Yes, U.S. Manufacturing Can Compete

PBS aired a good interview (online summary here) a few days ago on midwest manufacturers that are holding their own against foreign competition. Not just holding their own, but actually winning back business. Although some of the initial summary is a bit misrepresented, the fundamental premise of the story is a breath of fresh air after being bombarded with the conventional wisdom that north american manufacturing is dead. Let’s walk our way through the summary.

PAUL SOLMAN [PBS correspondent]: U.S. manufacturing isn’t dead yet, not in Milwaukee, not in the rust belt, not in the U.S. as a whole. It’s still 12 percent of the economy, 10 percent of jobs, well-paying — averaging some $70,000 a year — and manufacturing accounts for two-thirds of U.S. exports, keeping us the world’s top manufacturing exporter. Yet it’s lost more than five million jobs in the past decade alone.

DAN LURIA, Michigan Manufacturing Technology Center: It’s not imaginable that you could continue to let a sector decline at that rate without having severe consequences for the rest of the economy. It’s small, but pivotal.

He begins by implying that U.S. manufacturing is dying… although it "isn’t dead yet." Actually U.S. manufacturing itself is better than ever. Exports are at record levels and manufacturing dollar output is at record levels.

Manufacturing jobs are down, and significantly. We must keep in mind that those lost jobs were held by real live humans with families and mortgages, but at the same time if we used that same metric we would say that farming is dead. Instead the U.S. remains the world’s largest net exporter of agricultural goods. Politicians often pontificate that we must increase productivity in order to be competitive, then in the next breath they moan the loss of jobs. In a perfect world output would grow fast enough to offset jobs lost by productivity, thereby creating full ongoing employment. In a perfect world. Unfortunately today’s world includes companies that believe they need to outsource to take advantage of cheaper labor, instead of improving their internal operations.

Still, that doesn’t mean that competitive pressures from foreign manufacturers create difficult environments, especially for domestic companies that believe traditional accounting metrics that labor is purely a cost and inventory, even in transit on the high seas, is an asset. But there is hope even for those companies.

PAUL SOLMAN: It’s also savable, say Professor Dan Luria and his colleague, Joel Rogers, because the gap with lower-cost foreign competitors is now down to just 17 percent and could be largely eliminated with just two changes by U.S. manufacturers.

Wage inflation overseas, especially in China, is partly to blame for the narrowing gap. The other is due to a situation that gets a lot of negative press, although it is helping the U.S. export economy and even the housing market.

DAN LURIA: Now the dollar has already come down more than 10 percent against European currencies, and recently it’s come down almost 8 percent against the Chinese currency.

PAUL SOLMAN: It’s come down even more in the weeks since we interviewed Dan Luria. A lower dollar, of course, would mean lower prices for U.S. goods in countries with strengthening currencies, thus increasing U.S. sales abroad. It would also make their goods more expensive here. But by cutting imports and boosting exports, U.S. manufacturing would come out ahead. Another force working in our favor: wages are rising in China and elsewhere, further closing the cost gap. Then there’s regulation, an extra expense here to protect our workers, protect the environment.

But there’s another factor, one we’ve been harping on for years: the hidden costs of long supply chains from offshore outsourced manufacturers and suppliers. Companies are finally beginning to wake up to those costs and risks.

PAUL SOLMAN: But the most important factor of all in the cost-gap shrinkage may be least widely publicized: the growing global importance of what’s called a short supply chain.

TERRY HANSEN [President, Ultra Tool]: If there’s a hiccup, if the boat sinks, now you’ve got a major gap in production.

MATT LEVATICH [VP Harley-Davidson]: What if there’s a transportation disruption within China and the product can’t get to the port? How do you even solve that problem if there’s no airport where the parts are being produced?

PAUL SOLMAN: And what about a bio-threat, SARS, avian flu?

MATT LEVATICH: All kinds of issues. What if there’s a dozen containers of components that have a quality issue or were made with lead paint, right? What do you then? The longer the supply chain, the more complex it is, the more issues and factors that have to be evaluated, and the more unknowns.

PAUL SOLMAN: So a shorter supply chain is simpler, more flexible. And the more transportation costs rise with the price of energy, the cheaper it will be compared to importing from great distances.

The correspondent and interviewees continue to discuss the improved competitive position for U.S. manufacturers, but concede that it won’t last forever. Foreign manufacturers are also diving into lean manufacturing and other improvement methods, and change is accelerating. A rebound in the dollar could change the situation fairly quickly.

The bottom line? If you’re not working as hard as you can at improving, you will soon be facing enormous competitive pressure and the chances of survival are not good.