere near the quality. And New Balance, America’s second-largest maker of athletic shoes, has retained a strong US manufacturing base in an industry notorious for outsourcing production to the sweatshops of the Far East.

“The fact remains that American manufacturing still has the potential to be very competitive,” says Scott Paul, Executive Director of the Alliance for American Manufacturing. “By and large, it is very modern and efficient with a highly skilled workforce. There are some structural disadvantages like our tax system and our healthcare system that need to be addressed, but I think that there are also a number of inherent advantages.”

Chief amongst those is, of course, proximity to market. The United States remains the largest consumer of manufactured goods in the world – a market that has, in recent years, been increasingly satisfied through foreign-made goods (America is also the world’s largest importer). But with energy and transport costs experiencing huge fluctuations over the past 12 months, many companies have been revisiting their decision to source production overseas. “People are beginning to look for ways to either put more of their capacity through their US operations or are just pulling out completely of contracts with manufacturers in China,” confirms O’Marah. “China is the one that is really losing ground here.”

Diversifying the base
According to the results of a recent AMR study, the number one reason for companies ramping up domestic operations is less supply chain risk due to proximity to market. In the initial rush to go to China for lower costs, companies were essentially abandoning the idea of a diversified manufacturing or sourcing base in favor of a headlong rush towards low-cost manufacturing. Now, however, a growing number of people are realizing that there is more to cost than just dollars per day of labor – and for many, the risk of operating in an unstable environment is no longer a price they are willing to pay. “There are a lot of other factors to the total cost, and risk turns out to be the one that was least understood but has become the most relevant,” says O’Marah.

The end result is that companies are increasingly concerned with having a diversified manufacturing base in order to minimize exposure to risks. “They’re diversifying. They’re not withdrawing from China or Vietnam or anywhere else; they’re just rebalancing,” he confirms.

Hank Cox, VP of Communications at the National Association of Manufacturers, agrees. “You want to have a backup plan whatever you do because you just never know what could happen, and things are pretty volatile at the moment,” he says. Cox’s organization has increasingly been hearing anecdotal stories of companies bringing back production from China to the United States as a result of the difficulty in dealing long-distance. “Once the rising transportation costs were factored in, they just thought the cost advantages were declining in importance and it was a lot easier for them to be doing the work right here where they could guarantee the quality,” he continues. “And if we see political or economic instability arising in certain foreign countries – as we very well might given the current downturn – then that might become another factor in the decision to keep manufacturing closer to home.”

And with economic conditions as they are, other issues have been added to the mix, too. “Supplier failure has returned as a huge risk,” says O’Marah. “People had gotten accustomed to suppliers being reasonably reliable in terms of their business viability, but supplier failure in the Far East has become a much more serious concern.” Research also shows that China poses the most risk in terms of intellectual property infringement – with 53 percent of respondents in a recent AMR survey saying that was their top issue. The second highest was supplier product quality failures, with the third being internal product quality failures. “All three of the top answers as to why China adds risk to the supply chain are actually nothing to do with cost – labor costs, transport costs, they’re way down the list,” O’Marah confirms.

Cox agrees that IP protection is a real issue. “I’ve known many manufacturers who have made an effort to go overseas, to China in particular, who go over with a product and within a couple of months people all over town are duplicating it,” he says. “The failure of China and a lot of other countries to appreciate and honor intellectual property does work against them, and that is a key factor in why a lot of businesses either just don’t want to go over there in the first place or return to the US pretty quickly. If your business depends on patented products that you’ve spent many years developing, you don’t want to go to a place where it’s just going to be stolen and where there’s little you can do about it.”

America goes high-tech
And make no mistake, IP protection is important, for it is in the production of high-end goods that America really excels. The US sold more than $200 billion worth of aircraft, missiles and space-related equipment in 2007, and $80 billion worth of autos and auto parts. Deere & Co. sold $16.5 billion worth of farming equipment last year, much of it to the rest of the world. Then there are the gas turbines for power plants made by General Electric, the computer chips from Intel and the fighter jets from Lockheed Martin. Household names like IBM, Boeing and Hewlett-Packard are among the largest manufacturers by revenue. And the nation’s pharmaceuticals and biotech industries lead the world. Manufacturing in the United States isn’t dead or even dying: it’s moving upscale, following the biggest profits and becoming more efficient.

