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Manufacturing—Coming Home to Roost?

AH, MANUFACTURING . . .

Those who have read my first book, heard me speak, or read my blog know how I feel about the U.S. manufacturing sector. My premise has long been that America’s downtrodden manufacturing sector will recover and grow again due to the maturing of the country’s largest and smartest generation ever, combined with a decline in China’s labor force resulting from the country’s decades-long “one-child” policy.

Eight years ago I wrote: “Yes, manufacturing will return to the U.S.—starting now, and its growth will accelerate over the next 10 years!” I posited that the offshoring of manufacturing that accelerated in the 1980s was partly a result of the small size of the native-born Generation X, and that their diminutive numbers led to a significant rise in labor costs. This in turn led to further offshoring of manufacturing to countries (especially China) with larger, and therefore cheaper, labor pools. While not labeling it as such then, I pointed out that China’s one-child policy was going to create a labor shortage “sinkhole” that would lead to rising labor costs and help direct manufacturing back to the United States, which “has an abundance of natural resources, energy, technology, built-in consumer demand, money/capital, and now the biggest and best labor force in the nation’s history.”

I tend to be overly optimistic at times, and perhaps my ten-year time frame was a tad unrealistic, but as reported a couple of years ago in a CNBC news article about China’s rising labor costs, “change is in the air,” and “China is no longer a slam dunk for manufacturers looking for the lowest cost for operations.” In fact, the article pointed to research that determined that outsourcing manufacturing to China would be equal to the cost of manufacturing in the United States by 2015.

How about that?

Now, I’m not sure if that parity was actually reached in 2015, but there certainly have been reports of companies pulling plants out of China to find cheaper labor, with some re-shored back to the United States, where any cost differences are “offset by higher productivity of American workers.” That said, there probably isn’t going to be a massive exodus of manufacturing out of China, in part because domestic consumer demand remains strong in the country and is still rising. But it seems that those companies with little or no China customer base who brought their manufacturing to China for the cheap labor are starting to skedaddle. Given that 27 percent of the 220 U.S.–China Business Council member companies reported in 2011 that they utilized China as an export platform to serve the United States, a significant number of companies may be eyeing re-shoring.

Is there evidence for this re-shoring, and is re-shoring leading to a comeback in U.S. manufacturing? Well, yes to the first question, but the evidence is mixed, at best, for the second question. According to the Reshoring Initiative, the number of manufacturing jobs returning to the United States—or coming in-country for the first time—from overseas hit a record level in 2014. The initiative reported that 60,000 re-shored and new foreign direct investment–created jobs were added to the United States in 2014, in contrast to the 50,000 jobs lost to offshoring that year. This net increase of 10,000 manufacturing jobs represented the first net increase in at least twenty years. Among the prime drivers of re-shoring, according to the initiative, were escalating wages, shipping costs, and a relatively skilled U.S. workforce. Additionally, the United States is now ranked second, behind only China, in cost competitiveness from among the world’s top 10 export economies. The biggest companies bringing jobs back from China that year included Walmart, General Electric, Farouk Systems, and NCR.

Meanwhile, as to whether manufacturing is truly making a comeback, the latest Census Bureau data—2014 Annual Survey of Manufacturers—provides a mixed overview. While the U.S. manufacturing sector’s annual payroll climbed 2.5 percent from 2013 to 2014, the total number of employees declined by about 70,000. However, some manufacturing sectors reported significant employment growth during this time. For example, household appliance manufacturing reported a 7.8 percent growth in employment, and all elements of automobile and auto parts manufacturing reported employment gains.

And data from the Bureau of Labor Statistics isn’t providing much support in relation to my feelings about manufacturing. According to its latest (2015) Employment by Major Industry Sector projections, the number of manufacturing jobs will decline by just over 800,000 between 2014 and 2024. Mind you this is a lot better than the 2.1 million manufacturing jobs the BLS believes were lost between 2004 and 2014, so I could suggest that this represents a recovery of sorts. Additionally, I can point out that the Bureau’s most recent manufacturing employment number of about 12.3 million (as of March 2016) is roughly 120,000 higher than the 2014 number used for its projections. Nevertheless, and perhaps needless to say, no manufacturing positions are listed by BLS as among the “fastest growing occupations, 2014–24.”¹

