The Competitive Edge: Three Reasons Manufacturers Should Invest in the United States

The Competitive Edge: Three Reasons Manufacturers Should Invest in the United States

Energy, demographics and innovation provide compelling reasons for moving manufacturing 
to the U.S.

Executives in an industry known for offshoring recently asked me why they should consider moving their operations back. While the United States remains the most competitive country in the world for manufacturing in many respects, three reasons stand out at this juncture.

Energy Revolution. One energy expert described the dramatic shift as "the energy equivalent of the Berlin Wall coming down." Since 2008, the U.S. has seen a steep rise in available domestic natural gas and oil, a result of coupling hydraulic fracturing with directional drilling technologies, providing U.S.-based industry with some of the cheapest and most abundant energy resources in the world. Considering manufacturers account for about 20% of total energy consumption here, this is a decisive factor.
 

By 2015, the U.S. is projected to overtake Russia as the largest natural gas producer, and domestic prices are forecast to remain far below those in Europe and Asia. Manufacturers that rely on natural gas, particularly in the petrochemical industry and downstream industries such as plastic and rubber, are taking notice. The American Chemistry Council says chemical industry investment here has eclipsed $100 billion; many global companies, including Germany's BASF, Canada's Methanex, South Africa's Sasol, South Korea's Hanwha Chemical, and Japan's Kuraray, are making investment plans. Energy-intensive manufacturers and producers of equipment and construction materials for drilling are also looking to invest.

Because America's key manufacturing competitors are years behind us in implementation of shale exploration and drilling technology, North America is expected to remain the premier region for shale gas and oil for years to come.

Demographic Changes. With the continuing retirement of baby boomers, worldwide competition for a diminishing number of skilled workers will intensify. Much has been written about our aging population and the skills gap that has American manufacturers scrambling to find workers with STEM capabilities.

And yet, relative to its competitors, the United States is in the catbird seat: Of the largest economies, ours is the only one expected to see growth in its working-age population in the coming decades. America's workforce will continue aging until the last of the boomers retire in a little over a decade -- then, amazingly, we'll see an increase in the number of young workers. According to the Pew Center, this is largely due to a growing Hispanic population, which today accounts for more than a quarter of the population less than one year old. This should prove to be a significant comparative advantage for employers, particularly manufacturers in need of an increasingly skilled workforce.

Our competitors face a different scenario. Japan's senior demographic represents a quarter of the population today and will continue expanding. Europe is not far behind. In Germany, for example, by 2050 seniors will account for more than 30% of the population (compared with about 20% here). China is also approaching a tipping point. Over the next few decades, its working-age population will decline by hundreds of millions of people.

These changing demographics give the United States an upper hand in the potential for economic growth.

Innovation. While data from the National Science Board show that emerging economies, especially China's, are closing the gap on us in terms of R&D investments, the United States remains the 800-pound gorilla in this category. Its share of worldwide R&D spending sits at 30%, while the EU's share is roughly 25% and China's is now 15% (up from 4% in 1996). Overall, the U.S. spends more than $400 billion on R&D, twice as much as China.

This is important for all manufacturers because of the spillover effects of innovation, which link directly to R&D. Economist Joel Popkin, describing this phenomenon in a landmark study a decade ago, said product and process innovation generated through R&D spending in one industry affords advantages not just to its network of suppliers, designers, and engineers -- benefits can also spill over to market participants, competitors, and even other sectors. Firms are more likely to profit from spillovers when R&D takes place in geographic proximity, especially for benefits from more generalized R&D.

With more R&D spending in the U.S. than anywhere else -- and thus more innovation -- why not invest here?

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

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