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The State of American Manufacturing 2017 PUBLIC ACCESS

Five Snapshots Reveal the Challenges The Nation Must Meet Before It Can Revive Its Manufacturing Sector.

Mechanical Engineering 139(05), 38-43 (May 01, 2017) (6 pages) Paper No: ME-17-MAY2; doi: 10.1115/1.2017-May-2

This article provides an insight into the state of American manufacturing through five snapshots based on research data. Two recent trends—outsourcing and digital services—have enabled manufacturers to stretch that old definition to the breaking point and made it difficult for statistics to capture the entirety of the manufacturing sector. Research and development supports better design and engineering, which add the majority of value to high-value products and the industrial processes needed to make them. Experts suggest that manufacturers are hiring people with the right skill sets. In a 2015 Deloitte Consulting and Manufacturing Institute survey, 80% of manufacturers reported a moderate or serious shortage of qualified applicants. Chinese exports have depressed entire manufacturing-oriented communities, leading to widespread unemployment and lower wages as local markets failed to adjust to this onslaught. However, it is believed that cheaper, more capable robots working with people might improve the economics of domestic production.

What made manufacturing one of the central issues of the last presidential election? Some experts point to a chart (reproduced below) that plotted output per worker, or productivity, against factory employment. While productivity made steady gains over several decades, employment declined—then collapsed.

Indeed, more than 70,000 U.S. factories closed and 5 million manufacturing jobs evaporated between 2000 and 2016.

However, that seemingly simple chart can be interpreted in different ways.

According to one reading, as automation and information technology made factories more efficient, they needed fewer workers. In 1980, manufacturers needed 25 workers to produce $1 million worth of products, according to Mark Muro, a senior fellow at the Brookings Institution. Today, thanks to automation, they only need 6.5 workers.

But that might not be the whole story. The Information Technology and Innovation Foundation, a highly respected policy think tank, notes that productivity has been growing at a steady rate for decades. Why did the job losses accelerate only after 2000?

The ITIF believes manufacturing productivity gains in recent years may be overstated. Much of it has been driven by the computers and electronics sector, which defines output in terms of processing capacity, not the number of computers and chips produced. (That actually fell from 2000 to 2010.) Calculate manufacturing productivity without computers and electronics, and it rose more slowly from 2000-2010 than it did the previous decade.

Factory Productivity Rises While Employment Falls

Source: Bureau of Labor Statistics

Grahic Jump LocationFactory Productivity Rises While Employment FallsSource: Bureau of Labor Statistics

Instead of rising productivity, ITIF blames job losses on Chinese imports, which rose dramatically after China joined the World Trade Organization in 2001.

Instead of trying to explain the entire state of American manufacturing in a single chart, we offer five snapshots, each unfolding from a slice of relevant data. Together, they present a picture of a dynamic component of the economy: one that is larger and more complex than politicians or the popular press realize.

Manufacturing is still often defined by a physical transformation: milling, molding, assembly, and so on. But two recent trends—outsourcing and digital services—have enabled manufacturers to stretch that old definition to the breaking point and made it difficult for statistics to capture the entirety of the manufacturing sector.

Most engineers are familiar with outsourcing production work to other factories. While many consumer products companies outsource manufacturing overseas, they often design, engineer, test, source, and manage the logistics of their supply chain in the United States. Those are tasks identical to ones performed by manufacturing employees, yet none of their employees are counted as working for manufacturers. According to a U.S. Census Bureau estimate, at least 54,000 factoryless firms employing 3.4 million workers purchased contract manufacturing services in 2012.

Manufacturers also outsource services—everything from unskilled labor like cafeteria operations and equipment maintenance to professional jobs like product design, and even management. Some companies, like DHL, not only manage supply chains, but deliver materials to machining stations on the factory floor as well.

These were once all factory jobs and would have been counted as factory employment. Today, although they still depend on manufacturing, they are classified under such headings as information, food services, and repair and maintenance. This greatly understates the importance of manufacturing in the U.S. economy.

Manufacturers have long bundled their products with services, such as contracts covering maintenance and repair. Over the past decade, however, some vendors have begun to translate improvements in software and sensors into more compelling value-added services. For example, the bearings maker SKF will remotely monitor their products even after installation to detect problems before they force a work stoppage. Other companies promise to operate machinery and facilities remotely to improve their performance.

According to an estimate by the Organization for Economic Cooperation and Development, services added one-third of the total value of products sold by U.S. manufacturers in 2011. Few of those services would be captured in manufacturing statistics.

