American Manufacturing

Keith McBride on June 27, 2013 in Macroeconomics

(Photo Credit: Curt Carnemark / World Bank)

 

Interesting article in Forbes by economist Bill Conerly about the future of American manufacturing.  You can read it here. 

Lots to take away from this.  Among other conclusions that Mr. Conerly draws, I noted two interesting points:

First, he argues that American manufacturing has lost jobs over the last 15-20 years not because of decreases in American manufacturing output, but because of increases in American manufacturing efficiency; they have found ways to maintain or increase production with less workers and resources.  This is likely a combination of increased automation (robotics & technology) in the manufacturing process, and because the labor-intensive manufacturing jobs (which couldn’t be automated) moved offshore to cheaper labor pools.    Whether it’s robots or off-shoring of factories, neither is good news for American factory workers who are still looking for jobs.

Second, he argues that the secondary costs of locating production facilities off-shore are starting to take their toll on businesses who need faster responses to their customers’ changing demands, and better quality control.   Specifically, Conerly says:

“The attraction of offshore manufacturing has been low cost. The tradeoff is a very long supply chain, delaying changes in product design and composition. You may want more pink and less purple, because that’s what your customers are buying this week, but if the purple has just been loaded on a slow boat from China, you’ll get it whether you can sell it or not. Another offset to lower costs is sometimes lesser quality control. That’s a bigger issue when consumers can compare notes with one another and quickly raise their voices in unison. Maintaining quality control is more important in a world with rapid information flows.”

So, even if a company is saving money by taking advantage of cheaper labor overseas, they are losing the time it takes to transport the finished product back to their markets in North America.    Its also harder to guarantee that a product made so far away will be up to a standard, and with social media, consumers are able to share instant and widespread reviews of products that disappointed them.

Business journals are beginning to frequently report on this recent “on-shoring” trend: companies seeing the value of bringing at least some portion of their production back to the United States.   The good news is that companies bringing production back to the U.S. are looking to tighten quality control, and should add weight to the idea that “Made in USA” means quality.  The bad news is that they are also likely to take advantage of technology like automation which make it possible to produce more with less labor.   Conerly points out:

“Our image of factories is often a large floor with hundreds of bustling workers manning different machines. My factory tours, however, show a different reality: large floors with hardly anybody around. The plant manager will point to a face in a control room. We’ll meet a person doing a quality inspection. A few other people will be tending equipment. The total number of bodies is generally low.”

As these companies return these production facilities to the U.S., they are not going to be replacing jobs that were lost when the factories closed and moved overseas.