Despite the government’s assessment of future manufacturing employment, I remain convinced that manufacturing is coming back to the United States, and that the country will once again become a manufacturing powerhouse. Unfortunately, it’s not looking like the return of manufacturing will boost job numbers as robustly as I once thought, but perhaps it can at least stabilize them. I suppose I need to confess to being a bit myopic at times, in that I focus on the demographics at the expense of other factors. Thus, while I focus on the potential increase in jobs with manufacturing’s return to America, I might neglect the potential impact of automation and computerization on such potential employment. But this makes sense as I don’t count machines and computers, I count people.

Bottom line, manufacturing is returning to America, but it is coming back in with extensive automation. For example, Foxconn, which has been manufacturing Apple devices in China, is investing more than $100 million for manufacturing facilities in the United States; however, $30 million of this investment includes construction of a robotic manufacturing facility in Pennsylvania. According to a “Voices” article by the Governing Institute, Foxconn’s planned Pennsylvania plant will require only a few dozen employees, compared to the many thousands of employees its non-robotic plant needed in China. The article further notes that this is indicative of a jobless recovery of the U.S. manufacturing sector, in which returning and already established companies are utilizing automation to replace low-cost foreign workers.

Perhaps this all means that Gen Y and demographics in general are not much of a factor with regard to manufacturing and employment, but do demographics suggest anything else about manufacturing? Given the fading out of the Baby Boomers and the rise of Generation Y, what needs to be manufactured? What assembly lines need to be ramped up and which ones need to be idled? Are we looking at potential upside or downside?

On a bare-bones level, you can take everything you’ve learned in the previous chapters and apply that knowledge to try to determine which manufacturing streams will need to ramp up production or which ones might need to ramp down. For example, in Chapter 22 we determined that demographics and all the generations from Z to the Boomers support a bull market for just about everything “tech” going forward. Thus, just about any company that manufactures parts used in technology has a potentially bright future and may need to ramp up the production lines. Of course, please take note of potentially and may, as the business of technology is fast-paced and cutthroat. New widgets are constantly coming online and manufacturers are often in price wars with each other to get tech companies to use their particular widgets. No sooner has one widget been adopted as being perfect for a new cell phone technology, than a newer one is introduced and quickly adopted.

How about healthcare? We saw how demographics will influence that sector going forward, so you can apply that knowledge to manufacturers of healthcare supplies. Right?

Consider this recent headline: “Medical Textiles Market Is Expected to Witness Lucrative Growth by 2022 Due to the Rising Health Consciousness and Technological Advances.”

What’s missing from this headline?

You got it—any mention of the significant growth of the elderly population, which is probably more of a factor in the expected growth than the two listed factors. At least the article itself acknowledges the demographic component first when talking about what is “fueling the growth of the global medical textiles market.” Oh, and according to the article, the growth is expected to rise to more than $20 billion by 2022 compared to the roughly $14 billion value of the market recorded in 2014. So, do you think manufacturers of medical textiles are looking at boom times ahead?

Now consider the many other components of the healthcare field, all the various supplies that need to be produced to support the healthcare needs of the elderly and infirm. Given the massive population of the Baby Boomers, especially compared with the current crop of elderly Silent Generation members, do you think we’re going to need a few more wheelchairs, walkers, and home-care beds? Do you think manufacturers of these products, as well as all the other numerous medical products and devices, are going to need to ramp up their production lines?

I believe you get my point and can apply your knowledge of demographics to manufacturing on your own now. So with that, I’ll leave you with some manufacturing companies to consider with regard to demographics. You can think about the products these companies make and try to figure out whether the demographics support their various production lines going forward or call for idling. Oh, and if you are thinking about investing in any of these companies, you know the mantra regarding “due diligence.” So make sure you follow it.

General Electric (GE)

Boeing (BA)

Procter & Gamble (PG)

Cisco Systems (CSCO)

Lockheed Martin Corp. (LMT)

3M (MMM)

Sony Corp. (SNE)

Honeywell International (HON)

Johnson & Johnson (JNJ)

Boston Scientific Corp. (BSX)

Invacare Corporation (IVC)