“It’s not cost-competitive to offer low-skill, assembly-type jobs to American workers anymore,” says Cox. “You just can’t afford to pay people to do that in an advanced economy like ours. But while those jobs are gone, that doesn’t mean that we’re not manufacturing. It means that we’re concentrating on the high-end where the best jobs are, where the jobs pay much better and where there’s a better future.”

Instead, American firms are turning to technology and domestic expertise to help keep costs down and compete for business. Manufacturing in the United States provides advantages foreign competitors often can’t match, such as speed, flexibility and access to the highly capable US workforce. For instance, last year Caterpillar Inc. declared it was to invest $1 billion in a multiyear capacity expansion plan for five of its Illinois plants. And leading chipmaker Intel recently announced a $7 billion investment in US-based advanced manufacturing facilities, citing the country’s highly skilled workforce as a key factor in its decision.

As a consequence of this shift, Cox contends that the modern manufacturing worker needs to have high skill levels as a pre-requisite, with a background in mathematics, science and computing deemed essential. “You have to be able to re-learn your job,” he insists. “It’s more sophisticated than it used to be.”

This shift in the US manufacturing model is, if anything, a move away from what China manufacturing represents: the world of low cost and huge volumes. O’Marah argues that we’re moving back toward a higher degree of craftsmanship in manufacturing, where smaller total volumes, higher unit prices, higher levels of quality and longer-life products are the order of the day. “A company like Harley-Davidson, which does almost all of its manufacturing domestically, is the kind of firm that will see success,” he says. “Bobcat is another example of a US-based manufacturing operation that focuses on high quality. They use relatively highly paid US labor, and they’re not just churning out cheap stuff. They’re producing long-life, high-quality, well-serviced machinery. So we’re seeing a move toward increasing craftsmanship in manufacturing and away from low-end commodity manufacturing. And it’s going to require a lot more skill, a lot more human capital, and is definitely not just a question of cheap labor.”

Maintaining the advantage
Back in China, the fallout from the downturn continues to be felt. Last month, Chinese exports fell at their fastest pace in 13 years as the recession further depressed demand for goods in the US and Europe, the country’s largest markets. Guangdong, a southern province of China close to Hong Kong, is a major manufacturing base for electronic products, toys, textiles and plastics and accounts for around a third of China’s exports. It is the country’s richest province, yet growth in exports from Guangdong slowed dramatically from 22.3 percent in 2007 to 5.6 percent in 2008.

Nonetheless, despite the slump China has big plans for manufacturing in Guangdong, with the Chinese National Development and Reform Commission releasing plans last month for the region’s Pearl River delta area to become a significant innovation center by 2020. Around 100 state laboratories for engineering innovation and research and development will be established in the next three years, and the goal is that by 2012 there will be three to five industrial clusters powered by high-technology that will generate more than $14.6 billion in industrial output in total. By 2012, R&D expenditure will account for 2.5 percent of the region’s annual GDP, and the proposal sets out plans to improve intellectual property rights protection and make finance more accessible for companies occupied in technological development. Such plans would create a force to be reckoned with – even for the likes of the US and Europe.

Clearly there is no room for complacency, and it is this that America needs to guard against. Manufacturing has traditionally accounted for around two-thirds of the private sector R&D in the US, and Cox points out that China, India and other countries are only too aware that if they want to be competitive and prosperous in the future, they must invest more in R&D. “We can’t just sit on our laurels and take our current advantage for granted,” he says. “We need to be more aware of it and channel more money into it, both in the public and private sector. We have a problem getting our government to understand the value. We ought to help manufacturing be more competitive in the world and it’s an ongoing battle.”

Paul agrees. “I think that at all levels – from labor-intensive, medium-skilled jobs up to the very high end – there’s still a considerable amount of competition coming from China,” he cautions. “We do have some advantages in high-end manufacturing, but we’re at risk of squandering those advantages if we don’t take a longer-term view of how to remain competitive. This means rebalancing our economy to be more production-oriented.”

