A forward-looking analysis of the trends, management strategies and best practices that will help U.S. manufacturers compete successfully.
What is the future of manufacturing in the United States throughout the rest of this decade and into the next? To hear some manufacturers tell it, a more accurate way of phrasing that question might be, "Is there a future for U.S. manufacturing?" Based on the responses to the "Future of Manufacturing" survey undertaken by IndustryWeek and consulting firm Crowe Horwath, manufacturers of all sizes, in all industry verticals, face mounting challenges on several fronts: The ability to attract and keep skilled labor. Intense, and some would say unfair, competition from low-cost countries. Rising healthcare costs that show no sign of slowdown. Environmental compliance and other regulatory demands.
Manufacturing Under Pressure
"In our industry, more and more production is being outsourced to China. Should the cost differential change due to improved exchange rates, increased freight cost, higher wage rates in China, closer material costs, etc., then U.S. companies with manufacturing capacity should be able to make a comeback."-- corporate executive at a steel furniture manufacturer in the Southeast with revenues between $50-$100 million
"We missed the opportunity to convince our society of the importance of a production-based economy. The 'service economy' model will provide us with the next 'Great Depression' in the next decade or two."-- corporate executive with a maker of plastics/rubber products in the Southeast with revenues under $25 million
"We are developing partnerships with local high schools and higher education. Area business leaders are now working together to communicate common goals and needs with economic development and higher education leaders to create curriculums that will meet the demands of the future workplace." -- director of manufacturing with an aerospace company in the Midwest with revenues between $500 million-$1 billion
"Small manufacturing is at a huge disadvantage because of our trade policies and the lack of a value-added tax on our borders, like every other country has. When importing a product into the U.S., you pay a 3.31% tariff. Other countries have a higher tariff plus a VAT, that could total 30%." -- corporate executive with a maker of plastics/rubber products in the Midwest with revenues under $25 million
All of these pressures threaten the long-term growth potential of U.S. manufacturers, but by far the main market pressure in 2008 is the cost of raw materials, according to 70% of all respondents. While that pressure is expected to ease significantly over the next three years, it will still be the top market pressure in 2011, say 55% of respondents.
Top market pressures vary by firm size. For example, respondents from small manufacturing companies (less than $25 million in annual revenue) are more likely to be concerned with rising healthcare costs (48%) and competition from low-cost countries (50%) than are respondents from large manufacturers with $1 billion or more in annual revenue (26% and 38%, respectively).
Taxes are also a concern, with a majority (55%) of respondents indicating that above-the-line business taxes (e.g., sales tax, use tax, property tax) will have a moderately negative impact on their business, 9% saying taxes will have a high negative impact and 18% expecting no negative impact. The smaller the company, the greater the impact of taxes on future growth potential. While 53% of large manufacturers believe taxes will have a moderate to high negative impact on their business, that response rate increases to 61% for mid-size companies and balloons to 74% for small companies.
Consider the Source
"Growth opportunities will be in the global marketplace. Those items that are more complex, or can be sold to countries that are more concerned with quality and innovation, will be the prospective customers of U.S. manufacturers." -- production supervisor with an aerospace manufacturer in the Southeast with revenues between $100-$500 million
"Supply chains are getting longer and more complex and inflexible. U.S.-based manufacturing has a huge advantage over overseas sourcing. All our manufacturing is done in the U.S. but we are not as responsive as we need to be to compete with overseas sourcing." -- corporate executive with a sign manufacturer in the Rocky Mountain region with revenues under $25 million
"Mexico has big opportunities due to less stringent regulations on manpower. We got into Mexico years ago and hopefully that will help us stay ahead of the competition." -- engineering manager with a chemical manufacturer in the Northeast with revenues between $25 million-$50 million
Respondents indicate an average 18% of their products are manufactured or directly sourced from outside the United States, and that trend is growing. Three years from now, international manufacturing/sourcing is expected to reach 25%.
Among companies with $1 billion or more in annual revenue, international manufacturing/sourcing is expected to increase from an average 30% in 2008 to 39% in 2011.
In terms of where U.S. manufacturers' products are sold, non-U.S. sales currently average 16% of total sales. International sales are expected to grow to an average 22% of all sales in three years. Again, that trend will be accelerated with large companies, as non-U.S. sales are expected to grow from their current level of 29% to 36% by 2011 for those manufacturers with $1 billion or more in sales.
When asked whether the United States is under consideration for construction of a new facility within the next three years, the majority of respondents (58%) answered yes. The largest percentage of yes answers came from small manufacturers (less than $100 million in annual revenue), with 61%.
When it comes to sourcing, not surprisingly the most popular country is China, with 54% of respondents. What's more, that percentage is likely to increase by 5% to 59% over the next three years. However, other areas will see an even bigger percentage increase. Mexico/Latin America, for instance, will see sourcing from U.S.-based companies grow from the current 27% to 34% in 2011. India will almost double in popularity as a sourcing base, from 17% in 2008 to 30% in 2011. Interest in European Union countries will drop 3%, from 30% to 27%.
