policy to help manufacturing business

The Competitive Edge: Headwinds and Tailwinds for US Manufacturing

We're on the verge of a renaissance. A handful of smart, proactive public policies could swing the race for global advantage in the direction of making things in America.

Jack Welch once said, "If the rate of change on the outside exceeds the rate of change on the inside, the end is near." U.S. manufacturers understand this better than others. No sector has experienced more external change over the past 15 years, and no sector has done more to survive and even thrive in the face of it. 

The sector stands on the verge of a renaissance -- a recapturing of lost market share since the late 1990s as a consequence of questionable public and private sector decision-making. There are tailwinds propelling American manufacturing in that direction, but it isn't there yet. While the U.S. economy surpassed its pre-recession output levels in mid-2011, manufacturing is only 75% recovered and is not expected to reach its pre-recession output levels until late next year.

See Also: Global Manufacturing Economy Trends & Analysis

Headwinds Affecting U.S. Manufacturing

Structural costs. Every few years, MAPI examines the relative cost of manufacturing in the U.S. The most recent study showed that, on average, manufacturing in this country would be more cost-effective than for our major trading partners if it weren't for burdens such as the corporate tax rate, regulations and tort costs. Such structural costs give American manufacturers a 20% disadvantage against our largest competitors. Our outdated tax system, with the highest corporate rates in the industrial world (a total average of 39.2% compared to an OECD average of 25%) is the biggest reason for the disparity.

Stephen Gold of MAPI
Stephen Gold: "We're on the verge of a renaissance. A handful of smart, proactive public policies could swing the race for global advantage in the direction of making things in America."

Washington is stuck in the worst political gridlock in memory. Two years ago, a debt ceiling stalemate in Congress led to the Budget Control Act of 2011 and the downgrading of the U.S. credit rating. A year later, with the fiscal cliff looming, The New York Times observed: "A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts, undermining economic growth in the coming months." Now, even with signs the economy is picking up steam, a broad political schism is growing over how to fund the government for FY15 and (once again) whether and how to raise the federal debt ceiling. Manufacturers continue sitting on the sidelines, waiting for U.S. politicians to get their tax-and-budget house in order.

Weak global economy. With 95% of potential customers lying outside America's borders, a healthy and expanding global economy is critical to U.S. manufacturing growth. The initial recovery after the financial collapse spurred growth in exports, which increased 47% between 2009 and 2012. Since then, however, the global economy has been stuck. The EU, our second-largest export market, has been mired in its longest recession since World War II. China, our fourth-largest export market, is experiencing its slowest economic growth since 1990. And Japan, our fifth-largest export market, has experienced five recessions in 15 years and is only now seeing growth rates that suggest true economic recovery.

Tailwinds for American Factories

Energy revolution. The American energy revolution, particularly the "shale gale," is a boon to industry. While fracking and directional drilling methods have been around for decades, new technologies such as global positioning and sensors have suddenly made the U.S. the world's largest producer of natural gas. Prices here, though slowly rising, are still roughly a quarter of those in Europe and Asia. Beyond the industries that rely on natural gas as a feedstock, the falling energy prices benefit the entire sector, since manufacturers are the nation's biggest energy consumers.

Narrowing wage gap. A decade ago, politicians were proclaiming the end of U.S. manufacturing because of cheap labor costs in China. That is changing. According to Boston Consulting Group's 2011 study, productivity-adjusted wage rates in China that were 23% of the U.S. average in 2000 are expected to increase to 44% of the U.S. average by 2015 -- and perhaps 69% of wages in the American South. Because labor costs are a smaller proportion of the total cost of U.S. manufacturers, many goods will be just as economical to make here as in China.

Supply chain re-evaluations. Much of American manufacturing's lost market share of the past two decades arose from suppliers moving offshore to be closer to production. But natural disasters such as the Japanese earthquake and tsunami added to rising global shipping costs, demonstrating the vulnerability of long, interconnected supply chains. As a result, a growing number of American manufacturers are re-evaluating their supply chain strategies and are considering their options for sourcing more of their inputs in this country. Such a trend would play a crucial role in the redevelopment of U.S. industrial clusters.

Find out how manufacturing has led the U.S. economic recovery and holds the keys to national security at iw.com/looking4good.

We're on the verge of a renaissance. A handful of smart, proactive public policies could swing the race for global advantage in the direction of making things in America. 

Stephen Gold is president and CEO of Manufacturers Alliance for Productivity and Innovation (www.mapi.net).

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