Positive Manufacturing Gains Clouded by Uncertain Future
John D. Littler
Littler Diecast Corporation
Economic issues are dominating the political conversation as we near the November presidential elections. From my perspective as a manufacturer, there is one encouraging economic trend that is gaining traction, but a number of other issues that need to be resolved no matter who occupies the White House next year.
First, the good news. For decades, millions of American manufacturing jobs have travelled overseas. Now, production is returning the United States. The process – commonly known as reshoring – accounted for the creation of about 50,000 manufacturing jobs in the last few years. That’s about 10% of the 495,000 manufacturing job additions since the low in January 2010, according to an article in the Sept. 10 issue of Plant Engineering .
Proponents of sending work offshore list low labor costs and outsourcing non-core competencies as major reasons for sending work to China and other emerging markets. Many believe that labor costs in these markets can be low enough that they offset the often hidden costs of manufacturing overseas. These hidden costs include delivery, quality and communications issues. These factors, plus rising offshore labor rates and increases in transportation costs, make production in the United States increasingly attractive.
For example, with Chinese wages rising at about 17 percent per year and the value of the Yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. After adjusting for higher American productivity, the wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. Meanwhile, in the last four years, shipping costs have risen 71percent because of higher oil prices, as well as cutbacks in ships and containers.
The reshoring trend has been documented by a number of sources. In a recent survey of 252 North American Die Casting Association (NADCA) members, 23 percent reported they gained business from offshore competitors last year. Other evidence of reshoring’s growth was cited in a PricewaterhouseCoopers (PwC) report this year and an analysis released by The Boston Consulting Group (BCG) last year.
Despite the good news on reshoring, manufacturers still face a tough economy in the months ahead. While there are many aspects of the economy that would affect the manufacturer, but there are four issues that matter more than others, according to Dr. Chris Kuehl. Kuehl is managing partner of Armada Corporate Intelligence and economic analyst for the Fabricators & Manufacturers Association, International.
The four issues Kuehl cites are economic growth, tax policy, export markets and regulations. Here are some of the reasons each of these is important to manufacturers.
Economic Growth - The first issue that matters most to manufacturers especially in the short term is the potential for immediate growth in the economy. Thus far the economy has been stuck in a very slow and unsatisfying growth pattern. The manufacturing community would much prefer growth rates approaching 3 percent at least and something above 4 percent would be even better. The projected growth rate for next year is barely 2 percent and that will do little more than extend the stall. To get immediate growth would involve some form of stimulation. However, the political issues involving any stimulus are fraught with problems, ranging from costs and stimulus targets to fundamental concerns about increasing the debt.
Tax policy – Tax reform that reduces corporate tax rates could have a positive impact for manufacturers. Even without a rate reduction, arriving at some conclusions about prevailing tax rates would allow manufacturers to plan and budget with more certainty. However, the widely divergent views on taxes by the two presidential candidates means that tax policies will not be easily resolved.
Export Market - The third issue that matters most for the manufacturer in the U.S. today is continued access to the export market. Neither party is strongly pro-trade during an election as it is far too tempting to assign blame to the Chinese or the Europeans or somebody else for trade problems. Access to export markets is affected by a variety of interrelated factors, including monetary policy, trade pacts and tariffs. The immigration issue is also a factor because some in the U.S. would like to hire more from Mexico if that could be done legally.
Regulations - Regulations affecting health care, the banking system and the environment all have an impact on manufacturers. The majority of the small and mid-sized manufacturers oppose the Affordable Health Care Act on the grounds that it will either cost them money or remove the ability to retain their workers with benefit packages. The Dodd-Frank bank reform effort has thus far given rise to over 500 new banking regulations from 27 different agencies which have all but stalled lending from the banking community. This has meant severe restrictions on access to credit, which slows the industrial community dramatically. The Environmental Protection Agency is still pursuing the climate change issue and new regulations pop up almost every month.
Given the conflicting policies on most of these issues, the perfect political party for the manufacturer would be some kind of hybrid that combined the best of both worlds. It would be a hybrid that favored lower taxes, targeted stimulus, promotion of exports coupled with some protection from predatory imports and all wrapped around a reduction in regulations that inhibit business growth. In the ideal world, a party with these policies would help manufacturing continue its resurgence.