When looking at world events, we have been accustomed to a considerable amount of America’s investment in manufacturing going to China. Lately, however, investments abroad haven’t been looking so rosy. Manufacturing costs in China have been increasing and government regulations there have become much tighter and China’s economic growth is slowing.
A recent example in Fortune magazine illustrates how China’s pressure on foreign companies can quickly deteriorate a business opportunity. Previously, wind turbine manufacturing was dominated by foreign operators, who had a 40 percent market share and the technical know-how. This market share dissipated to 10 percent after a crisis in China’s financial market caused the government to change the technical requirements and to source most everything from their domestic suppliers.
The above example points out the problem the U.S. has seen with sending our manufacturing jobs to China. When the economy in China abruptly changes, the Chinese government likewise changes the rules of manufacturing. In addition, we have been sending much technological information and know-how to them as well — which, in turn, changes their need for our expertise. However, recent factors have created higher prices for China’s manufacturers which include increases in labor and transportation costs as well as the rising value of China’s currency, causing higher prices for their goods. Overall, the cost of outsourcing manufacturing to China will be equal or more than the cost of manufacturing in the United States in just a few years.
Another reason the U.S. has an advantage over China is the increase in natural gas and other petroleum products due to fracking, thus lowering energy costs for U.S. manufacturers. In particular, it has made high-energy consumption requirements to produce certain products, such as the recycling of steel, much more competitive.
Overall, global labor productivity growth has become sluggish. The latest data from the Conference Board, a business research firm, shows productivity growth (measured by GDP per employed person) fell to 1.8 percent in 2012 from 2.3 percent in 2011. The global financial crisis has a big impact. China’s average productivity growth fell from 12 percent one year between 2003 and 2007, and to less than 9 percent between 2008 and 2012. Although growth is still strong, China’s GDP per worker is only 17 percent of an American worker.
If we look at the basics of manufacturing — price, delivery, quality, and service — we find that if one basic overrides the rest, the requirements in the other basics somewhat diminish. Unfortunately, this can lead to extreme problems in the other basics. Other factors in the cost of manufacturing include energy costs, technological progress and worker productivity.
A recent example in China would show that by not controlling manufacturing and power generation air discharge standards, the air quality has greatly diminished. This has caused more of the wealthier and progressive companies to leave.
Not only have manufacturing moves to China become less desirable, but also many other areas in the world have become equally unacceptable as well. The business climate in Russia has become unstable and workers’ wages are high and work performances quite low in Western Europe. The Middle East is in turmoil and labor relations in Asia unreliable. Although not Chinese, Takata, a Japanese manufacturer, shows how quality control can greatly affect a company’s reputation. Its airbag fiasco has caused millions of cars to be recalled, which makes the future of the company tenuous.
Although some countries saw improvements in productivity last year, such gains can be a reflection of a faltering economy in which fewer people are doing the work. In Spain, for instance, productivity has improved since 2007 and both GDP and employment have fallen (by 4.2 percent and 13.7 percent, respectively). Moreover, countries like Germany, which successfully limited job losses during the recession, report stagnant productivity. Output per person is also subject to the business cycle: when an economy starts to recover, firms often work their employees harder, rather than hire new workers. This initially boosts productivity but as firms take on more workers, productivity growth will fall.
What does all this mean to the modern manufacturer? First and foremost, the China market is probably imploding for American manufacturers. Therefore, ensure that the market you send your products to has a future. Getting back to the basics of manufacturing – price, delivery, quality, and service – check your own operations to see that you are meeting the standards required. If you are cutting back on any of them, how will it affect the other basics? Check your product against your competition. If his product is weak in any of the basics, is it your opening to increase your sales? Last but not least, keep your workforce positive.
Made in Philadelphia
But what has manufacturing in China and other countries have to do with Philadelphia? Back around the time of the Civil War, Philadelphia was known as “Workshop of the World.” The city was a world of workshops known for its skill, versatility, and diversity in manufacturing and production. This occurred from the 1880s to the 1920s. Of course, like many societies, there were many “up and down” cycles in America (as in many countries) and after the 1920s manufacturing in Philadelphia hit a down cycle. However, it did pick up again during World War II, only to diminish again after the war.
One of the problems in Philadelphia was that many of its factories were old and obsolete. Along with that, most workers’ houses were originally built around these factories and, likewise, became old and obsolete. With modern transportation, workers didn’t want to live next to their workplace — especially, in housing that lacked basic amenities and that had become virtual slums. Poverty increased in these areas as middleclass workers moved to the suburbs.
Although the industrial base declined, others factors have caused an increase in the area’s economy. Being ideally located in the center of one of the nation’s largest markets, and with the city greatly developing more access to many transportation systems, many corporations are locating in the greater Philadelphia area. Equally important, is the increase in the city’s health and educational institutions. Thus with smarter and healthier population, the growth of higher tech industries has been made possible.
Fortunately, the city is now thriving again as it is also becoming known for its innovation in manufacturing and electromechanical engineering. As a result, the city now has a good manufacturing base and is ideally located for transportation of raw materials into the city and finished goods out via means of ground, air and sea. Another feature of Philadelphia is that there has never been a one- or two-industry city. It is known for its product diversity including textiles, leather goods, iron and steel, machine tools and hardware, locomotives, shipbuilding, chemical, pharmaceuticals, paints, printing and publishing, electrical and mechanical subassemblies, and many other forms of manufactured products. Because it has a diverse manufacturing base, and some internationally known manufacturers, it is quickly becoming the city to locate.
Kip Anthony is president of EFF Labs, Inc., a leading solutions-based contract manufacturing company.