Manufacturing Lies

[M.D. Holloway]

An associate wrote this...

Manufacturing Lies
By Tom Granahan, Editor-In-Chief, Manufacturing.net
Manufacturing.Net - December 14, 2006
When Mark Twain spoke of “lies, damned lies, and statistics,” he must have been talking with someone in the manufacturing industry.

OK, maybe not. But it is fairly safe to say that the health of no major industry in the U.S. is more misunderstood than that of manufacturing. (And we have the statistics to prove it.)

Like so many things that are wrongly portrayed in the mainstream media (think the war in Iraq, the state of the economy, and Philadelphia sports fans), the perception can often become the reality. It’s not too late yet, but if we’re not careful manufacturing is going to lose the hearts and minds of an entire country.


Misunderstanding No. 1: U.S. Manufacturing Has Lost Its Significance

How many times have you heard, “Manufacturing is dead,” or “All the manufacturing jobs are being outsourced.”? Plenty. Much more, I’m guessing, that you’ve heard that the average annual rate of growth in manufacturing over the past 45 years is in-line with the rate of the overall growth of the U.S. economy.

That’s right; over the past 45 years, manufacturing growth has kept pace with the economy, and has grown significantly faster than the agriculture, mining and construction industries, according to data from the Commerce Department and the Bureau of Labor Statistics.

“To say that manufacturing is less significant today than it was 45 years ago is not the case,” said Norbert Ore, Chairman of the Manufacturing Business Survey Committee at the Institute for Supply Management. “To grow 3.5 percent a year-over-year is not insignificant.”

Where the math usually gets fuzzy is in comparing manufacturing’s overall share of the U.S. economy. It is indeed true that the industry’s piece of the pie has shrunk – from 23.3 percent of gross domestic product in 1960 to today’s 12 percent – but that’s a reflection of the phenomenal growth of the services industry, which has surged to 50.9 percent of GDP from 30.2 percent.

“Today, we’re paying for services that weren’t even created 45 years ago (think lawn care or grocery delivery), and everything we buy has a service component,” he said. “Manufacturing is continuing to thrive, but the services sector is just exploding because of the type of society we’re in.”

So where does that leave U.S. manufacturing? Well, it’ll probably continue to grow at or close to the same respectable pace it’s been growing at for the past 45 years. For starters, it’s not as labor intensive as it once was, so the competitive advantage doesn’t go to the low cost of labor. Two, the country’s ability to innovate and focus on higher-value products, where technology is part of the process, means manufacturing here isn’t disappearing anytime soon.

Finally, increased customization requires that more manufacturing gets done closer to the consumer market, which is a good segue to…

Misunderstanding No. 2: U.S. Manufacturing Firms Go To China For Cheap Labor

There is no getting around the fact that U.S. manufacturing jobs have been lost to China over the past 15-20 years, but what’s less obvious is why. The answer isn’t $2-a-day labor, but Chinese demand.

“Contrary to popular belief, it’s the Chinese consumer that really attracts U.S. firms to China, not cheap labor,” said Joseph Quinlan, chief market strategist at Bank of America.

China is a mishmash of markets encompassing different dialects, varying levels of development, and great disparity in wealth.

“These variables, along with many others (the brand-sensitivity of Chinese consumers coupled with intense foreign and local competition) dictate that American firms adapt to local taste and operate on the ground,” Quinlan said. “Customer proximity, in other words, is key in China.”

As further evidence, he noted that in 2004, just over 73 percent of total sales by U.S. majority-owned foreign affiliates in China were to the local market, which is substantially higher than the global average of 63 percent. But just 7.1 percent of U.S. affiliate sales in China in 2004 were for export to the U.S., well below the global average of 10.4 percent. And just over 19 percent of total foreign affiliate sales were for export to third market, also below the global average of 26.6 percent.

“China as an export platform for U.S. firms is more myth than reality,” Quinlan said.

