Investing In US-Based Manufacturing Automation — The Next Industrial Revolution
I have spent the past several decades working in product development and sourcing predominantly in China. When Wuhan shut down, it sparked a fire to bring production back to the US as quickly as possible. Seeing images in April of 2022 of Shanghai, a city of 28.5 million residents, in strict lockdown over the zero Covid policy is a reminder that this issue is not going away. While those who work in manufacturing within the consumer product space have been fearful of the seemingly perfect storm for years, the pandemic of 2020–2 brought on a whole new onslaught of problems escalating tensions and fears. The topic of supply chain seems to be on everyone’s minds.
This looming crisis coupled with the conflict in Russia sending already high gas prices to levels we have not seen in several decades combined with issues of policy, class disparity, environmental concerns, rising costs and labor shortages and bring me to the topic of of bringing manufacturing, innovation and jobs to the US. Right now, the world does not need another app or tech platform. The Silicon Valley approach to investing is being coupled with traditionally midwestern institution brands and thought leaders speaks for the case in a shift in structure from churn and burn to build for long-term returns.Companies are now struggling to find alternatives shifting labor-intensive work from China to Mexico and Central America, Turkey, and Ukraine. Chinese factories are looking to Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka for secondary factory locations to avoid paying high tariffs. As the cost of automation declines and is rolled out, we will see more competitive options, but for now, that is not going to be fast enough to save 2021 and 2022.
According to a Deloitte report from March 2022, “US manufacturers have room to run with advanced manufacturing compared to many competitors globally. Advanced global “lighthouse” factories showcase the art of the possible in bringing smart manufacturing to scale. Investment in robots, cobots, and artificial intelligence can continue to transform operations. Foundational technologies such as cloud computing enable computational power, visibility, scale, and speed. Industrial 5G deployment may also expand in 2022 along with advances in technology and use cases.”
Innovation in manufacturing is the foundation of what the US was built on. Automation is the wave of the future that so many industries have resisted. Industries such as telehealth to computer chips, glass blowing to food delivery drones all have huge growing demand. The tale goes that during every global crisis, there’s a spike in innovation.
Later in this article, we will address some of the issues facing China. Factories are not sexy and they are not quick to change. Part of China’s success was their inexpensive labor, ability to build and scale at rapid speed and to chase the opportunities. This means fast-tracking what I have heard called Manufacturing 4.0. The pandemic has accelerated the awareness of these new manufacturing technologies but now they need an influx of capital, customers and companies to increase supply chain resilience, boost profitability, and provide a roadmap for reshoring production. Joe Biden has vowed to direct over $600 billion in federal spending each year toward domestically manufactured goods to rebuild factories in affected regions with high unskilled labor. One of the proposals requires that products have at least 75% domestic content to meet federal guidelines for being made in the country, up from 55%, the White House said.
There are several very large companies such as Siemens USA that plans to invest $54 million and create 300 jobs in expanded domestic production of electrical components like circuit boards used in electric vehicle chargers, data centers and industrial sites. Intel Corp said it is planning on pumping $100 billion to build potentially the world’s largest chip-making complex in Ohio, to address global shortages of semiconductors. Chief Executive Officer Pat Gelsinger’s strategy is to restore Intel’s dominance in chip making and reduce America’s reliance on offshoring. An initial $20 billion investment — the largest in Ohio’s history — on a 1,000-acre site in New Albany will create 3,000 jobs, Gelsinger told Reuters. That could grow to $100 billion with eight total fabrication plants and would be the largest investment on record in Ohio.
Another Ohio business, GOJO, reportedly tripled its production almost overnight to meet pandemic demand through automation. And despite popular belief, this allowed for job creation of 500 new employees in 2020. Here is a current issue with labor shortages in the US, but studies have shown that these new technologies can allow for an increase in wages. With inflation on the rise, this is key.
Rising gas prices combined with insane competition for products to get on ships, into trucks and eventually to the final destination has dominated the headlines. The US is vastly behind when it comes to the environment. Manufacturing 4.0 gives us a chance to reduce pollution dramatically.
