Reports of the Demise of U.S. Manufacturing Premature
by Harry E. Figgie Jr., Matthew Figgie, and Rick Solon
A widely held notion has developed that U.S. manufacturing is dead, that U.S. companies can no longer compete in a global “flat” world, and that our economy has shifted inexorably from one based on manufacturing to one centered around services. Politicians and the national media reinforce this perception. For years Washington has been abuzz with talk of U.S. manufacturing’s demise. Rarely does anyone make supporting a manufacturing base a priority, probably because of the perception that there is no U.S. manufacturing base.
With apologies to Mark Twain, we’re here to tell you that reports of our demise are way premature. Our small (under $50 million) manufacturing company, like thousands of others in the United States, is consistently profitable and competes just fine with our international competition. How do we and others do it? By being better, leaner, faster, and yes, sometimes even less expensive than our foreign competition.
There is no denying, of course, that manufacturing no longer dominates the U.S. economy as it once did. During the past fifty years the percentage of U.S. employment in manufacturing has declined from about fifty percent to about ten percent, and measured by GDP, its share of the economy has fallen from more than 25 percent in the 1950s to about 12 percent in 2005. These oft-repeated numbers are slightly overblown, because they do not take into account that the largest U.S. manufacturers have over the years outsourced many of their accounting and human resource functions, shifting them from the manufacturing ledger, to services. Yet even so, the decline does represent a profound shift that is not about to be reversed. Manufacturing will never again dominate the U.S. economy as it once did.
But that’s an old story. It’s time to write a new script.
Precipitous Fall Has Ceased
The notion that we continue to witness the collapse of U.S. manufacturing is a canard. In large part, it is the hangover from the first three years of this decade, when the number of workers employed in manufacturing declined from about 17.3 million to about 14.5 million. But while it is true that manufacturing shed almost 3 million jobs this decade, since 2003 the decline has leveled off to more modest, historic averages. Between 2003 and 2006, the number of workers employed in manufacturing dropped to 14.2 million—a decline of only 300,000. The numbers are actually better than that. Manufacturing supported more than 20 million jobs in the United States in 2006: 14.2 million jobs directly within manufacturing, and more than 6 million in sectors outside of manufacturing such as accounting, wholesaling, transportation, finance, insurance, and real estate. In fact, every dollar in a manufactured product’s final sale supports $1.37 in other sectors of the economy, the highest multiplier of any other sector. (Wholesale and finance businesses, for example, generate only about 50 cents of economic activity.)
In the course of doing business, manufacturing spurs demand for everything from raw materials, to sophisticated computer software and equipment, to financial, legal, health, and accounting services. No wonder state and local communities prefer manufacturing plants over any other kind of investment, and no wonder the federal government is so intent on preventing the collapse of the Big Three U.S. car companies. The production of automobiles stimulates the demand for everything from raw materials, to robots, to the purchase of health insurance.
In recent months, manufacturing has taken a beating like every other segment of the U.S. economy. In the three month period between September and November of this year, manufacturing lost an incredible 258,000 jobs. But we have to believe that this recession, like all others since World War II, will end, and when it does, all signs point to a robust turnaround. Remember, U.S. manufacturing still accounts for about $50 billion in exports every month. Standing by itself, it would be the eighth largest economy in the world. More goods are made in the United States today than at any time in history, and 2006 was a record year in the U.S. for output, revenue, profit, and return on investment. Revenues hit a record of nearly $5 trillion, and despite all the hand wringing about manufacturing’s dismal future, for the first time since such data began to be recorded in 1947, after-tax manufacturing profits exceeded eight percent. Likewise, for the first time ever, return on equity exceeded 18 percent.
The U.S. share of world exports of manufactured goods actually increased marginally between 1980 and 2001, from 13 percent to 13.5 percent. That increase was due to the ability of U.S. manufacturers to significantly raise their productivity. Annual value added per worker increased from about $81,000 in 1998, to about $96,000 in 2005, with increases in manufacturing productivity consistently outpacing other sectors of the U.S. economy. From 1977 to 2002, productivity in the overall economy increased 53 percent, while manufacturing sector productivity rose 109 percent. Indeed, the United States remains the most prolific manufacturer in the world, with an output two and a half times those vaunted Chinese factories.