Misunderstanding No. 3: The Midwest Is A Manufacturing Wasteland

Don’t tell that to Kalamazoo. Few areas have been as devastated by an industry’s decline as has this southwestern Michigan town, which depended heavily on the paper manufacturing facilities that used to dot the landscape.

But as they’ve disappeared, up have sprouted plenty of innovative, entrepreneurial manufacturers, not to mention a Radio Frequency Identification Center at the local community college, where manufacturers of all sizes learn about the latest use of the technology. Kalamazoo is home to Pfizer’s largest manufacturing facility in the world, and also a large manufacturing operation of Stryker, a big medical-device maker.

The Midwest has indeed been rocked by the transformation of the industry, but there is more to manufacturing than heavy industry, and Kalamazoo is indicative of how the broader region is coping with the change: by luring high-tech, skilled, innovative manufacturing, and putting in place the resources to keep it. It’s a trend going on throughout the country in areas that have been hit hard by the slowdown in labor-intensive manufacturing.

Has “traditional” manufacturing in the U.S. suffered its fair share of blows? No doubt, with a large swath of the working population feeling the impact. And the industry as a whole sure needs to do a better PR job. But before sounding the death knell for U.S. manufacturing, remember this: There’s nothing we’re saying about China today that we didn’t say about Japan 20 years ago.

And that’s no lie.

[m21sniper]

"Like so many things that are wrongly portrayed in the mainstream media (think the war in Iraq, the state of the economy, and Philadelphia sports fans), the perception can often become the reality. It’s not too late yet, but if we’re not careful manufacturing is going to lose the hearts and minds of an entire country."

As a die hard eagles and flyers fan, i resemble that remark!

[lendaddy]

Unless I'm mistaken Pfizer is leaving Kalamazoo soon.

[azasadny]

I guess that article doesn't include the domestic automodile mfg industry...

[M.D. Holloway]

Originally posted by lendaddy
Unless I'm mistaken Pfizer is leaving Kalamazoo soon.

They may be, I know they are leaving CT and moving all that production to Indiana.

[widebody911]

I thought this was going to be a Bush-bashing thread...

[widgeon13]

Interesting article on front page of NYT on issues of Chinese manufacturing, partcularly in Shenzhen.

http://www.nytimes.com/2006/12/19/world/asia/19shenzhen.html?hp&ex=1166590800&en=30ad7b00638d156e&ei=5094&partner=homepage

[Moneyguy1]

Grocery delivery a new phenom? Really, talk to the old folks who remember the 40s. It was quite common, as was lawn care......A lot of kids back then made money by doing mowing, weeding and in the winter shoveling. Now "lawn care" is an "industry".

Where are the consumer electronics manufacturers? When was the last time you saw a Zenith or an RCA that had a "made in America" sticker?

The upstate New York area, home to former powerhouses like Kodak, Xerox, Rochester Products, Delco, Stromberg-Carlson, Phaudlers, American Laundry and Machine, Graflex, and others too numerous to mention, and the ancillary companies that supplied machine parts, advertising and other support services are either gone or dramatically downsized. I was involved in the financial scene in the area from Buffalo to Albany. The entire upstate area is struggling, and the cities have "downsized", losing population left and right. Real estate values in certain areas have plummited. A three bedroom home in the close in suburbs on a decent sized lot can be had for under 100k.

If there is growth in recent years, it is based on dramatic losses in the years preceeding. Getting back 3.5% per year after years of losing 10%+ is not a gain, it is still a case of losing ground over time.

As for the growth in "services", how long before this part of the overall pie is saturated and stops growing? Any economy can afford only so much non-producing drain. One cannot ignore the reduction of manufacturing as a part of the whole pie without some degree of trepidation.

We can paint all the rosy scenarios we want, but there are a number of product areas that have suffered greatly and may never recover. We may, as a nation, weather this change in fundamental operation, but we will be a far different nation because of it: less independent, more beholding to outside sources for necessary goods, and with an ever greater divide between the extremes of wealth. Whether this is good or bad is for the future to decide.