TMTpost: The Truth Behind The American Manufacturing Sector’s Downfall
The seemingly declining American manufacturing sector has been in fact rising all along.
In this new century, China emerges as a manufacturing giant in the globe, while the once strongest country, the US, steps down from the throne and is seemingly declining. According to statistics from U.S. Bureau of Labor Statistics released in 2012, since 2000, 5.7 million job positions had been axed in the US, about 33% of the total job positions in the manufacturing sector. Statistically speaking, the loss of job positions we are taking about here is even more serious than that during the Great Depression in the 30s. Thus, compared to the enormous manufacturing sector in China, many experts are actually saying that the American manufacturing sector is having a downfall.
In February, 2012, the Executive Office of the President and the National Science and Technology Council of the US together released A National Strategic Plan For Advanced Manufacturing, making advanced manufacturing officially a national strategic plan. After that, companies like Apple and Caterpillar etc. started to move its overseas production lines back to America. With all these efforts, the American manufacturing sector seemed to be back on the right track toward recovery once again, having a head-to-toe transformation at the same time. President Obama had announced in 2012 that an investment of one billion dollars would be invested in the building of 15 manufacturing innovation institutes, which would focus on innovative IT technology, intelligent manufacturing research and development, new energy technology and new materials, as new efforts to revitalize the American manufacturing sector.
In the past 15 years, it appears to many that the manufacturing sector in the US has been declining. And in many people’s mind, this very sector only started to revive due to the American government’s strong intervention and supporting policies. However, that’s not the story at all. The seemingly decline of the American manufacturing factor has been in fact rising all along.
Declining or shrinking?
In the Framework For Revitalizing American Manufacturing released by the Executive Office Of The President Of The U.S., a graph shows clearly the changing curve of the productivity in manufacturing of the US since 1987:
We can easily learn from the graph that the hourly output in manufacturing of the American manufacturing sector had been a steady linear trend. Even after 2000, the period that’s considered the worst time for the American manufacturing sector, it’s actually still rising. Hourly output in manufacturing indicates the manufacturing sector’s production efficiency. It’s a key indicator for determining the development level of the manufacturing sectors in every region.
According to the productivity and costs: manufacturing sector graph, from 1987 to 2010, the manufacturing productivity of the American manufacturing sector had been rising at a rocket speed, reaching a 214.8% jump. Although one third of the job positions in the manufacturing sector were axed during that time, the final manufacturing output of the US still had a 45% increase.
Statistics from authorities in the US clearly show that the American manufacturing sector has never really had any actual decline. The US only transferred a majority of low-end jobs to overseas regions where labor cost was lower. It was never a sign of decline. Those job positions that were axed in the US were in fact in the middle and down stream of the value chain of the entire manufacturing sector. They produced relatively low value, consumed a great deal of energy, and generated a large amount of carbon emission. The decrease of such low-end manufacturing jobs can actually help optimize the structure of the manufacturing sector in some level. Additionally, high-end job positions that were able to stay in the US are having continuous and rapid growth in unit output, allowing the American manufacturing sector to still have fast output growth even after axing about on third of its low-end positions.
Let’s compare the US to other countries in the G8, which are also leading manufacturing countries, to have a better understanding of the American manufacturing sector’s place in the world and its development speed.
The main manufacturing countries in the G8 are the US, Japan and Germany. If we set the index of the value added in the 1978 100, then we could see that the US surpassed Germany in 1992 and Japan in 1997. Even after 2000, which period is seen as the golden age for the Chinese manufacturing sector and the downfall of the American manufacturing sector, American’s growth rate has been higher than that of Japan and Germany still.
That being said, from the perspective of growth rate and production efficiency, the American manufacturing sector has never been behind any major traditional industrial countries. In contrary, some indicators show that the American manufacturing sector is in the leading position. The main reason for the public’s misperception of “the American manufacturing sector’s downfall” is largely due to the fact that a majority of middle and low-end jobs were transferred to overseas, and the fact that the US had done so based on its great control on the value chain of the manufacturing sector.
