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Manufacturing Will Grow Again in the West

Those who say manufacturing jobs will never return to the West don't know what they are talking about. Either that or they are purposely being disingenuous because it is the only way they can justify outsourcing decisions focused on the realization of short-term objectives.

Manufacturers unwittingly created a monster when they began transferring manufacturing to China about two decades ago. The process, while initially favorable to everyone, today threatens to completely drain production from other parts of the world (and not just the West) in favor of China, creating a lopsided environment that should be anathema to any supply chain management guru and business executive.

It's pure insanity for a manufacturer to locate all production resources in a single part of the globe, and yet that is what the high-tech industry and many other manufacturing sectors of the global economy celebrate in China today. Recent discussions about conditions at facilities in China manufacturing products for {complink 379|Apple Inc.} and other major OEMs are, in my opinion, misplaced. While the focus on alleged labor and human rights violations is pertinent, Apple executives and other supply chain professionals in the high-tech industry should also be looking at the potential production snafus that would occur if disruptions in China were to halt their activities in the region.

This is why I disagree with Steve Jobs, the late Apple CEO and chairman, who reportedly told President Obama manufacturing jobs won't ever return to the United States and western countries. In time we will know how accurate his prediction was, but personally I am convinced manufacturing jobs will migrate back to the West and that the torrential outsourcing of production to China will eventually slow to a trickle. The current system is unsustainable and will unravel as it becomes clear we have created an unusual, highly faulty, unsupportable, and potentially dangerous supply chain management condition.

The massive outsourcing to China by businesses threatens to inflict significant damages upon many regions of the global economy. There are major geo-political implications for the rest of the world in this manufacturing shift, and we are already witnessing some of these in the hollowing out of communities and growing production unemployment worldwide. The solution advanced by many that the US and Europe could instead focus on higher-end design and services job is faulty. Chinese workers desire these jobs, too, and the country is already taking steps to advance opportunities for its citizens in finance, services, and high-tech design.

That China sits astride the global manufacturing sector is indisputable. It has for the last two decades been winning outsourcing contracts from foreign manufacturers for its factories and setting off controversies in developed economies in Europe and North America over vanishing jobs and emasculated municipalities.

But this is not a political diatribe. The West operates a capitalist system, and probably the best reasons for the position I take here is that the current system violates so many time-tested norms of the capitalist economy. The outsourcing of production to China will slowly decrease over the next years, and eventually some high-end manufacturing activities will begin to migrate back westward. This may be a controversial position today, but I am fully convinced we will one day see a revival in the manufacturing economies in Europe, North America, and other parts of the globe.

In my next blog I will expand on this and advance five reasons I believe manufacturing jobs will eventually start growing again in the West.

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21 comments on “Manufacturing Will Grow Again in the West

  1. Barbara Jorgensen
    February 27, 2012

    @Bolaji: I fervently hope you are right in your analysis, and I expect you will be wiriting about this in upcoming blogs, but I do have a concern about one obstacle to re-establishing manufacturing prowess, at least in the US. That is labor unions. While many unions exist for very good reasons and serve their members well, others have jacked up salaries and have tied the hands of many organizations that try to progess beyond their existing business model. There are still no-show jobs in government; rules that can bring work to a stop for the smallest of reasons; and other abuses of the system. I'm not saying that unions do not have a place and that they have not accomplished a lot of good. And abuses exist everywhere. To bring some jobs back, there will have to be concessions made and I hope unions are able to see the big picture when the time comes.

  2. FLYINGSCOT
    February 27, 2012

    We cannot compete on cost so it will need offshore manufacturing to cost the same as onshore before manufacturing jobs come back.  This could be done by labor costs rising offshore or by protectionist importing policies.

  3. bolaji ojo
    February 27, 2012

    Barbara, You may have a point about labor unions but that is beside the point. Jobs didn't move out of the west because of labor demands or even higher wages alone. They won't move back either because labor unions cave to manufacturers' demands. They will move back because the current system is untenable.

