Industryweek 7929 Global Charts
Industryweek 7929 Global Charts
Industryweek 7929 Global Charts
Industryweek 7929 Global Charts
Industryweek 7929 Global Charts

American Manufacturing: Not a New Dawn, But a Welcome Advance

Dec. 17, 2014
Is there a renaissance in U.S. manufacturing afoot?

Is there a renaissance in U.S. manufacturing afoot? The media says ‘yes’ with many examples including a $4 billion investment by Dow Chemical (IW 500/21) to boost its ethylene and propylene capacity on the U.S. Gulf Coast; an announcement by Flextronics (IW 1000/171) of its plans to create a $32 million product innovation center in Silicon Valley; and a decision by Airbus (IW 1000/52) to build a $600-million assembly line in Alabama for its jetliners. If you’re wondering if this revival is for real, L.E.K. Consulting decided to find out by surveying decision-makers in 10 U.S. manufacturing industries at companies with $500 million in revenues or more. This survey involved in-depth interviews with high-level executives about the factors driving their decisions on where to locate their manufacturing.

The picture that emerged revealed a modest improvement in U.S. manufacturing, but not a dramatic wave of reshoring. More companies are investing in the U.S. through expansion and productivity enhancement tools, or considering it as a location for their new manufacturing facilities—but this is more of a rebalancing after several years in which manufacturing shifted to lower-cost nations such as China.

Our research shows five critical themes that are playing out across a number of manufacturing industries:

1. Strong end-market demand is driving companies to produce closer to their customer base. Executives noted that proximity to the customer base allows for greater responsiveness, better positioning in the markets being served and more accurate demand forecasts, which can be done for a shorter horizon. Additionally, closer alignment between R&D and production can foster rapid innovation. Finally, end-market customization can more easily be achieved through domestic assembly or supply chain postponement.

2. Managing supply chain risk by re-locating closer to customers offers shorter lead time, increased flexibility, enhanced efficiency and customer responsiveness. Manufacturing disruptions that occur overseas can be easier to manage by shortening the supply chain—ensuring on-schedule production and avoiding delays in reaction time.

3. Narrowing differences in energy and labor costs have made the U.S. more attractive. For example, the U.S. possesses an abundance of inexpensive energy thanks to the fracking boom. More than 60% of survey respondents “strongly” agreed that the discovery of shale gas within our borders has positively affected the competitiveness of U.S. manufacturing, especially in the chemicals industry. Additionally, companies aren’t saving as much on wages in these formerly low-cost countries. China’s hourly rate nearly doubled from $1.90 in 2008 to $3.50 in 2013. U.S. manufacturers have also closed the gap by enhancing their productivity and their use of automation. Technological advances in processes have reduced the importance of labor costs as part of the overall cost structure. The shift from labor-intensive to technology-intensive manufacturing processes has made the U.S. more competitive and diminished the benefit of outsourcing to lower-cost countries. In the future, we expect a growing emphasis on more sophisticated manufacturing such as the use of 3D printing to accelerate product development.

4. The importance of innovation, differentiation and speed to market were other key findings cited by the majority of those surveyed. American companies have a competitive advantage when it comes to producing technologically advanced, differentiated goods that require precision manufacturing and rigorous quality control. As manufacturers seek growth in local markets, they find that they must tailor some of their products to those markets and become faster at getting products to market in order to thrive. One corporate strategist said, “It’s tough to get the same quality level and cycle time to serve your customers if your supplier networks are far away,” while another stated,  “Overall, the harder the skill required, the closer to home we keep it.” The other component of interest is that the U.S. maintains strong protection of intellectual property rights, making it that much more appealing to manufacturers.

Importance of Business Environment

5. The importance of business environment and regional attractiveness were both critical factors for many executives. The U.S. has stronger laws and institutions relative to developing economies which provides companies greater intellectual property protection and higher safety standards. However, executives cited that high corporate taxes and regulatory uncertainty are the two biggest factors hindering U.S. manufacturing from growing faster.  Others expressed concerns that the U.S. might not have enough skilled labor to meet demand as manufacturing becomes more sophisticated and technology driven.

We believe that the future of U.S. manufacturing is relatively buoyant. Approximately 68% of respondents ‘strongly’ or ‘somewhat’ agreed that their industries would accelerate over the next five years, while 33% ‘strongly’ agreed that their industries will see higher investment in onshore manufacturing by U.S. producers than in offshore manufacturing over the next five years.

Our take? We predict that companies won’t close their existing facilities in China to re-shore them in the U.S. Instead, these companies will expand into the U.S. with new, expanded and productivity-enhanced facilities—in sectors such as aerospace, defense, industrials, oil and gas. The bottom line is that companies will locate close to where their growth is originating. This doesn’t amount to a renaissance or a new dawn. But after decades of decline, it’s a welcome advance.

Carol Wingard and Michael Connerty are managing directors in the Industrials practice at L.E.K. Consulting.

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