Through the spring and summer the business press has been abuzz with talk of a manufacturing resurgence in the U.S. This is not baseless chatter. Years of experience have educated many companies in the harsh realities of offshoring significant levels of production. Consistent challenges regarding legal protections, labour cost increases, freight costs, and the sheer managerial complexity of coordinating foreign operations have led many companies to cease offshoring initiatives and in some cases to even reverse them.
While these developments are justifiably being met with enthusiasm by U.S. manufacturers and the broader ecosystem that supports them, there is something being left unsaid. Manufacturing has changed substantially, and it is both the current change and as well as the direction of future changes that has permitted this resurgence. We are not returning to a glorious past of U.S. industrial might, but rather moving into an uncharted future of what will seem to many a barely recognisable version of manufacturing.
Several trends are driving a massive change in manufacturing:
- False Promises: Offshoring has not proven to be quite as easy as was originally thought. The labour cost arbitrage game has been a loser in recent years, as companies have been hammered by substantial labour cost increases, particularly in China. The combination of high freight costs, managerial complexity and evaporating labour cost savings has led many former offshoring advocates to rethink their arguments.
- Capital vs. labour: To borrow the language of economists, manufacturing operations are increasingly finding it beneficial to substitute capital for labour. The increasing importance of industrial robots (highlighted by Amazon’s acquisition of industrial robot company Kiva Systems), is driving a trend toward fewer but more highly skilled manufacturing jobs. All things being equal, the more manufacturing relies on precision, design and technical skills, and a robust, highly skilled workforce, rather than low-cost labour, the more competitive it will be in advanced economies. Luckily for the U.S., that is exactly what is happening.
- Innovation: Technologies such as 3-D printing and molecular manufacturing are on the cusp of upending our notions of manufacturing completely, and the powerhouse factories of China and other emerging economies lack the advantages necessary to ride that wave. As Vivek Wadhwa noted in a recent Foreign Policy article:
these advances play well into America’s ability to innovate, demolish old industries, and continually reinvent itself. The Chinese are still busy copying technologies we built over the past few decades. They haven’t cracked the nut on how to innovate yet.
The business of making things is far from dead in advanced economies. If anything, the changing nature of manufacturing suggests that the resurgence of interest in manufacturing in the U.S. may actually be understating the opportunity.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies, real estate investors and municipalities. He can be reached at 312-505-7238 or at [email protected].
ACM Partners: The Next Generation of Turnaround Management
Learn more at: http://www.linkedin.com/company/acm-partners/
Business Insider Emails & Alerts
Site highlights each day to your inbox.