U.S. Manufacturing: Challenges & Opportunities

There is a lot of misperception about U.S. manufacturing. How often do you hear the comment, "U.S. manufacturing is dying?" And when you ask people, "Why do you think that?" They say, "Well, manufacturing is only 17% of GDP now. All the jobs are going offshore. If only the Chinese would revalue the yuan 40%, life would be good." That's the perception.

Let's talk about facts, starting with the fact that 72% of the manufacturing job loss in the U.S. over the past five years is the result of productivity improvement. Let's talk about the fact that in the past five years, nine of the 10 largest industrialized economies in the world, including China, have lost manufacturing jobs. And let's talk about the fact that the average hourly cost for a fully-qualified manufacturing employee in China, including benefits, is around $5 compared with about $25 in the United States. You do the math. If you revalue the yuan 40%, the relationship becomes $7 and $25. I don't think that's going to fix the problem. Certainly, the Chinese should do something about their currency because it's having a significant adverse impact on the global economy, but it is not the silver bullet that will fix every problem. Back in the 1980s, we said the same thing to the Japanese. They revalued the yen and look what it did to their economy.

So let's look realistically at where U.S. manufacturing is positioned, where it can go, and where the challenges are. In reality, U.S. manufacturing is by far the largest manufacturing economy in the world.

People have said that if the U.S. manufacturing economy continues to grow at the rate it's growing today, and the Chinese manufacturing economy continues to grow at the rate it's growing today, it will be 2050 before they're equal.

When you look at the U.S. manufacturing economy as a percent of GDP, it's only 17.4%. In China it's more than 50% of their economy. So manufacturing is much more important to the average Chinese than it is to the average American.

To the average American, manufacturing is an afterthought. They don't see the value, and moving forward that attitude can have a dramatic impact on the U.S. Manufacturing output in the U.S. today is at the highest level in history – with fewer workers.

Now, you can say manufacturing is dying because we have fewer workers. But, to put this into perspective, in 1900 40% of the U.S. workforce was involved in agriculture. Today it's less than 2%. That's not because agriculture has died, it's mechanized and it's automated. The same thing is happening in manufacturing, not only in the U.S., but also around the world.

If you look at machine tool purchases over the last six years in the United States and Germany, we've acquired approximately $30 billion in machine tools. During that same period of time, China has acquired $50 billion. They are building for the future.

Manufacturing is changing and that change is occurring faster and faster; it's going to have dramatic impact on the way we do business. We need to step back and ask what's driving that change.

Do you realize since the dawn of the 21st century, internet usage in the world has increased fourfold? In the 1990s there was a frenzy to lay fiber optic cable across the Atlantic and the Pacific, and in the time it took to lay the cable, technological advances created four times the capacity that they originally planned for. As a result, communications costs dropped dramatically.

Today we can say we're in pretty good shape; in North America 69% of people have access to internet. In Asia, it's only 10%. But if you look at it from a different perspective, Asia has 35% of the internet connections in the world and North America has 21%.

So it is truly becoming a small world and how are we, the United States, going to compete in that manufacturing economy of the future?

Falling Behind in Trade

First, let's accept that today, the United States is much more focused on durable goods. The commodity business went offshore years ago; products such as textiles and footwear first went to Mexico, then to Hong Kong, then to Taiwan, and finally to China.

Do you realize that if Wal-Mart were a country it would be the seventh largest importer of Chinese goods? If people want the Chinese to revalue the yuan 40%, do they also want Wal-Mart to increase their prices 40%?

That being said, we are a durable goods economy, and with durable goods, production follows demand, and in many cases, that's good. But we have to be competitive and U.S. consumption of durable manufactured goods has continued to grow. However, in 2003 we reached a significant inflection point because for the first time in history we imported more durable goods than we manufactured.

It's okay to say, "Well, the commodity stuff went offshore. It doesn't matter." But at this point in time, consumption is growing in the U.S. and around the world at such a rate that we can't keep up. What do we do next?

Let's take a look at durable goods manufacturing by industry. There are seven industries that are very important to manufacturing technology providers, with motor vehicles being number one. Some 40% of the global machine tool demand is consumed by the motor vehicle industry. In the U.S. automotive industry's trade in durable goods, imports are four times exports. In aerospace, it's just the opposite. So when we look at our durable goods trade deficits, automotive sticks out like a sore thumb.

Now, let's consider durable goods trade by country. U.S. exports to Canada and China are slightly lower than imports. We've got problems in Mexico, but we are also behind with Japan and the EU. Now let's take a more in-depth look and examine imports and exports in the automotive sector.

This is not really a big deal in China because in most cases the Chinese are making automobiles to sell in China, not to sell in the U.S. But there are huge deficits with Japan and the EU. Why is it that in the United States, we can't compete with Japan and the EU?

With respect to Japan, a lot of it has to do with currency. And economists tell me we have a very tenuous situation in Japan. If the yen suddenly begins to strengthen, Japan could go into recession or depression, and it would have an adverse impact on the global economy.

When we step back and look at it, there is no silver bullet that is the magic answer. So we've got to look at the U.S. manufacturing economy, and determine how we can favorably impact it. And when you look at the U.S. manufacturing supply chain, some dramatic things have happened.