New manufacturing reports

Just a quick note on a few new reports relating to manufacturing in the I-Cubed Economy.
Thanks to Egils Milbergs at Accelerating Innovation, there is this report by Mark Schweitzer and Saeed Zaman of the Federal Reserve Bank of Cleveland on the relationship between manufacturing productivity and employment – Are We Engineering Ourselves out of Manufacturing Jobs? There answer to that rhetorical question is no. But their conclusion is interesting:

As recently as 1990, roughly 30 percent of U.S. gross purchases were domestically produced goods, whereas 52 percent of purchases were domestic services. Now, only 25 percent of U.S. purchases are domestically produced goods. About half of this decline is attributable to the rise of imported goods, but the rest is simply the result of greater consumption of services, which likely reflects a change in consumption preferences.

Implied in that conclusion, however, it that the change in consumption preferences from goods to services is in part made possible by the lower costs of goods (due, in part, to higher manufacturing productivity) which frees up funds to be used for services instead.

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Thanks to the New Economist for pointing out some new studies on the effect of offshoring. From Europe comes
How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy by Giorgio Barba Navaretti, Davide Castellani and Anne-Célia Disdier

ABSTRACT: Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive. Our paper contributes to this literature by examining how outward investment to cheap labour countries affect home activities of a sample of French and Italian firms that turn multinational in the period analysed. The effects of these investment are also compared to the effects of outward investment to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counterfactual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad. We find no evidence of a negative effect of outward investment to cheap labour countries. In Italy they enhance the efficiency of home activities, with also positive long term effect on output and employment growth. Also for France we find a positive effect on productivity and the size of domestic activity, although not as robust and significant. Investment to developed economies from both countries have essentially scale effects but which do not trickle down on productivity at home.

And Karsten Bjerring Olsen at the OECD has produced Productivity impacts of offshoring and outsourcing: a review:

This paper surveys the empirical literature on offshore outsourcing and its productivity effects. Due to the small number of existing studies, the survey also includes research that may serve as indirect evidence of the phenomenon’s link to productivity, such as its effect on skill upgrading.
The most apparent conclusion drawn from the review is that there appears to be no clear patterns as to how offshore outsourcing affects productivity, and that much depends on both sector and firm-specific characteristics. There are some indications, however, that positive productivity effects from foreign material sourcing depends on the degree to which firms are already globally engaged, but also that such engagements generally could be close to their optimum level in developed economies.
There is little existing research on offshoring of services, but it appears that its productivity enhancing effects generally are small in manufacturing plants while being of a somewhat greater magnitude for firms in the services sector.

“Little existing research on offshoring of services.” Humm … sounds like an opportunity.

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Finally, there are two new Department of Defense reports The first is the DOD’s Annual Industrial Capabilities Report to Congress which describes the current state of the defense industrial base:

U.S. suppliers appear well-positioned to supply the most critical technologies enabling 21st century warfare. Nevertheless, although the industrial base supporting defense generally is sufficient to meet current and projected DoD needs, there are and will always be problem areas that the Department must address.

A case in point:

The provision of body armor to troops deploying to Iraq demonstrates both the very real difficulties in properly assessing evolving operational requirements, as well industry’s ability to respond to those requirements once established. DoD body armor requirements increased greatly prior to combat operations in Afghanistan and Iraq, straining domestic industry’s ability to meet DoD warfighting requirements. In particularly short supply was the specialized ballistic backing material incorporated into the body armor. Between April 2002 and May 2003, the Department’s monthly requirements for the backing material quadrupled and the sole domestic source–Honeywell–was unable to keep up with the demand. Although not completed in time to support initial operations in Iraq, Dutch State Mines (headquartered in the Netherlands) built a new production facility for a comparable backing material in Greenville, North Carolina, significantly increasing domestic production capacity. Increased capacity for the backing material is absolutely essential because DoD requirements continue to evolve as body armor design advancements make enhanced protection possible.

The report also discusses key DOD programs to support that base, such as ManTech. If you want to know where manufacturing technology is headed, look at were DOD is putting its energies.
Which brings us to the second DOD report – Report of the Defense Science Board Task Force on Manufacturing Technology. That report hints at the future of manufacturing in one of the findings of their review of ManTech:

The question of how to affordably manufacture products based on next generation disruptive technologies is as important as establishing the technical capability. DOD invests far more on research and
development of new product technologies as compared to its investments in process technologies. But investment is needed in the capability to manufacture products that incorporate emerging, disruptive technologies–such as nano-based products–which offer promise for a quantum difference in warfighting capability within the
next decade. With more emphasis on production concerns early in development, such capabilities could be fielded quicker and more economically. Identifying such technologies is challenging, but could be informed by the peer review process previously mentioned.
In addition, DOD needs to invest in disruptive manufacturing process technologies–in particular, in timely access to affordable low-volume, state-of-the-art production capabilities. Solutions such as dual-use (civil and military) production or automated, multi-product “flexible manufacturing” need to be considered. Investments need to be made in prototypes and advanced concept technology demonstrations that address affordability (low cost) and rapid production of small quantity production.
(emphasis in original)

Disruptive manufacturing process technologies. Now there is something to keep an eye on — as it will disrupt all of the projections and assumptions about the future of global manufacturing.