As Manufacturing Rises, Its Share of GDP Falls

Between 1997 and 2015, manufacturing output as measured by real value added rose by 40 percent. That may sound impressive, but gross domestic product more than doubled over the same period and the contribution of manufacturing to the U.S. economy declined 25 percent.

Source: https://www.bea.gov/industry/gdpbyind_data.htm

Grahic Jump LocationAs Manufacturing Rises, Its Share of GDP FallsBetween 1997 and 2015, manufacturing output as measured by real value added rose by 40 percent. That may sound impressive, but gross domestic product more than doubled over the same period and the contribution of manufacturing to the U.S. economy declined 25 percent.Source: https://www.bea.gov/industry/gdpbyind_data.htm

Manufacturing is not only bigger but also more important to the economy than most people think. In 2016, it accounted for nearly 12 percent of U.S. gross domestic product and two-thirds of all goods and services exported by the United States. By itself, American manufacturing would rank as the world's eighth largest economy.

U.S. manufacturers make valuable products. This is true of all developed nations. The United Nations Industrial Development Organization estimated that only 63 million of the world's 367 million manufacturing jobs were in developed nations, but those workers added two-thirds of the final value of all manufactured goods.

To take one example, a highly cited 2011 analysis led by Kenneth Kraemer of University of California, Berkeley, found that for an iPad that sold for $300 in the United States, Apple retained $90 in profit. After Apple, the biggest winners were South Korea and Taiwan, which supplied the chips for the device.

Compare that to the value added by factories in China that assembled the iPad. Those factories captured only about $10 for each iPad assembled.

The study's authors found similar patterns for most branded products assembled in China.

High-value production supports other benefits. Manufacturers support about half of all research and development conducted in the United States, and more than two-thirds of private R&D. To be sure, about one-third of that private R&D is spent by pharmaceutical companies (largely for clinical studies), but aerospace, chemicals, computers, electronics, and motor vehicles also made significant contributions. All told, U.S. manufacturers plow about 11 percent of sales back into R&D.Why Manufacturing MattersPercentage of GDP11.7Percentage of workers8.5Average salary$26.36/hrPercentage of U.S. engineers employed>30Value added$2.2. TrillionExports$1.1 TrillionPercentage of goods & services exports66Foreign direct investment$1.223 TrillionPercentage all U.S. R&D49Economic activity/$ manufacturing sales1.35-1.5Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Bureau of Census, National Science Foundation, industry studies.

Research and development supports better design and engineering, which add the majority of value to high-value products and the industrial processes needed to make them. Some argue that moving production overseas isolates design engineers from the process knowledge needed to make high-quality, low-cost products. Still, factoryless firms such as Apple, Nike, and Google continue to succeed by developing innovative product designs while letting manufacturing partners plan the production process.

 

Grahic Jump Location 

Manufacturing once promised good wages, benefits, and lifetime employment to Americans with a strong work ethic and modest skills. That contract has changed, but opportunities still exist for people with the right skill sets.

The U.S. manufacturing sector lost 5 million jobs—4 million of them in production and nonsupervisory positions— between 2000 and 2016. Yet it still employs 8.5 percent of the nation's workforce, twice as many as construction. Manufacturing workers are well-compensated, and 92 percent qualify for employer health insurance, according to the Kaiser Family Foundation. Their wages and benefits averaged $81,289. That's 20 percent higher than the average of all nonfarm workers, according to the U.S. Bureau of Economic Analysis.

Yet many manufacturing-related jobs are not counted due to outsourcing. Those jobs range from design and engineering to maintenance and IT. Since businesses often outsource work to cut costs during recessions, this exacerbated the employment drop after 2008.

Researchers struggle with trying to figure out the full extent of manufacturing jobs. In 2015, for example, The Brookings Institution estimated the number of people employed by the manufacturing value chain, which stretches from manufacturing through sales and service. Their estimate is three times larger than that of workers classified as manufacturing.

Of course, many of the people counted in the manufacturing value chain are retail and wholesale workers who handle both domestically produced and imported goods. Nor does the Brookings study capture factoryless firms, or the hundreds of thousands of temporary workers that manufacturers now employ.

Yet Brookings found that in 2010, in an economy shaken by a massive recession, jobs in design and technical services, R&D, and market analysis rose by roughly 376,000 employees. Although aftermarket services declined, the growing trend to bundle services with products (made easier by the Internet of Things) is likely to bounce back very strongly in the future.

Manufacturing Jobs: Official Data Vs. Value Chain Estimate

According to official statistics, manufacturing employment shrank by almost 25 percent between 2002 and 2010. Yet losses among all workers, from researchers through retailers, who owe their jobs to manufacturing were half of that, and some professions, such as design and market analysis, even grew despite the recession.

