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Published: August 23, 2011
 / Autumn 2011 / Issue 64

 
 

Manufacturing’s Wake-Up Call

A new study shows how the decisions made today by goods producers and policymakers will shape U.S. competitiveness tomorrow.

A debate over the future of U.S. manufacturing is intensifying. Optimists point to the relatively cheap dollar and the shrinking wage gap between China and the U.S. as reasons the manufacturing sector could come back to life, boosting U.S. competitiveness and reviving the fortunes of the American middle class. Whenever production statistics in the U.S. surge, it seems to bolster that hope; as New York Times columnist and Nobel laureate Paul Krugman put it in May 2011, “Manufacturing is one of the bright spots of a generally disappointing recovery.”

But then when disappointing economic growth indicators are released, the pessimists weigh in. They argue that the U.S. has permanently lost its manufacturing competitiveness in many sectors to China and other countries, that the sector is still declining after years of offshoring and neglect, and that it might never return to its role as the linchpin of the U.S. economy.

Both the optimists and the pessimists are partially correct. U.S. manufacturing is at a moment of truth. Currently, U.S. factories competitively produce about 75 percent of the products that the nation consumes. A series of identifiable smart actions and choices by business leaders, educators, and policymakers could lead to a robust, manufacturing-driven economic future and push that figure up to 95 percent. Alternatively, if the U.S. manufacturing sector remains neglected, its output could fall by half, meeting less than 40 percent of the nation’s demand, and U.S. manufacturing capabilities could then erode past the point of no return.

Those findings emerge from a recent sector-by-sector analysis of U.S. industrial competitiveness, along with a survey of 200 manufacturing executives and experts, conducted by Booz & Company and the University of Michigan’s Tauber Institute for Global Operations. (So researchers could best analyze the relationship between U.S. employment and the future of manufacturing, plants located in the United States were counted as American, regardless of where the company that owned them is headquartered.) The studies — which included comparisons to similar Booz & Company studies of China and Switzerland — found that the U.S. has a much more productive manufacturing base than many people think. But no single country, not even China or the U.S., can claim to be the factory of the world, in the way the United States was after World War II.

Instead, for the foreseeable future, manufacturing will largely be regional. To be sure, exports play a critical role in any strong economy, and as we’ll see, a global play (including offshoring) can be viable, especially when there are challenges at home. But for many manufacturers, economics and market dynamics increasingly suggest that they locate factories close to their major markets, including the United States. This type of region-oriented footprint is a clear way to provide adequate scale and volume, minimize transportation and logistics costs, increase market responsiveness and innovation, and customize products for the unique preferences of different regions and cultures.

If factory labor costs and currency rates were the sole enablers of manufacturing success, then the West could not compete with emerging nations or offshoring. More and more, though, these factors play a smaller part in manufacturing decisions. Four other considerations, all more complex, drive manufacturers’ choices about where to place and expand factories:

1. The skill level and quality of factory employees, especially for high-tech facilities.

2. The presence of high-impact clusters, in which many companies can learn from one another and innovate more readily.

3. Access to nearby countries with emerging consumer markets and lower-cost labor (for the U.S., this means building a future with Mexico).

4. A reasonably competitive regulatory and tax environment (for the U.S., this means simplifying and streamlining the current tax and regulatory structure).

 
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Resources

  1. Joni Bessler, Stephen Li, and Sophia Pan, “China Manufacturing Competitiveness 2009–2010,” Booz & Company and AmCham Shanghai, 2010: Forecast of prospects and dangers for the burgeoning manufacturing industry of Greater China.
  2. Kaj Grichnik and Conrad Winkler, with Jeff Rothfeder, Make or Break: How Manufacturers Can Leap from Decline to Revitalization (McGraw-Hill, 2008): Explains the ISSR framework in more detail and how to foster a manufacturing renaissance.
  3. Ronald Haddock, Niklas Hoppe, Olaf Bach, and Martin Naville, “A Renaissance at Risk: Threats and Opportunities for Swiss Manufacturing,” Booz & Company and Swiss-American Chamber of Commerce, 2010: Analysis similar to this one for a country with great strengths and some vulnerabilities in manufacturing.
  4. Wallace (Wally) J. Hopp and Mark L. Spearman, Factory Physics (McGraw-Hill/Irwin, 2008): Influential textbook articulating ways in which manufacturing leaders can develop stronger capabilities and higher strategic performance.
  5. For more on this topic, see the s+b website at: www.strategy-business.com/operations_and_manufacturing.
 
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