Some Conundrums In Worldwide Manufacturing

A study by Alliance Capital reveals that the world’s 20 largest economies lost 22 million manufacturing jobs from 1995 to 2002. China, Japan, Brazil and other countries lost more manufacturing jobs than the United States did. Even China, which is supposed to be where most factory jobs are going, lost 15 million jobs during that period. America lost 2 million jobs. Percentage wise, Brazil led the list with a 20 percent drop; Japan’s factory workforce shed 16 percent of its jobs; China was down 15 percent; and the United States had an 11 percent drop. However, it should be noted that this data can be a bit misleading because a portion of those jobs were service-oriented, such as cafeteria or security workers, and they were merely outsourced to a service company.

It is a conundrum that during this same period that jobs were declining, manufacturing output increased by 30 percent. In the last decade, U.S. manufacturing production has actually increased by about 40 percent. From 1992 to 2000, U.S. shipments in the industrial machinery and equipment SIC code increased by 85 percent. Despite higher wages in the United States, a number of non-U.S. firms have chosen to produce cars in the United States. This includes Honda in Ohio, Mercedes-Benz in Alabama, BMW in South Carolina and Toyota in California.

Hence, with each passing day, it takes fewer people to make more “stuff.” Gains in technology and competitive pressure have forced factories to become more efficient, allowing them to boost output with far fewer workers. Why? Because manufacturing productivity continues to increase. Between 1995 and 2000, productivity in the U.S. manufacturing sector grew by 4.3 percent per year, compared with 2.2 percent growth, for the rest of the economy. In the third quarter of 2003, U.S. manufacturing productivity grew by 8.6 percent.

Few challenges to manufacturers worldwide raise the anxiety level more than the threat from China. This threat is more alarming to U.S. manufacturers and high-wage competitors such as Japan because of China’s enormous population and production potential. At one time, China produced only low-cost goods such as luggage, toys and shoes. Today, it makes half of the world’s cameras, a third of its air conditioners and televisions and a quarter of its washing machines. China is also beginning to produce machine tools, tool and die equipment, and plastics.

The China conundrum is, at the same time, that China is a threat to producers, consumers have benefited from the lower-priced products that are produced there. China offers companies an opportunity to remain competitive in world markets by incorporating lower-priced components that are made in China into their products and thereby generating substantial additional profits. It has been reported that Volkswagen made 70 percent of its profits in 2003 in China. Moreover, China is the fastest-growing export market for American products; that market has quadrupled since 1990. China imports more mobile phones and steel than any other nation, and the local auto market is poised to explode as its massive middle class trades in bikes for cars.

China is competitive primarily because it has extremely low labor costs. However, all is not rosy in Chinese manufacturing. For example, attempts by Chinese companies to make semiconductors have a mixed record. Making high-end chips requires expensive, imported equipment and does not play to China’s natural strength in cheap labor.

Further, Mr. Greg Mankiw, chairman of the President’s Council of Economic Advisors, argues that outsourcing the production of goods and service to lower-wage countries is “something that we should realize is probably a plus for the U.S. economy in the long run.” He asserts that although there could be a short-term loss of jobs, it will make companies more competitive and provide money to invest, which in turn will create more high-value jobs long term. However, those individuals losing jobs short term may not see the long-term benefit. Consider this conundrum, particularly during this political season.

The Alliance study concludes that increased capital investment provides one of the strongest determinants as to whether a manufacturing plant will survive and continue to prosper. Surviving plants are 31 percent more capital intensive than those plants that exit an industry, and survivor plants are 3.3 percent more productive than the plants that fail. Ownership must make a long-term commitment to investments in productive capital goods that increase the capital labor ratio of the workers at the plant.

A brilliant idea is worthless unless it can be made into something tangible and then distributed. Companies need to adapt, innovate and create new products. All of this can help, but it will be a long and difficult struggle for producers. Meanwhile, the conundrums in worldwide manufacturing will continue to exist.