Controlling the value chain
In the matter of the value chain in the manufacturing sector, the American sector has always had the most profitable industries and been dominating the parts that have the highest value added. Aside from these advantages, the American manufacturing sector also transfers its low-end parts that have low value added to overseas. We can literally say that the US has been controlling the order of most of the value chain of the manufacturing sector globally, and it’s organizing it to its benefits.
In 2011, Booz & Company released an analysis report on manufacturing sector which included an analytical graph of the American manufacturing sector’s competitiveness in domestic markets. In the graph, statistics showed America was still in the leading position in sector such as chemical, astronautics, machinery, medical equipment, and semiconductor manufacturing while lagging behind in textile, clothing, appliance, furniture, and computer sector etc.
Textile, clothing, and furniture sector are typical labor-intensive industries that don’t require much advance technologies. Without the support from a dominating brand, it’s very hard to make much profit out of these very sectors. As for high-tech manufacturing sectors like appliance, computer, and electronic device, which I would rather call them “high-tech assembling sectors” instead, are actually in the downstream of the semiconductor industries. These sectors usually face fierce competition while having low value-added in the meantime. For instance, Apple alone has 92% of the total profits of the global smart phone market. If we add Samsung into the math then together these two companies’ profit made out of the smart phone market would surpass 100% of the global market’s profit. In other words, other smart phone makers no make profit at all, but in fact, losing money. That being said, Chinese smart phone makers who produce 1.63 billion smart phones annually are not really making any money.
Through building up competitive advantages in highly profitable manufacturing sectors and controlling the highly profitable parts on the value chain of middle and low-end manufacturing sectors, the American manufacturing has gained the ability to have a profit rate that’s far higher than the world on average.
Continuous innovations drive the American manufacturing sector forward and allows it to keep up with the development of the industry
Innovations are the core engines of the American manufacturing sector. They are the things that really drive the sector forward and help build competitive advantages. In 2007 when Apple introduced the first generation of the iPhone, Nokia, Microsoft and Blackberry were the main forces in the field of smart phones. And before that, American smart phone makers such as Motorola were barely holding on in the markets as second-tier brands in terms of their sales performance. After iOS and Android went big, the whole smart phone sector then quickly became American-centric. The US was then able to get the largest shares on the value chain, making made money and influencing the market for its own benefits.
The automobile sector is another manufacturing sector that can show America’s ability to innovate continuously. When other traditional car companies were still making their car hybrids and were hoping to utilize their current technologies and patent investment to the greatest extent, Tesla emerged with the image of a total electric car maker, bring up a great stir within the automobile industry. Tesla’s fast expansion made traditional car makers realize that the future of the car industry and markets, beside the cars themselves, would be controlling the standard charging stations, building charging station network, and improving battery technology for electric cars. All these things are new to traditional car makers, and therefore they literally have no competitive advantages in these fields. The emergence of Tesla and its revolutionary innovation forced the automobile industry to work toward the area of electric cars. Apart from that, another disruptive innovation has also gradually become extremely prominent.
In 2012, Google’s driverless car received its license plate in Nevada, which allowed it to be driven on the road. Once again, traditional automobile companies were faced with a new disruptive force. In the last two decades, from ABS, ESP, advanced braking system to assisted parking system, parking warning system, and other assisted driving system etc., and many new advanced technologies were gradually rolled out to the market, making made money. However, the appearance of driverless technologies disrupted the market making then seemed to be outdated. Once driverless technologies are commercialized, they can not only free the hands of the drivers and give them more space and time, they will completely change the designing patter of automobiles, traffic rules, and the whole operation model of the entire service industry of the automobile.
When faced with America’s strong ability to innovate continuously, traditional industrial countries that have a competitive automobile sector lose their advantages completely. Even the finest and most well-designed fuel engines can’t compete with the cutting-edge electric cars. Since the oil crisis in the 70s when the order and value chain of the automobile sector were built, the technology has evolved to the level where the automobiles that are powered by gasoline engines will lost their edge. The automobile market and sector will be redefined by these leading edge innovations.
