Is U.S. Manufacturing on the Mend?

But manufacturing in the U.S. is making a comeback; and if it is poised for bigger gains in the future, it will be due to a number of forces, not least of which is the advent of what we call Smart Manufacturing—the joining of Big Data, smarter enterprise software and automation with lean production techniques. Driven partly by rising labor costs offshore and the desire to produce closer to one’s customers, more U.S. companies are producing at home. Factory employment has been growing over the past four years, reaching 12 million. And electricity costs in the U.S. are a fraction of what European manufacturers face. According to Eurostat, the average cost per kilowatt-hour of electricity in USD for Germany, France and Italy was 35 cents, 19 cents and 28 cents, respectively, in 2012. For the U.S., that cost is 12 cents.

But it isn’t just the cost equation. As Lawrence Summers, President Obama’s first director of the National Economic Council pointed out, “Technology is accelerating productivity in mass production to the point where even China has seen manufacturing employment decline by more than 10 million jobs over the most recent decade for which data is available.” Skeptics, however, point to that fact that manufacturers report difficulty in finding skilled workers, a subject of continuing concern and of this magazine’s continuing coverage.

It is an open question whether the recent separation of innovation from manufacturing comes at the price of learning and creation of capabilities that will generate future innovation. Fortunately, the emergence of smart technologies and new tools, such as data analytics and additive manufacturing (3D printing) are leveling the playing field for everyone. Even in a world linked by big data and instant messaging, the gains from smart systems and co-location are open to those with the energy and nimbleness to leverage them. (For more on manufacturing’s evolution, see the Chief Executive Special Manufacturing Edition, packaged with this issue.) To be certain, it is unlikely that manufacturing will regain in absolute terms the share of the workforce it once did. Globalization has driven rising productivity rates around the world more or less equally.

The one major factor that remains unequal is taxes. Alexander Cutler, CEO of Eaton, a power transmission company, told MIT’s Suzanne Berger, a political science professor, “if you put a job in Canada, you know what the regulations and taxes will be. In the U.S., there are competing philosophies in Washington, and rules can flip overnight. Global tax regimes have changed markedly since the 1990s, when U.S. corporate tax rates were competitive. Today, the 35 percent rate sticks out. We’re now the highest since Germany and Japan have reduced their statutory rates.”