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Manufacturing Lies

Some days it seems U.S. manufacturing has no friends. While you might not read about it, there is more going on than layoffs and plant closings, and the death of the industry has been greatly exaggerated. Here's proof.

When Mark Twain spoke of “lies, damned lies, and statistics,” he must have been talking with someone in the manufacturing industry.

OK, maybe not. But it is fairly safe to say that the health of no major industry in the U.S. is more misunderstood than that of manufacturing. (And we have the statistics to prove it.)

Like so many things that are wrongly portrayed in the mainstream media (think the war in Iraq, the state of the economy, and Philadelphia sports fans), the perception can often become the reality. It’s not too late yet, but if we’re not careful manufacturing is going to lose the hearts and minds of an entire country.

Misunderstanding No. 1: U.S. Manufacturing Has Lost Its Significance

How many times have you heard, “Manufacturing is dead,” or “All the manufacturing jobs are being outsourced.”? Plenty. Much more, I’m guessing, that you’ve heard that the average annual rate of growth in manufacturing over the past 45 years is in-line with the rate of the overall growth of the U.S. economy.

That’s right; over the past 45 years, manufacturing growth has kept pace with the economy, and has grown significantly faster than the agriculture, mining and construction industries, according to data from the Commerce Department and the Bureau of Labor Statistics.

“To say that manufacturing is less significant today than it was 45 years ago is not the case,” said Norbert Ore, Chairman of the Manufacturing Business Survey Committee at the Institute for Supply Management. “To grow 3.5 percent a year-over-year is not insignificant.”

Where the math usually gets fuzzy is in comparing manufacturing’s overall share of the U.S. economy. It is indeed true that the industry’s piece of the pie has shrunk – from 23.3 percent of gross domestic product in 1960 to today’s 12 percent – but that’s a reflection of the phenomenal growth of the services industry, which has surged to 50.9 percent of GDP from 30.2 percent.

“Today, we’re paying for services that weren’t even created 45 years ago (think lawn care or grocery delivery), and everything we buy has a service component,” he said. “Manufacturing is continuing to thrive, but the services sector is just exploding because of the type of society we’re in.”

So where does that leave U.S. manufacturing? Well, it’ll probably continue to grow at or close to the same respectable pace it’s been growing at for the past 45 years. For starters, it’s not as labor intensive as it once was, so the competitive advantage doesn’t go to the low cost of labor. Two, the country’s ability to innovate and focus on higher-value products, where technology is part of the process, means manufacturing here isn’t disappearing anytime soon.

Finally, increased customization requires that more manufacturing gets done closer to the consumer market, which is a good segue to…

Misunderstanding No. 2: U.S. Manufacturing Firms Go To China For Cheap Labor

There is no getting around the fact that U.S. manufacturing jobs have been lost to China over the past 15-20 years, but what’s less obvious is why. The answer isn’t $2-a-day labor, but Chinese demand.

“Contrary to popular belief, it’s the Chinese consumer that really attracts U.S. firms to China, not cheap labor,” said Joseph Quinlan, chief market strategist at Bank of America.

China is a mishmash of markets encompassing different dialects, varying levels of development, and great disparity in wealth.

“These variables, along with many others (the brand-sensitivity of Chinese consumers coupled with intense foreign and local competition) dictate that American firms adapt to local taste and operate on the ground,” Quinlan said. “Customer proximity, in other words, is key in China.”

As further evidence, he noted that in 2004, just over 73 percent of total sales by U.S. majority-owned foreign affiliates in China were to the local market, which is substantially higher than the global average of 63 percent. But just 7.1 percent of U.S. affiliate sales in China in 2004 were for export to the U.S., well below the global average of 10.4 percent. And just over 19 percent of total foreign affiliate sales were for export to third market, also below the global average of 26.6 percent.

“China as an export platform for U.S. firms is more myth than reality,” Quinlan said.

Misunderstanding No. 3: The Midwest Is A Manufacturing Wasteland

Don’t tell that to Kalamazoo. Few areas have been as devastated by an industry’s decline as has this southwestern Michigan town, which depended heavily on the paper manufacturing facilities that used to dot the landscape.

But as they’ve disappeared, up have sprouted plenty of innovative, entrepreneurial manufacturers, not to mention a Radio Frequency Identification Center at the local community college, where manufacturers of all sizes learn about the latest use of the technology. Kalamazoo is home to Pfizer’s largest manufacturing facility in the world, and also a large manufacturing operation of Stryker, a big medical-device maker.

The Midwest has indeed been rocked by the transformation of the industry, but there is more to manufacturing than heavy industry, and Kalamazoo is indicative of how the broader region is coping with the change: by luring high-tech, skilled, innovative manufacturing, and putting in place the resources to keep it. It’s a trend going on throughout the country in areas that have been hit hard by the slowdown in labor-intensive manufacturing.

Has “traditional” manufacturing in the U.S. suffered its fair share of blows? No doubt, with a large swath of the working population feeling the impact. And the industry as a whole sure needs to do a better PR job. But before sounding the death knell for U.S. manufacturing, remember this: There’s nothing we’re saying about China today that we didn’t say about Japan 20 years ago.

And that’s no lie.

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