Clustered R&D organizations will powerful support to innovations
Usually, innovations, influential and disruptive innovations especially, are not made by some companies alone. In the US, certain industries will generally have an industrial cluster that helps share information in certain areas. For instance, the Silicon Valley in San Francisco, the High-tech Zones in 128 Highway in Boston, and the Research Triangle Park in the North Carolina etc., are all regarded as economic clusters, which are the America’s most important innovation base.
The Research Triangle Park sits next to North Carolina’s Raleigh, Durham, and Chapel Hill, locating at the center of these three cities, forming a research triangle area. The Research Triangle Park’s success is largely linked to its proximity to some of the most renowned universities in the US: University of North Carolina in Raleigh, Duke University in Durham, and North Carolina State University in Chapel Hill. The Research Triangle Park also has over 130 research facilities and over 39,000 employees working for 157 different organizations.
The Research Triangle Park is also one of the important operation base of IBM, with about 11,000 employees currently working in that area. Aside from that, the park also home to Lenovo’s global headquarter that has over 2,000 employees. GlaxoSmithKline’s largest R&D center is based in the park as well, with about 5,500 employees. The well-known Red Hat and SAS had also set up their HQ here at the Research Triangle Park.
As for manufacturing companies, the park has major international players like BASF, Bayer, Cisco, Freescale Semiconductor, National Semiconductor, Ericsson, General Electric, and Dupont etc. In this park, close cooperation exists between downstream and upstream companies, R&D organizations and manufacturing companies, and even among companies of different sectors, reducing the communication and integration cost to the lowest level. One innovation that emerges within the park will trigger a chain reaction and affect the whole industrial chain.
The biggest assets of the Research Triangle Park are the three research universities in that area. This Research Triangle Park is probably the area where there are the most researchers and facilities in terms of the density.
In January, 2014, the innovation research center mentioned in the National Strategic Plan For Advanced Manufacturing, which aimed to build a smarter, more reliable, more secure and more environmental friendly 21st century low cost power network, was announced to be founded in the campus of North Carolina state university. The leading party of this plan, the U.S. Department of Energy, promised to offer 7 million dollars in 5 years to fund this project, including participants like over 30 companies, universities and other NGOs. These participants were mostly based near the park. It’s apparent that in the very Research Triangle Park, the proximity of different companies allowed them to share information, collaborate closely, and it also gave out more possibilities for innovations to take place.
IT industry boosts the manufacturing sector
For the modern manufacturing sector, information technology is no longer as simple as CAD/CAM or MRRII. Today information technology is deeply linked to the design, manufacturing, assembling and service providing process of the manufacturing sector.
In the area of product design, visualization technology and simulation software could drastically accelerate the process of product design, testing, and modifying. Planes nowadays no longer need massive wind tunnels to test to modify their drag coefficient and important components are able to be tested with software simulation. As for manufacturing planning, enterprise resource management and supply and demand management system can comprehensively process the cost, delivery speed, productivity, rate of equipment utilization, and the quality of products to make a better planning and integrate downstream and upstream supply chains, helping the industrial chain reach an optimal state in terms of resources. The application of mobile devices, Internet of Things, and big data enables service models, which used to be driven by malfunction, to transform to actively detect and predict malfunctions to reduce cost bring by unnecessary errors, improving the service models.
The US has been the leading power in the informatization of the manufacturing sector all along. Decades ago, the US had already brought about the core concept of resource management of the manufacturing sector, which were the MRPII/ERP. In today’s world the best ERP software is also from the US and Germany. 20 years ago, Boeing had already built a large commercial airplane that was designed completely with computers, the very first case in the world, the Boeing 777. In the last decade, information technology has been helping improve the supply chain of the manufacturing sector. It connected different countries in the world and contributed greatly to the globalization. And the US, with the whole supply chain at its disposal, deployed its manufacturing sector through out the whole world and distributed the value chain accordingly. For example, iPhone are designed and developed back in the US, letting the US get the greatest profit. And Japan and Korea provide Apple with crucial chips and components, making them the sharers of some of the profits. Taiwan is in charge of developing the manufacturing technology and organizing manufacturing activity, making Taiwan also, another sharer of the profit. In this case, the rest of the little profit goes to mainland China, which provides supply chain, experienced assembly workers, and infrastructures, to produce products.
