A Renaissance for American Manufacturing?
Greater stability, productivity and innovation—along with a shift in comparative labor-costs—are restoring the made-in-America advantage.
September 14 2012 by Dale Buss
China has become the biggest market for Amway’s nutritional supplements. But three years ago, when the icon of multi-level marketing faced a decision as to whether to build a state-of-the-art supplement plant in China or in the U.S., Amway chose to erect it down the road from its global headquarters in Ada, Michigan.
“There’s a significant premium on reliability, quality and continuous supply” provided by manufacturing in the U.S., says George Calvert, chief supply chain officer for Amway. “And people recognize the U.S. as a market that has very good control over our food quality.”
Consequently, Amway just opened the $24-million, 120,000-square-foot plant in suburban Grand Rapids. Thanks to innovations, such as a three-and-a-half-day work week and extensive cross-training of most of the 50 blue-collar employees in the non-union plant, the Ada operation is 50 percent more productive than Amway’s old supplement factory in California.
Multiply Amway’s decision by the hundreds, and the resulting mosaic presents a very clear picture of American manufacturing in the early stages of a renaissance. Making stuff has become a significant economic engine again, fueling the U.S. economy.
Manufacturing’s share of GDP rose in 2011 to 12.2 percent from 11 percent in 2009, the best streak since the ’50s. During the first half of 2012 the U.S. factory sector grew by another 3.1 percent versus a 4.8-percent global decline. And while the stagnation of the U.S. economy in mid-2012 has been a drag on American factories as well as everything else, and budget cuts will hurt defense contractors, the resurgence in domestic fabrication looks to have the legs to outlast the current doldrums.
This is a mainstream phenomenon fed by industrial giants as well as smaller enterprises. More than a dozen of 108 manufacturers of all sizes recently polled by MIT are definitely plan to “onshore” some of their production. Already doing so are players such as Cummins, Harley-Davidson, John Deere and Master Lock. General Electric, in Muncie, Indiana, and Caterpillar, in Fort Worth, Texas, are facing off with new U.S. capacity over a burgeoning automotive market. Yet smallish Stanley Furniture also is investing $8 million in new machinery in a once-doomed plant in Robbinsville, North Carolina, to make baby cribs it used to build in China.
Such are the looming advantages of making stuff in America that more foreign-based manufacturers are being drawn to it as well. And it’s not just automakers. The new wave from abroad includes Airbus, which plans to build its first U.S. assembly line in Mobile, Alabama, a right-to-work state, just as Boeing sited its newest plant three years ago in right-to-work South Carolina.“For CEOs, it’s a nice, almost perfect storm for re-establishing their U.S. manufacturing base,” says Barry Misthal, global industrial manufacturing leader for the consulting firm PwC. “Everything is lining up right now to support the case for putting production in the U.S.”
The “storm” has several components:
- American plants have become vastly more productive. Streamlined during the recession both out of necessity and strategy, now they’re seeing results. Waning union power has helped the cause.
- Foreign wages continue to rise significantly, reducing the appeal of national labor-rate arbitrage that used to severely disfavor the U.S. From 2003 to 2008, average annual wages increased by 5 percent to 21 percent in Mexico, Malaysia, China and Brazil but only 3 percent in the U.S.
- Supply-chain vulnerabilities exposed by the earthquake and tsunami in Japan in early 2011 stunned many American CEOs into reconsidering the importance of having things made close at hand. They learned what Jim Stitt has practiced for decades as CEO of Cutco, an Olean, New York-based cutlery maker and direct seller. “We could buy the product cheaper in Asia, but we need to control inventory and quality and get product in here during peak sales periods, and you can’t just turn that manufacturing switch on and off from that far,” he says.
- Currency values have shifted enormously. The dollar has fallen by nearly one-third over the past decade against a basket of currencies including the euro, British pound and yen. That’s a long enough track record to bias CEOs toward U.S. production.
- A huge expansion in availability and a plunge in prices of domestic natural gas have fueled much of the manufacturing boom, especially in chemicals, machinery, transportation equipment and steel fabrication. Meanwhile, higher global oil prices have made sustaining a worldwide supply chain much more expensive.