Growing manufacturing

What is the fate of manufacturing in the I-Cubed Economy? The answer to that question is not straightforward. Some believe that the American factory is headed the way of the dodo bird. The US can not compete with low wage manufacturing in other nations, especially with the cost of transportation of finished goods so low. The container ship changed the manufacturing calculus, forever some claim. “The world in a box” in The Economist relates the story of how containerization unleashed globalization:

Loading loose cargo, a back-breaking, laborious business, onto a medium-sized ship cost $5.83 a ton in 1956. McLean calculated that loading the Ideal-X [the first container ship] cost less than $0.16 a ton. All of a sudden, the cost of shipping products to another destination was no longer prohibitively expensive.
This opened up all sorts of possibilities. Instead of manufacturing goods locally, a company could afford to replace its overcrowded multi-storey factory in Brooklyn with one in Pennsylvania, where taxes, electricity and other costs were lower, and then ship its goods to New York in a container. Later the factory might move to Mexico; it is now probably in China.

That dynamic shows up in recent data (Wall Street Journal “U.S. ‘Birthrate’ For New Factories Is Steadily Falling”):

The rate of factory openings was 3.8% in the third quarter of 1992 and stayed above 3% for much of the rest of that decade. But in 1998, the rate began falling and hit 2.4% in the first quarter of 2005. Closings, meanwhile, have hovered around 3.5% for much of that period.

The net effect is fewer US factories.
Even when new manufacturing is taking place, it is at greenfield sites in the low cost south – where unionization and legacy health care costs are not an issue. (See the data in the Wall Street Journal First Shift, Second Shift… Southern Shift.)

That shift reveals a more complicated picture of US manufacturing. Transplant auto companies are thriving in America. As the Christian Science Monitor points out – America’s other automakers roaring ahead:

For all the difficult news about plant closings and big quarterly losses, America’s auto industry is retaining jobs better than other traditional industries.
Overall employment in domestic manufacturing is down sharply during the past 15 years, yet the automotive sector employs more people than it did in 1990.

And, the latest word on manufacturing is positive: Outlook for Domestic Manufacturing Growth Is Strong, Survey Says”:

The Site Selection Network of the National Association of Manufacturers (NAM) and Deloitte’s Manufacturing Industry practice released the results of the organizations’ joint 2005 Manufacturing Location Survey today at National Manufacturing Week. The survey found that more than 60 percent of respondents intend to expand their facilities in the next three years, and 70 percent of these expansion plans are expected to be domestic.

In addition, the story of offshoring is not clear. While globalization and offshoring takes manufacturing jobs out of the US, it can in some cases also help US companies fight off the competition – as Business Week describes in “The Future Of Outsourcing”:

For decades, PCMC’s Green Bay (Wis.) factory, its oiled wooden factory floors worn smooth by work boots, thrived by making ever-more-complex equipment to weave, fold, and print packaging for everything from potato chips to baby wipes.
But PCMC has fallen on hard times. First came the 2001 recession. Then, two years ago, one of the company’s biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. “All you hear about is China and all these companies closing or taking their operations overseas.”
But now, Compton says, he is “probably the most optimistic I’ve been in five years.” Hope is coming from an unusual source. As part of its turnaround strategy, Barry-Wehmiller plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explains Vasant Bennett, president of Barry-Wehmiller’s engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints — and keep production in Green Bay. Barry-Wehmiller says the strategy already has boosted profits at some of the 32 other midsize U.S. machinery makers it has bought. “We can compete and create great American jobs,” vows CEO Robert Chapman. “But not without offshoring.”

The management guru types are pushing this idea, as Business Week goes on to describe:

a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is “transformational outsourcing.” Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But its peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.