Working it Out
"Those companies that have and continue to develop a skilled workforce will see the largest growth opportunities." -- director of manufacturing with a maker of industrial machinery in the Midwest with revenues under $25 million
"We need to bring back jobs that have been outsourced to other countries so the small companies can stay in business." -- corporate executive with a metals manufacturer in the Southeast with revenues under $25 million
"In-house development of talent is a huge opportunity. A lot of talent leaves seeking growth opportunities that are lacking within their present company." -- operations manager with a maker of consumer goods in the Midwest with revenues between $500 million-$1 billion
Contrary to current trends, production workforces are expected to increase in the next three years. Respondents predict an average 6% increase in their U.S. production workforce and an average 5% increase in their non-U.S. production workforce.
There's a marked difference in where that increase will come from, depending on the size of the companies. Respondents from companies with $1 billion or more in annual revenue expect to see a 2% increase in their U.S. workforce and an average 8% increase in their non-U.S. production workforce. However, smaller companies (annual revenues under $25 million) expect an average 7% increase in their U.S. workforce and a 3% increase in their non-U.S. workforce.
Respondents overall expect wage increases over the next three years to average 7%. Because respondents from larger companies expect their non-U.S. workforce to grow more than their U.S. workforce, the average wage increase expected by these respondents is lower than that expected by smaller companies (5% vs. 7%).
For all respondents, the most frequently cited prediction for expected changes in the workforce over the next three years was no change at all; they believe their workforce will remain at the same level in 2011 as it is in 2008. Considering the declines the industry has weathered over the past decade (more than 3 million production jobs have been lost since the turn of the century), just stopping the bleeding would be very good news indeed.
The Power of Technology
"Technology and skilled worker availability may limit new product development, contrary to some countries where adequate resources are available. Competition for workers will drive increasing benefits, rather than the massive decreases we've seen in the past two decades. It's a matter of company survival." -- VP of environmental activities with a chemical manufacturer in the Northeast with revenues between $1 billion-$20 billion
"The biggest opportunity will be in reducing labor costs, utilizing automation to save money which will in turn make manufacturers more cost-effective." -- operations manager with a consumer goods maker in the Southeast with revenues under $25 million
When it comes to information technology, more respondents currently have design system software in place than any other type of IT (61%). Three years from now, nearly half of all respondents expect to have ERP, MRP/MRP II and online purchasing/selling software in place. Not surprisingly, the biggest IT spenders are large manufacturers. Among respondents at companies with $1 billion or more in annual revenues, a majority currently or plan to use eight of the 14 listed solutions (see chart). That number drops to five out of 14 for mid-size companies ($100 million to $1 billion), and three out of 14 for small manufacturers (less than $100 million).
On the hardware side, currently 50% of respondents use wireless networks, the only production/automation technology used by at least half of all respondents. Three years from now, however, a majority expect to use five of the 10 listed technologies (see chart). Eight of the 10 technologies are or will be used by a majority of large manufacturers (the two exceptions are robots and motion controls). The results are similar for mid-size companies who also are or will be using eight technologies; the exceptions are vision systems and motion controls. Small manufacturers anticipate using six of the 10 by 2011.
The use of alternative power sources is expected to increase over the next three years. Currently, most respondents rely on traditional power sources, such as electric (92%) and gas (74%). Three years from now, 15% of respondents expect to use solar power and 12% expect to use wind power in their facilities.
A Time to Grow
In the final analysis, the growth of a manufacturing enterprise comes down to dollars and cents, so we asked, "How do you expect your revenue to change in the next three years?" Overall, respondents expect their companies to grow by 15% between now and 2011, with the largest group (26%) anticipating growth of 25% or more. Fewer than 4% (3.9%) expect a decrease in revenues over the next three years.
Encouragingly, nearly nine in 10 respondents (89%) expect organic growth, while 42% expect to experience growth through mergers and acquisitions (both responses were allowed). Small (92%) and mid-size (94%) manufacturers were more optimistic about organic growth opportunities than large manufacturers (74%), who actually saw their future growth more likely to come through M&A activity (82%).
The Crowe Horwath/IW Custom Research "Future of Manufacturing" study was conducted online in August and September, 2008, to IW subscribers who indicated their job title as corporate and executive management, or operations, production and plant management. A total of 349 completed surveys were collected. All responses were anonymous. This report is based on data from this research, including the responses to open-ended questions.
About Crowe Horwath LLP
Crowe Horwath LLP (www.crowehorwath.com) is a public accounting and consulting firm. Under its core purpose of "Building Value with Values," Crowe assists clients in reaching their goals through audit, tax, risk and consulting services. Crowe professionals provide public and private company clients with thought leadership in many sectors, including financial and diversified financial services, healthcare, government, private equity sponsored, inventory-based, retail, not-for-profit, higher education and food and commodities. With more than 20 offices and more than 2,500 personnel, Crowe serves clients worldwide as a leading independent member of Horwath International.
About IW Custom Research
IW Custom Research is an operating unit of IndustryWeek and provides insights into executives' opinions and manufacturing trends. IndustryWeek connects decision-makers within manufacturing enterprises to share ideas and tools that inspire action. In print, online and in person, the IndustryWeek community is the leading resource for manufacturing operations knowledge.