The Value Proposition
Business has migrated to a truly global, “flat” environment in which U.S. manufacturers must be much more nimble and creative in order to survive. Who among us could have predicted as recently as a few decades ago that we would be competing with low cost competitors not only in China, India, and Mexico, but Vietnam, Cambodia, and even South Africa? But we do compete, despite indirect labor costs significantly higher than the rest of the world. Direct labor costs are not the problem, in part because they are only 5–15% of total costs in most manufacturing concerns. We do, however, face higher costs in the areas of taxation, employee benefits, tort claims, and government regulation, even compared to our nine largest trading partners.
So how do we compete? Staying competitive in a global economy means sourcing parts and components globally, and managing global supply chains effectively. Modern manufacturing is less about the process of turning raw materials into components or finished products, and more about a system designed to perform the activities required to deliver an end product that meets the customer’s needs.
Fortunately, most customers are looking for more than just a low price. The key to competing internationally has much more to do with the value proposition. At Clark Reliance, for example, we design and manufacture instrumentation devices for boilers, such as steam traps, controls, liquid level gages, and sight flow indicators. For the industries to which we sell—oil and petro chemical and power generation, among others—performance and safety are paramount. The cost of our products typically constitute less than three percent of the individual components of a particular site, so our customers are more concerned with life cycle than with the initial expense of our product. They understand that if by choosing a less expensive alternative they are going to go through two or three replacement parts in the same period our product would continue to perform, ours is actually their least expensive option. They understand that a bad valve or control can waste hundreds of thousands of gallons of water or expensive chemicals in a single batch process. On some of our bigger jobs, a repair person might have to climb three stories on a scaffold to be in a position to repair the boiler. We’re not going to under price a competitor in China or India, but we do have the ability to provide our clients with a superior product.
Some industries, of course, have a more difficult time than others creating a value proposition. It’s much more problematic for Ralph Lauren, for example, to demonstrate to the consumer the value proposition between a $20 and a $40 shirt. That’s why 96 percent of all clothing purchased in the United States is now imported. But there are plenty of other businesses which set themselves apart by using technical expertise to design a fundamentally better product. Long life, coupled with an ability to manufacture an item the first time with the correct design and performance, makes all the difference in the world to most clients. That’s where small and midsize companies in the U.S. have an advantage, as long as they have honed a value proposition based on the technical skills of their people.
Remember the Tried and True
Building a better, safer, more long-lasting product is only part of how U.S. manufacturers compete, of course. Price most certainly still matters, which means that continuous process improvements remain critical. Competing in a single, “flat” world has forced U.S. manufacturers to adopt new management techniques, or rather, revisit old ones. In today’s environment, books, magazines, and the world wide web are filled with the latest management jargon. Total quality management, Six Sigma, lean manufacturing, network optimization, continuous flow processing, fishbone, and Kaizan and Kanban are just a few of the latest buzzwords that those responsible for corporate profits are being pressured to understand and implement.
It is much more important, however, to remember that there are some basic, proven profit improvement techniques that will never go out of style, that anyone can learn and implement, and that can always be used to eliminate waste and improve quality.
There is great value in modern management techniques and philosophies, of course. Six Sigma and lean manufacturing have made world class companies out of global giants GE and Motorola, among others. And any new jargon that helps companies focus on profit improvement and cost reduction values should be welcomed with open arms. But the danger of modern techniques is that as they become more complicated, they require expensive consultants to implement. In fact, we believe that the primary obstacle preventing many businesses from implementing a comprehensive profit improvement program is the intimidation factor. Names like Fishbone, Direct Material Optimization, and Discounted Cash Flow sound like you need a PhD, or at least a high priced consultant, to understand. Nothing could be further from the truth. Every manager of every company and profit center can understand the underpinnings of how to implement the most important profit improvement techniques. That is the challenge during these difficult economic times: to use the downturn to improve efficiencies in every part of a company’s operations, but particularly in world sourcing and in the supply chain.
In our next article, we will offer more specific advice on the most basic techniques that any manager of a small or midsize manufacturing companies can use to increase profits and be ready to thrive in the global environment as soon as the current recession begins to lift.
(Harry E. Figgie Jr., Matthew Figgie, and Rick Solon are currently writing Looking for an Edge: Demystifying Today’s Management Strategies and Techniques, intended to debunk the myth that effective profit improvement needs to be anything more than unadorned common sense.)
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