In the early 80’s, I remember first hearing the haunting anthem to America’s manufacturing challenges in the song "Allentown" by Billy Joel. In the ditty, Joel chronicles the demise of Bethlehem Steel (it went bankrupt in 2001 and is now a casino) and its impact on families in the Eastern Pennsylvania area around Allentown. The song represented the concern many Americans had over manufacturing’s demise in our country. Good men and women, through no fault of their own, were thrown out of work based on apparent labor savings in foreign cities they had never heard of.
For nearly three decades, Americans have fretted about manufacturing jobs leaving our shores ("offshoring") and headed to many foreign locales. China got many of these plants, but in fact, a lot of the jobs ended up in nations from Vietnam to India. This phenomenon, and the raw emotion surrounding it, caused everyone from politicians to ordinary Americans to worry that our great country was somehow in a slow downward demise.
There was certainly evidence to suggest that we, as a nation, were in trouble. According to CFO Magazine, the United States lost nearly 8 million manufacturing jobs since 1980. The segment still employees 12 million in this country and accounts for 12% of GDP and 9% of the workforce.
The Death of Manufacturing Exaggerated
However, there is good news in the past 6 months or so. Many publications are recounting a remarkable shift from the offshoring that caused the pain in the Billy Joel song.
One example: in the most recent CFO Magazine, Randy Myers writes of the resurgence of American manufacturing in an article entitled Gearing Up. The article tells the story of Peerless Industries, a privately held maker of audio-video mounting systems. The company, which has $100 million in annual sales, decided to spend nearly $20 million to open a 300,000 square foot manufacturing facility in Aurora, Illinois. This facility will consolidate multiple locations in Illinois but also in China. The company is “poised and ready for any major upturn in business,” says vice president of finance John Logerquist.
Your Place or Mine?
Peerless is just one example of many manufacturers moving operations back to the US. Inboundlogistics.com’s Lisa Harrington reports on the resurgence to “onshoring or reshoring” in “Is U.S. Manufacturing coming back?” “U.S. consumers could see more products labeled 'Made in the USA' on store shelves in the near future,” reports Harrington. “As labor rates in China soar and manufacturers discover unforeseen complications at overseas production facilities, many businesses are revisiting the advantages of keeping operations close to home.”
Labor is critical because of the high cost of transportation, taxes and other costs that are incurred when products are manufactured in other countries. Harrington goes on to say “Because wage rates account for 20 to 30 percent of a product's total cost, manufacturing in…areas of China will be only 10 to 15 percent cheaper than in the United States—even before inventory and shipping costs are considered.” When the labor advantage goes away, the business case for foreign manufacturing drops into the single digits or evaporates completely.
Labor cost is only part of the picture. Accenture recently conducted a study of nearly 300 manufacturers and produced a report on the current state of manufacturing in the US. "Getting closer to the customer allows for improved flexibility to respond to uncertain demand and unknown customer requests in an agile way with fast delivery times, while maintaining high quality and optimized costs," write study author John Ferreira, executive director of Accenture's North American Manufacturing practice.
"In the first part of the rush to China, engineering and manufacturing leaders made outsourcing decisions based only on production and labor costs," notes David Morgan, CEO of D.W. Morgan Company, a global transportation and logistics provider based in Pleasanton, Calif. "Logistics wasn't invited to the party. Companies thought they would save 50 percent, but ended up saving only 10 percent once they factored in all the supply chain variables" said Morgan in the inboundlogistics.com report.
The reshoring phenomenon is gathering steam and could result in 2-3 million jobs in the United States, according to Boston Consulting Group’s senior partner Harold Sirkin in a report (summarized here) that his consultancy released.
Of course, plants located in foreign lands won't necesarrily be shut down. The location of manufacturing in the future has a lot to do with the total cost of getting goods to the customer. “It depends on what goods they’re making and what markets they’re serving” says Sirkin in CFO Magazine. “We don’t expect plants to be closing in China” based on local needs. “When companies make a new plant decision, they may put it in the U.S. and repurpose the plant in China to produce goods for the Chinese market.”
CFO's and real estate directors can reach out to site selectors and logisticians that can help calculate the total cost of options including labor cost and skill, real estate costs and available incentives. The team can then fold these costs into a model that accounts for customer and logistics issues to spit out which locations work best for the project.
Business leaders have to make the right call for their own organizations, of course. The United States may or may not be the best location for a plant, but the fact that the trend is getting more press coverage is encouraging as the much hoped for recovery gains steam.
Back in Allentown, unemployment is as high as it's been since 1986, according the the US Bureau of Labor Statistics. The community, and many like it across America, hope that all the consultants are correct; they could use some jobs for a few good men and women in the cold winter of 2012.
When the resurgence comes, maybe Billy Joel can finally write a new and happier song about America's manufacturing might.