Innovations that are very likely to dominate the market in the future, such as big data, cloud technology, VR equipment, wearable technology, and 3D printing technology were also developed in the US. And the truth is big data’s standard, Hadoop, is decided by the US so far and the global top 10 SaaS provides are all American. It’s apparent that American will maintain its advantages in innovations and will still be steps ahead of other countries. The power of information technology is incredibly powerful.
Low energy price
Technological breakthroughs in recent years have given the American manufacturing sector another strength: cheap energy providers. Ever since shale gas and the related hydrofracturing method had been industrialized, the whole industrial system suddenly realized they had discovered a large supply of cheap oil and natural gas. Energy resources that used to be hidden under the shale are now being mined everyday, pumping fresh blood to industries. The hydrofracturing method drastically reduced the price of oil and natural gas that were needed in the energy-intensive industries like steel, aluminum, papermaking and petrochemical industry etc. BCG estimates that the energy price in the US nowadays is 30% to 50% lower than that of other major export countries.
In August, 2014, BCG released the Global Manufacturing Cost-Competitiveness Index, suggesting that the cost index of the American manufacturing sector was in a pretty low position among 25 export economies, which was largely due to the cheap energy price. As for China, its cost was only 6% lower than that of the US even though the US’s labor cost was third times higher than China’s.
The report also mentioned that only the cost structure of the US and Mexico would be improving. The low increase rate of salary, continuous increase of productivity, stable currency rate and outstanding energy advantages are the factor that will make the US and Mexico the huge stars in the manufacturing sector. Besides China and South Korea, other top 10 export economies all had a cost that’s about 10%-15% on average high than that of the US.
As artificial intelligence technology and robot technology mature in the future, more manufacturing sectors will transform from labor-intensive to technology-intensive. Even at present, for example, in Tesla’s factory, 200 robots took over workers’ jobs and are now operating the line. This is a result from the maturing industry automation technology and also from the electric car technology revolution that reduced the complexity of automobile structures. The cheap energy price has been a huge attraction to such technology-intensive industries, even more than that of the labor cost.
In conclusion, the US’s manufacturing advantages had never been damaged by the massive job reduction within the manufacturing sector in country in the past 15 years. Even so, when faced with new challenges brought by the constantly evolving information technology and a new round of manufacturing sector upgrade, the American government took initiatives to guide the sector and strengthen the country’s advantages in manufacturing. From the reviving plan in 2010 to the National Strategic Plan For Advanced Manufacturing in 2012, the US had been making efforts to optimize its resource allocation and guiding the sector and American society to develop resources and leading-edge technologies. As the factory of the world, China has always been a strong manufacturing country, but never a leading one. It’s necessary for China to learn from the US and make a better strategic plan for the nation’s very manufacturing sector.
But here I want to point out that the modern manufacturing sector is only a small part of production. From product design, material purchasing, manufacturing, logistics, branding, to the markets, they are all important parts that make the value chain of the manufacturing industry. The reason for China’s success as a manufacturing hub is its low manufacturing costs, which include labor cost, land cost, material cost, and even the cost for managing pollution. America’s move to bring factories back to the country from China will definitely make the cost go up once again. Given the fact that the US is a high welfare society and other costs also exist, it’s still very hard for the US to bring back the labor-intensive manufacturing industries, especially those that produce little value, to the US. It’s not something that some policies or direct investment could pull off. The future manufacturing sector in the US will continue to be high value-added and of low labor intensity. What the US is trying to achieve now will probably happen after major breakthroughs in the manufacturing sector are brought by the information technology and industrial automation technology.
[The article is published and edited with authorization from the author @Erjiefu, please note source and hyperlink when reproduce.]
Translated by Garrett Lee (Senior Translator at ECHO), working for TMTpost.
Originally published at www.tmtpost.com.