19 September 2013
I’ve added another graph and a previously unasked question for smaller manufacturers toward the bottom of this essay. The additions are in green. Folks who are actually involved in manufacturing are in the best position to answer that question. Thoughts and comments will be appreciated. — C.H.
12 September 2013
The Boston Consulting Group (BCG), a global management consulting firm, recently issued a research report  that projects that manufacturing employment in the U.S. will increase by 2.5 million to 5 million jobs by 2020, due to swelling exports of manufactured goods. BCG’s report bases its projection on the very high productivity of American manufacturers, compared to manufacturers in other countries, along with the low cost of energy (especially natural gas and electricity) in America, compared to other countries. These competitive advantages, assisted by rapidly increasing wage rates in China, are projected to result in a substantial relocation of production to the U.S. from Europe and Japan, along with a significant “reshoring” of American jobs that went abroad — especially to China — in recent years.
The Information Technology and Innovation Foundation (ITIF) is a Washington D.C. think tank. ITIF’s “mission is to help policymakers around the world better understand the nature of the new innovation economy and the types of public policies needed to drive innovation, productivity and broad-based prosperity.” Much of ITIF’s work involves promoting innovation in American manufacturing.
ITIF has proposed a $1,000 wager with BCG that American manufacturing employment will not increase by 5 million jobs, or even by 2.5 million jobs by 2020, as BCG’s research report projects. ITIF contends that “a sustained bipartisan commitment to create national competitiveness policies” based on “Technology, Tax, Trade, and Talent”. 
Put succinctly, ITIF is betting that the positive market forces BCG projects are not sufficient to result in the American job increases they anticipate. However, it should be clear that ITIF would like to lose this bet. As you can see from the sidebar, an increase in American manufacturing jobs of anything like that which BCG projects would be a very positive change in direction for this country.
Regarding Smaller Manufacturers
Smaller manufacturers (for present purposes, “smaller” means 500 employees or less) represent 99% of all U.S. manufacturing establishments (more than 300,000 of them), and 72% of U.S. manufacturing employment. While the global competitive advantages that BCG’s report cites would clearly benefit large manufacturers, the magnitude of the effect on smaller manufacturers is less clear. The many smaller manufacturers, speaking generally, differ from the few large manufacturers in kind, not just in size. In particular, smaller manufacturers are, again generally speaking, privately owned, hence limited in access to capital and other resources.
Here are some of my concerns:
>> The Productivity Gap — There is a yawning gap in productivity between smaller and larger American manufacturers, due, at least in part, to practical access to equipment, technology talent and staff training. Apparently, American manufacturing productivity figures are substantially skewed. Overall, productivity compares favorably to other nations. For the segment where most of the jobs are, the comparison is less than favorable.
>> Inflation — Productivity has a numerator and a denominator. Part of America’s high productivity figures stem from static manufacturing wage rates, while output per employee has climbed. My good government keeps telling me that there is no inflation in the U.S. That’s not what I see at my local super market. The folks who are demanding a $15.00 an hour minimum from McDonald’s may be overly ambitious, but they do have a point. Wages in the U.S. need to rise, and wages are going to rise. The questions are how much and how soon.
>> Supply Chains — Many smaller manufacturers produce components for larger manufacturers: that is to say, they produce that which larger manufacturers choose to outsource. When foreign manufacturers shift production to the U.S., they may or may not choose to outsource components to local manufacturers. They may well prefer to source from familiar suppliers at home, especially in the absence of a significant local cost advantage.
>> The Mexican Option — Mexico, for all of its problems, is rapidly asserting itself as a viable, low cost place to manufacture for North American markets. It is reasonable to expect that some foreign firms intending to relocate production will choose to produce in Mexico rather than in the U.S. This is especially true for the types of work that smaller manufacturers do.