Source: Innovation and Manufacturing Labor: A Value Chain Perspective, Brookings Institution

Grahic Jump LocationManufacturing Jobs: Official Data Vs. Value Chain EstimateAccording to official statistics, manufacturing employment shrank by almost 25 percent between 2002 and 2010. Yet losses among all workers, from researchers through retailers, who owe their jobs to manufacturing were half of that, and some professions, such as design and market analysis, even grew despite the recession.Source: Innovation and Manufacturing Labor: A Value Chain Perspective, Brookings Institution

Brookings also concluded that manufacturers are hiring people with the right skill sets. That extends to the factory floor. Today, more automated plants need workers who combine computer savviness with human judgment. In a 2015 Deloitte Consulting and Manufacturing Institute survey, 80 percent of manufacturers reported a moderate or serious shortage of qualified applicants.

Econ 101 students learn that free trade improves everyone's welfare: Both consumers and manufacturers gain access to better goods at lower costs. If nations concentrate on areas where they have a comparative advantage, theory states, their exports will generally balance their imports, and workers displaced in one industry can find well-paying work in another.

That theory came under attack during the 2016 election campaign. Donald Trump and Bernie Sanders both argued that trade deals gave other nations unfair advantages. A growing number of economists agree.

First, the data: U.S. manufactured exports quadrupled over the past 25 years, yet its share of world trade fell and imports—especially from China—rose dramatically.

Not all imports have the same impact. Most Mexican imports are labor-intensive parts that U.S. factories incorporate into products to keep them competitive. Manufacturers worry more about China. Since China joined the World Trade Organization, giving its exports duty-free entry into the United States, more than 70,000 factories have closed and 5 million manufacturing workers have lost jobs.

The Information Technology and Innovation Foundation suggests this is no accident. The Chinese government limits imports through high tariffs as well as policies that force potential exporters to build plants in China. Poor intellectual property protection and preferences for Chinese-owned companies often put foreign firms at a disadvantage in the China market. Meanwhile, other nations have accused the People's Bank of China of currency manipulation in order to subsidize Chinese exports.

The ITIF says today's open markets are vulnerable to exploitation from countries that use state power to build exports and protect against imports—what the federation calls modern mercantilism. In fact, in 2014, it developed an index that ranked countries by mercantilist policies. China came out on top (57.5), followed by India (44.6). Germany was near the bottom (7.0) and Japan slightly higher (19.0).

The result of those mercantilist policies on some regions of the U.S. has been dire. David Autor, a labor economist at MIT, has said Chinese exports depressed entire manufacturing-oriented communities, leading to widespread unemployment and lower wages as local markets failed to adjust to this onslaught.

Source: U.S. Bureau of Census

Grahic Jump LocationSource: U.S. Bureau of Census

Much ink has been spilled about the threat to jobs posed by robots and advanced automation. But the evidence suggests the effect to date has been limited.

A recent study by the Boston Consulting Group identified 1.4 million industrial robots used worldwide. Three quarters of them are found in just four industries: transportation equipment; computers and electronic products; electrical equipment, appliances, and components; and machinery. In addition, 80 percent of robots are sold in only five countries: China, Germany, Japan, South Korea, and the United States.

Source: Robotics Industry Association

Grahic Jump LocationSource: Robotics Industry Association

Because they are so expensive and inflexible, robots are used today primarily in large factories for such highly structured tasks as welding or the precision placement of electronics. But robot makers are lowering prices, adding safety features that enable robots to work with humans, and developing more intuitive interfaces that make them faster and cheaper to deploy. As a result, Boston Consulting Group estimates that a welding robot costs only $8 per hour to operate (compared with $25 for a human welder).

The consulting firm expects that by 2025, the cost per hour will fall to about $2.

Will that eliminate jobs? Not necessarily. Recently, the McKinsey Global Institute looked at 2,000 discrete workplace tasks to assess their automation potential. Jobs involving collecting data, processing data, and predictable physical work were most vulnerable. About 60 percent of manufacturing jobs fell into that category (well behind accommodation and food services at 73 percent).

Of course, many factories do not do predictable physical work. For example, Marlin Steel in Baltimore responded to cheap Chinese imports by doing more custom work. While robots weld its specialized baskets, humans design them and manage the logistics. Overall, employment has doubled, but the mix of workers has changed.

In fact, cheaper, more capable robots working with people might improve the economics of domestic production. It happened in the 1990s, when banks began deploying ATMs. This reduced operating costs so much, banks opened new branches and hired more tellers. Manufacturing workers are hoping the same lightning strikes twice.

Copyright © 2017 by ASME
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