The recently passed economic stimulus plan will help address some of the short-term issues, but Paul argues that only sustained investment in reforming areas such as tax policy, education, healthcare and skills development – as well as reinvigorating the banking system to boost business lending – can be successful in the long-term. “We need to put an emphasis back on Main Street as opposed to Wall Street,” he says. “The innovation needs to return to the industrial heartland.”

Of course, there’s a recession to be survived first – and as the Detroit automakers and their suppliers will testify, things will most likely get worse before they get better. “The macro situation is guiding nearly everything right now and there’s a substantial amount of uncertainty about what lies ahead and when demand will begin to pick up again,” confirms Paul. “Every manufacturer I talk to is just hoping for some factory orders to come in, and longer-term capital investments and other things are on hold right now.” Nonetheless, planning for and investing in the future will be essential if firms are to successfully compete with emerging economies over high-end manufacturing work.

And while expecting the US to recapture industries that have already gone to China may be unrealistic, the fact of the matter is that America cannot afford to go back to the days of over-consumption and lack of production if it wants to maintain its status as the world’s pre-eminent economic superpower. Focusing on innovation and technical expertise could be the only way forward. “If we do a good job of it, then it will become exportable,” says O’Marah. “Countries that develop skilled manufacturing – or any type of technology that is superior – build a reputation for it; the Japanese have done this for years. And that supplants the preference for cheapness. I’m certain that we’ll see consumers migrate toward higher quality – at higher price points – for product that lasts longer and can be repaired and extended. We’re moving from the consume-and-throw-away to the buy-use-and-cherish phase.

“What China did to us over the last decade – or what we did to ourselves with China’s support – was favor abundance over excellence. Quantity over quality: that was the story of China. But in the current climate, people don’t want another piece of junk. They’re frustrated with the plethora of units and the lack of serviceability.” At the end of the day, it is here where the key challenge lies for American manufacturers: maintaining their current high-tech advantage. The skilled professional – one who can solve complex problems and deliver high quality at low-cost – has never been so critical.

Productivity increase
In the last 40 years, manufacturing output in real dollars has more than doubled while manufacturing employment has dropped by more than 26 percent – resulting in a tripling of the amount of manufacturing output per manufacturing worker in the US from less than $80,000 in 1972 to almost $240,000 per worker today.

Buy American
The final House-Senate compromise over the stimulus bill could reach $789 billion, with the thrust of the plan directed at infrastructure projects, unemployment benefits, assistance to states and tax cuts. According to a recent study released by the Alliance for American Manufacturing, investment in the nation’s infrastructure is the most effective approach to creating new jobs. Roughly 18,000 new jobs would be created for every $1 billion in new infrastructure spending on the nation’s transportation, energy, water systems and public schools.

While the construction and service industries will see the vast majority of job creation, manufacturing, which has been devastated by the current economic crisis, would also benefit from such an infrastructure stimulus, seeing an increase of 252,000 jobs nationally. The benefits for manufacturing would be felt throughout the economy, with new jobs created in such industries as fabricated metals, concrete and cement, glass-rubber-plastics, steel and wood products.

The report further notes that manufacturing employment gains from such an infrastructure program could be improved significantly if the percentage of US-made material inputs were increased. Simply put, a higher share of domestically produced supplies would have a significant impact in terms of generating new manufacturing jobs. Utilizing 100 percent domestically produced inputs for infrastructure projects would yield a total of 77,000 additional jobs nationally. Manufacturing would account for a significant 69,000 of that increase, a 33 percent jump in total manufacturing jobs generated.

Americans overwhelmingly support federal requirements for American-made materials in all federally funded infrastructure investment in the 2009 economic recovery bill, according to a random survey of 1001 US adults conducted by Harris Interactive on behalf of the Alliance for American Manufacturing. The national poll found 84 percent favor Buy American requirements; only four percent strongly oppose the requirement and seven percent somewhat oppose it.

“Buy American is a good deal for taxpayers and workers,” says AAM Executive Director Scott Paul. “US taxpayers understand the issue at hand. Buy American is longstanding US policy and consistent with our international trade obligations. The Senate should pass economic recovery legislation as soon as possible with Buy American requirements intact and reflect the will of the overwhelming majority of Americans.”