It remains unclear to me whether “transformational offshoring” is a means of saving US manufacturing or is just another piece of rhetoric for dressing-up the offshoring hunt for the lowest possible wages.
But, regardless of the rhetoric, manufacturing is undergoing a transformation. One place that transformation seems to be underway is in the birthplace of the American Industrial Revolution: New England. According to Jack Healy at the Manufacturing Advancement Center:

What seems to be counter-cyclical news is the recent announcement that New England gained 164 manufacturing plants over the past 12 months, and 1,700 over the past five years. This information was disclosed in recent data collected and issued by Manufacturers’ News Inc. Howard Dubin, Chairman of Manufacturers’ News, stated, “This unique region gained plants because its workers rank high in the skills, education, and technology that make up America’s new advanced manufacturing.”

The change represents not a return to the good-old-days, but a new strategy:

Aside from a few growing industry sectors, such as medical devices, what we are now seeing are numerous small manufacturing enterprises repositioning themselves and starting new operations to launch new technologies. As the large OEMs downsize and outsource to overseas suppliers, they are leaving a domestic supply chain of thousands of small manufacturing enterprises (SME) in search of new business.
. . .
Recognizing this change, the Manufacturing Extension Partnerships (MEP) in Maine and Massachusetts have launched an “Innovation” program. The program helps SMEs evaluate their current products and operating strengths, and develop a “technology roadmap” that will enable the companies to reposition. This roadmap includes the training of staff, both on a company-wide and an individual basis, to deal with the new technology that will be launched.

In the meantime, US companies are warning of a worker shortage. According to a survey late last year (as reported in the Wall Street Journal – “Firms’ New Grail: Skilled Workers”:

Difficulty in finding enough skilled workers is hampering the ability of many U.S. manufacturers to serve their customers.
Eighty-one percent say they face “moderate” or “severe” shortages of qualified workers, according to a survey by the National Association of Manufacturers and Deloitte Consulting LLP. More than half of manufacturers surveyed said 10% or more of their positions are empty for lack of the right candidates.
The shortfall is especially acute in skilled trades, for positions such as welders and specialized machinists. Gaps on the factory floor can make it harder for manufacturers to move quickly to exploit new market opportunities and could hasten the exodus of jobs as more employers hunt for skilled workers outside the U.S.

Not everyone has the same take on this skill shortage – as David Wessel relates in “Behind the Labor Shortage-Layoff Paradox: Lack of Skilled Workers”:

Frank Levy, a Massachusetts Institute of Technology economist, likes to ask executives who talk of worker shortages: “Have you had to stop production because you couldn’t get somebody?” And the usual answer is, “Well, no.” His interpretation: The complaining is really about the prospect of having to offer higher pay. “What they’d really like is to have lots of people to choose from without having to raise wages.”
But there’s more to this. The issue isn’t filling factory jobs that rely entirely on muscle and a willingness to show up for work on time; those jobs are going, either overseas or to automation. The issue is jobs like this one advertised by Pneumatic Scale Corp., which makes high-speed packaging equipment in Cuyahoga Falls, Ohio: “Experienced assembler capable of performing diversified electrical and mechanical assembly of intricate machines. … The successful candidate will have an understanding of PLC/PC-based (hardware/software) systems, utilizing Real Time Process Control applications (using C++, Visual Basic, and Windows NT) and instrumentation.” Few laid-off GM assembly-line workers need apply.

The NAM study also notes a disturbing trend within companies themselves:

Although the surveyed companies are spending more for training, on average, than companies responding to previous Skills Gap surveys, the majority of companies (64 percent) surveyed formally train less than 60 percent of their workforces. The decision whether or not to provide training to all employees may be driven by short-term cost pressures that companies are facing or by a lack of recognition by some regarding the beneficial performance, retention and attraction impacts of training and development investments.

The study recommends that companies increase their training budget to at least 3% of payroll.
The study also recognizes the need to transform the workplace:

The key message for U.S. manufacturers is that competitive wages and benefits are important in attracting and retaining employees, but these are just the starting points for developing a differentiated value proposition for employees. People want more from their work experience than a paycheck. They want transferable skills and experiences that make them valuable to their current employer as well as to the broader market. This comes in the form of challenging work assignments, training and development, advancement and promotion, and rotational assignments. Employees also want respect, recognition, and connection in the workplace, specifically relevant performance management processes and incentives (monetary and non-monetary), formal and informal networks, formal and informal mentoring, and a general sense of community within the workplace.

This movement to high-performance work organizations has been going on for decades (see my piece “Time to Get Serious About Workplace Change”). The battle for greater worker “empowerment” is likely to continue to go on for a long time – as long as management styles remain stuck in the 19th and 20th Centuries (see also the recent posting on The Business Innovation Insider: The rise of Manager 2.0).
Ultimately, it is the change in organizational and managerial focus and style that will re-invigorate US manufacturing. As US companies and workers discovered a long time ago, we can’t necessarily compete on cheap, we have to compete on better, smarter, and faster.

And what can we do to see this future come about? More on that next.