- American advantages in technological innovation are becoming more important as manufacturing becomes more complex. Smart automation, lightweight materials, nanomanufacturing and rapid prototyping—all are areas where U.S. companies excel. American workers excel at them, too. “The more sophisticated the product, the more skilled labor is required to make them,” asserts Hans-Werner Kass, senior partner for the automotive and assembly practice of consulting firm McKinsey.
As American consumers have become pickier, demanding more options in the goods they buy, it’s easier to satisfy them by building close to them. Sustaining a transoceanic supply chain “makes it harder for [manufacturers] to think about what point in the supply chain they can still give customers those choices,” said Martin Mrugal, senior vice president for manufacturing and consumer industries for SAP, the software giant.
Increasingly, Chinese manufacturing offers a distressing contrast to the product and production integrity of the U.S., whether it’s China’s relative lack of intellectual-property protection or the long line of safety recalls and incidents of workplace dangers. Consumer confidence in the safety of U.S. manufacture is benefiting domestic output of everything from Amway supplements to Stanley cribs.
Nearly all of Hunter Douglas’s competitors in the customized-blinds business fabricate their products in China or Mexico and ship them into the American market. But the Pearl River, New York-based company makes all of its blinds for the U.S. market in this country, many of them at a big plant in Broomfield, Colorado.
“Many of the others sell on price,” said Marv Hopkins, president and CEO of the North American Operations, a $2.5-billion company. “We have to make a better product. We have to make a more innovative product. We have to be more efficient in our manufacturing.”
And Hunter Douglas is. To make sure workers correctly assemble each of tens of thousands of unique orders, for example, the company designed its own barcode-based picking system called Pick-to-Light in which parts bins light up to indicate what part should next be selected by the worker. Additionally, line workers can use foot pedals to set their stations at just the right height for assembling shades of different dimensions.
In large part, as a result of relentless improvement of its U.S. manufacturing operations and its innovative product designs, Hopkins says, the company now exports Hunter Douglas blinds to 38 countries. Sales are coming back after a corporate retrenchment and resulting layoffs during the Great Recession, and manufacturing efficiencies keep boosting per-worker revenues for the company’s 5,000 or so workers.
Of course, Hunter Douglas has plants in Europe that supply the huge West European market. To be sure, it’s a multipolar manufacturing world everywhere now as transnational companies find big advantages in building wherever their markets are.
“Our manufacturing expansion pretty much follows growth in our respective [sales] regions,” says Steve Roell, CEO of Johnson Controls, a major, global automotive supplier. For example, the Glendale, Wisconsin-based manufacturer now has 45 plants in China. Five years ago, it had only 10.
Johnson Controls is favoring U.S. manufacture as it delves into next-generation technologies. The company built its first plant for making lithium-ion battery systems for hybrid and all-electric vehicles in Michigan, is supplying European as well as American customers from there and plans to double the facility. One big reason for plunking down there was $299 million in federal green-energy subsidies to build in this country.
Some argue that U.S. manufacturing could be rebuilt more quickly and rationally with lower corporate tax rates and even more industry-government cooperation. “Hyper-aggressive programs and policies must be enacted,” such as providing incentives for U.S. fabrication of products that result from domestically based R&D, says David Simchi-Levi, a professor at MIT specializing in manufacturing policy and a leader in supply chain management.
In any event, there remains a huge deficit to make up. Beginning in the mid-’90s, the American manufacturing sector lost six million jobs, a drop of 34 percent, as the number of plants declined by 17 percent. Manufacturing actually peaked at 28 percent of GDP in the ’50s and slid steadily until three years ago.
FuelCell Energy is one of the companies that has stuck to its knitting for all of its nearly 40 years of existence by making precision-manufactured fuel cells in Torrington, Connecticut (as well as in South Korea, for Asian markets.) One of the biggest reasons for sourcing not only the U.S. market but also Europe and parts of Asia from the Torrington plant is that its technical center is at nearby headquarters in Danbury, Connecticut.
“There are a lot of highly skilled Ph.D.’s there within an hour’s drive,” says Chip Bottone, CEO of the $120-million concern, whose products sell for about $3 million each. “They’re far enough away that they’re not tinkering with the commercial facility but close enough to do important collaboration.”
Success in domestic manufacturing is made this way. “The benefit of having design and manufacturing co-located has been way underestimated,” SAP’s Mrugal says. “And as technology continues to take more advantage of that, the U.S. will continue to benefit significantly.”