>> Natural Gas — Some smaller manufacturers will benefit from low natural gas prices, even more would benefit should electric prices decline along with natural gas. However, even with fracking, natural gas isn’t cheaper than coal as power plant fuel, and coal is by far the dominant fuel for electric power in the U.S. Yes, costs for electricity from coal will increase when a new round of emissions abatement equipment is required. Yes, almost all new electric generation capacity is either natural gas fired or based on renewable energy sources. Neither is cheaper than electricity from coal. So, I don’t see how smaller manufacturers can reasonably expect electric prices that are significantly lower by 2020. Smaller manufacturers can make substantial improvements in electric power utilization, hence reduce their power costs. But so can manufacturers everywhere.
>> Battle Damage — Over 40,000 American factories closed their doors during the first decade of this century. Many of the survivors have been severely impacted by the one – two punch of overseas competition and the Great Recession. The damages include debt acquired to cover losses, deferred maintenance and equipment upgrades, deferred product and process development, as well as talent and experience losses due to staff reductions. Many manufacturers have a long way to go before they even return to their condition in 2007, let alone going forward.
Of course, everybody interested in American manufacturing wants the 2.5 – 5.0 million jobs to happen. However, I don’t think they will. Like the people at ITIF, I think that the global market forces the BCG’s report discusses just will not be enough to result in such a large turnaround. This is due, in part; because I don’t think those forces do enough for smaller manufacturers, the primary arena for job growth.
ITIF’s proposals should help. However, most of those proposals are rather long term measures as they apply to most smaller manufacturers. I think that the fundamental needs of smaller manufacturers need consideration apart from those of larger manufacturers since smaller manufacturers are different in kind from larger manufacturers.
Recently, there has been much in the business press about the industrial commons — the matrix of services, suppliers and facilitators upon which a factory’s ability to operate depends. Smaller manufacturers are a vital constituent of the industrial commons. Right now, lack of an appropriate commons makes in quite difficult for manufacturers in several high tech fields to relocate production to the U.S. The big guys need the little guys.
Added 17 September 2013
Here is the same American manufacturing employment data shown in the sidebar above, plotted differently. The strong downward trend in employment is quite clear. It is also clear that employment drops sharply in recession years, then only partially recovers toward pre-recession levels in the years immediately following a recession. The previously unasked question is “what will it take to turn around the longer term trend and add 1.8 – 3.6 million jobs in American smaller manufacturing facilities by 2020?”
What will it take for BCG to win this bet?
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
 BCG’s report is available for download at: https://www.bcgperspectives.com/content/articles/lean_manufacturing_sourcing_procurement_behind_american_export_surge/
 From an ITIF Press Release, available at: http://www.itif.org/pressrelease/itif-challenges-boston-consulting-group-wager-number-american-manufacturing-jobs-added-
 ITIF’s views on manufacturing policy issues is detailed in Innovation Economics, Robert Atkinson and Stephen Ezell, Yale University Press (2012)
 From a report by the Manufacturing Extension Partnership, available at: http://www.nist.gov/mep/upload/MEP-Measuring-Results-Mar13-v2.pdf. The manufacturing Extension Partnership (MEP) is administered through the national Institute for Standards and Technology, part of the Department of Commerce. All smaller manufacturers should be aware of the services available to them through their local MEP office. Check NIST’s website: www.nist.gov
 For more on the Productivity Gap, see Confronting the Productivity Gap, this blog: http://blog.jerasustainabledevelopment.com/2012/11/28/confronting-the-productivity-gap.aspx
See A Mexican Renaissance, this blog: http://blog.jerasustainabledevelopment.com/2013/04/17/a-mexican-renaissance.aspx
 It should be mentioned that feedstocks produced from natural gas and natural gas liquids, especially ethylene and its derivatives, do provide major materials cost advantages across much of the petrochemicals industry, particularly plastics. This benefits smaller manufacturers (plastics processors) as well as larger manufacturers (plastic resins producers).
 Harvard professors Gary Pisano and Willy Shih do a nice job of explaining the importance of the industrial commons in their new book Producing Prosperity, Harvard Business Review Press (2012)