The Zero-Covid policy still has factories, docks and essential components to productivity in lockdown. This means a 40–80% reduction in ability to produce. China recently announced their plan to reduce the concentration of hazardous fine particulate matter from 47 micrograms per cubic meter to 35 micrograms by the year 2035. China’s crackdown is hoping to result in cleaner air but factories will have to comply and find ways to both keep up with production and these environmental laws. This is expensive and time-consuming. That report also shows emissions per capita in the United States are still more than double those in China so this is a worldwide issue that needs to be addressed. But fortunes were made decades ago from factory owners and their heirs have no desire to make expensive investments to keep up. The already dwindling labor force is not willing to travel hours away from their homes. Beijing is working through ways to try to protect factories and workplaces from insane rising costs but I would argue it is too late to salvage. They are discouraging industries like steel and coal producers from increasing prices beyond inflation. The government has vowed to investigate some of the price-gouging, shipment holding and hoarding.
Controversially, China’s currency rose in value giving a falsified value and powerful tool for buying up the world’s essentials like pulp, steel, grain, meat, petroleum, minerals and other essentials. The monopoly on those resources has especially been felt by mid-sized and smaller companies who do not have the volume to justify standing their ground. The US has the ability to produce these commodities at the same base cost. Labor and overhead are our achilles heel but technology is the way around this.
2020 saw temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products based on the demands of the pandemic and the US political stance which has triggered a rise in economic nationalism. A trade war three years after Donald Trump’s tariffs were initiated to fix the U.S. trade deficit, bilateral trade between the United States and China has now rebounded to all-time highs. But China’s trade surplus has continued to increase, and the U.S. deficit has gotten worse. “Manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains.” according to Harvard Business Review. “Automakers aren’t equipped to create the touchscreen displays in the entertainment and navigation systems or the countless microprocessors that control the engine, steering, and functions such as power windows and lighting. Another more arcane example is a group of chemicals known as nucleoside phosphoramidites and the associated reagents that are used for creating DNA and RNA sequences. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and DNA-based drug therapies, but many of the key precursor materials come from South Korea and China.” Experts agree that this is too little, too late and that the end consumer is going to take the brunt.
The price of a 40-foot container — approximately $3800 — today a quote came in for $45,000 for the same container with uncertainty of where the industry may head. Scarce containers have been diverted from less profitable small businesses to those who can afford these upticks. Trade lines from China to Europe and the Middle East are more profitable. Larger companies, like Home Depot, have gone to such extremes as chartering their own boats just to keep the basics moving. Retailers have been speaking up on investor earnings calls about the rising prices and shipping times as a warning for what is going to happen over the next 12–18 months. But investors have advised, do not budge on margins. This is not sustainable for business growth.
By the end of 2022, the number of DTC (direct-to-consumer)ecommerce customers will hit an all-time high of 103 million. More than half of consumer brand manufacturers are shifting their traditional retail strategies to offer products directly to a consumers. They’re cutting out the wholesales and retail store middlemen, instead selling directly to the end customer. But, where are those products coming from?? While this is great for emerging brands, it means traditional retailers who forecast and buy consistently in bulk are changing their production and shipping plans. 56% of brands selling on Amazon right now are based in Asia. Consumers have gotten used to free shipping and free returns along with 2 and 3 day delivery but these are unsustainable models for most companies and have vast environmental consequences. With supply chain issues not going away, this accentuates the need for smaller, faster runs on the local level.
Tariffs from the US on Chinese exports jumped sixfold between 2018 and 2020 increasing the cost of doing business overseas, adding to the price paid on those goods. The Trump administration’s logic was that tariffs would push more companies to divest from China and shift supply chains to the United States. Additionally, the philosophy was that the Chinese economy would suffer, giving U.S. negotiators more leverage over China at the negotiating table. Small businesses in the United States were unable to find alternatives, did not have an option to raise prices or have the means to hire expensive lobbyists. The higher tariffs on raw materials imported from China made it impossible to compete. And, the US is not currently set up to support most manufacturing competitively. Ed Gresser, a former assistant U.S. trade representative from the Progressive Policy Institute, says that economic theory suggests that tariffs will not move trade into balance. Now, he adds, “there’s been an experiment and the results are in.”
When demand surged in so many product categories, manufacturers struggled to shift. One example is major companies servicing U.S. groceries markets, where producers had difficulty adjusting to the plunge in demand from commercial food service to the rise in consumer demand. Hence the great toilet paper shortage with heightened demand at supermarkets. Manufacturers had to change over their production lines to fill consumers’ preference to soft multi-ply rolls rather than the thinner toilet paper that many hotels and offices purchased in much larger rolls. Adding to the complexity, different retail chains wanted their own packaging and assortments.
The only solution that I see as viable is to invest in innovation in manufacturing automation for long-term growth. It is the American Industrial Revolution revisited. As a Michigander living in the Bay area, I, for one, am excited to see who embraces the opportunities to shape the future.
