Manufacturing's Future in the US

In 1984, Data Resources Inc. founder Otto Eckstein completed a study on the future of manufacturing in the U.S. Eckstein, a Harvard University professor and former member of the Council of Economic Advisors, said “economic instability, high cost of capital and high exchange rates have created an untenable atmosphere for industrial growth.”

He noted that manufacturing is a vital segment of the economy, and that “to bet the future of our economic system on a service economy is a high-risk gamble that is hardly likely to succeed.”

The years since then, unfortunately, have seen a continuing erosion of manufacturing employment in many segments of the economy, even though industrial production has generally continued to rise, driven by productivity gains and other factors. Recently, however, IndustryWeek reported on studies that project manufacturing jobs returning to the U.S. over the next decade. Other press reports have recently cited plans for new U.S. factory construction and hiring by global firms such as Airbus manufacturer EADS NV (IW 1000/59) and Toyota Motor Co. (IW 1000/8).

Optimism about the possibility of improvements in manufacturing employment is largely based upon rising costs of labor in countries such as China that have drawn manufacturing jobs from the U.S. over the past several decades.

That is happening, but China and other developing countries still have huge labor pools that can be tapped at wage rates far below those that prevail in the U.S. Competition for manufacturing jobs will not go away. And, with capacity utilization about back to pre-recession levels, it will take investments in new capacity in order to yield gains in manufacturing employment.

The U.S. is still a market of consequence for the world’s manufacturing companies. While China’s growth over the past two decades has captured the headlines, the U.S. still prevails in terms of the scale of most markets and, even at currently slow growth rates, contributes a meaningful share of global growth.

Moreover, world economic growth, propelling millions of consumers into the middle incomes, will create a substantial new source of demand for manufactured products. The domestic and global foundations are both there for U.S. manufacturing firms (and those from other countries) to grow and yield strong returns to company shareholders.

Providing Clarity to Manufacturers

At this crossroads, what remains uncertain is the ability of the U.S. to regain manufacturing jobs, or whether its manufacturing firms will continue to expand mostly outside of the country. Some of the same challenges that Eckstein cited in 1984 regarding the future of manufacturing in the U.S. are ones that must be addressed today. The issues of economic instability and uncertainty that he cited are certainly on that roster. For manufacturers to invest in new capacity and in worker training, they must have clarity and a positive perspective about the U.S. business outlook and climate.

There are many factors that will enter into that assessment. Among the other recommendations that Eckstein made was one that suggested that the U.S. must give “the industrial viewpoint weight in policy decisions and make industrial development an explicit goal.”

That this remains true today is underscored by the recent good-news announcements of new factory construction and job creation, which is largely concentrated in states in which the climate for manufacturing is viewed as important by the political leadership.

Another data point supporting that argument, from a less positive perspective, is the near-daily headlines about firms challenged by regulatory themes and hurdles that are moving to more hospitable environments. If manufacturing is going to grow in the U.S. rather than in other countries, it will require more than healthy world markets to accomplish that. The quality of the U.S. business climate remains a barrier to manufacturing growth here.

Eckstein’s recommendations emphasized the need for U.S. firms to be able to succeed in world markets. That remains equally true today, although the basis for such success is quite different from that of three decades ago. It will be important that U.S. technology leadership continues, but it will become equally important that U.S. manufacturing firms focus on meeting the needs of the new entrants to the middle class, consumers and businesses that are probably more focused on price than on advances in the state of the art.

With such customers likely to be the source of most of the growth in demand for manufactured products, abandoning them to manufacturing firms from the developing countries that can produce “almost as good products at a great price point” will put enormous pressure on U.S. firms.

The discussion about manufacturing’s future calls to mind Yogi Berra’s observation about “déjà vu, all over again.” There are solid reasons why this sector of the U.S. economy could grow and prosper, and equally solid reasons why doing so will require that the country respond to significant global competitive forces.

Addressing economic instability and uncertainty, creating a positive climate for manufacturing and building a competency base that allows success in rapidly changing domestic and global markets alike are no less important today than when Eckstein authored his recommendations.

George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, Texas.