    Based on what you and I both know about manufacturing and the problems of single-sourcing, does it make sense for an OEM to centralize production in one region or even with a single contractor? Go to your nearest store and check out the manufacturing label on the first 10 items you see and most of these would have been made in China. The United States is not alone. What happens when the worldwide economy locates manufacturing in one country — not just a sngle region?

    To address your concerns about labor unions, those same demands you highlighted are being made in China right now. Workers demand higher wages when they see their employers making reasonably high profits. Is it unfair for Apple's manufacturers to ask for higher wages when they see the company making hundreds of dollars in profit on a product that costs them less than $200 to make? Do we believe the Chinese will always be satisfied with lower wages and what happens when the wage differential disappears and all a manufacturer is left with are supply chain support co-location and high logistics costs?

  4. bolaji ojo
    February 27, 2012

    Flyingscot, I disagree we can't compete on cost even now. We can. It's all about the product. There are certain products it would be stupid for a Western manufacturer to base their competitive position on cost but there are others where wages may make little to insiginificant difference. Supply chain experts at components distributors and even contract manufacturers have been asking OEMs for a while to begin looking at their total cost of ownership rather than just simply wages.

    You may succeed for a while in lowering your costs and gaining market share simply by trimming wages but what happens when disaster strikes and your shipment can't leave a port and that's the only source for your product. It may not happen but risk management is all about anticipating and putting in place redundancies.

  5. ITempire
    February 27, 2012

    Bolaji, I still am not convinced that manufacturing will come back to US or west. Your explanation about companies realizing that too much investment in China can be against the diversification's golden rule is spot on but will the beneficiary of this strategic shift be the West, we'l have to wait and see. I think other Asian countries or African countries, where labour cost is very low and infrastructure is drastically improving, may be serious candidates if diversification decision is taken by companies who outsourced.

  6. bolaji ojo
    February 27, 2012

    WaqasAltaf, Manufacturing won't flip wholesale back to the West and China won't lose its dominance in a hurry either but the pendulum needs to swing back to equilibrium. What many people don't know is that China didn't just suck manufacturing jobs from the West it also did from other nations, including Eastern Europe and stunted growth in the emerging nations you mentioned.

    The beneficiaries of a job shift from China will be many and I agree there are going to be many contenders. What will determine the beneficiaries? These will include the stage of development of the support services and other geo-political factors. How many of the lower-cost countries you mentioned will benefit will depend not just on the labor rates but also on the level of infrastructure development and if executives are fine with the decision.

  7. ITempire
    February 27, 2012

    “Do we believe the Chinese will always be satisfied with lower wages and what happens when the wage differential disappears and all a manufacturer is left with are supply chain support co-location and high logistics costs?”

    @ Bolaji

    I agree Bolaji. To add on, many companies are already concerned about rising labour costs and other factors due to inflation in China and also India. It wont be too long, when companies find other venues to shift their production units to.  However, its very unfortunate of the capitalism culture, that it finds venues where labour rights are not strong and where corporations can get away with wage rates lower than those prescribed by governments. 

  8. Eldredge
    February 27, 2012

    This discussion on manufacting is sure to be a hot topic. Certainly cost reduction has been a (if not the ) driving force for investment in China in recent history. But i don think other factors will become more dominant than they have been. From a consumer perspective (which is only one aspect of the issue) I would purchase more domestic products if they were available, and do search out sources that carry domestic products. Some issues that come to mind (in support of purchasing domenstic goods, even at a price premium):

      – Higher confidence in quality and purity of materials used and traceabllitiy to raw material sources

      – More confidence in regulatory compliance and enforcement, particulary for products that come in close contact or are used in personal consumption

    Certainly there are many more aspects to consider from the business and logistics perspective, which I am sure will be covered in depth in additional posts and articles.

  9. ITempire
    February 27, 2012

    Yes. Bolaji. Its not going to be only about labour cost if the contenders need to compete to gain from shift of manufacturing units from China. The factors you mentioned will play a strong part.

    However, the bad part of capitalism is that the culture of equality and benefit for all does not exist. If a single country benefits at the cost of many nations suffering from it, it will remain that way unless few handful owners of those corporations feel otherwise. The role of government diplomats will be important to make a paradigm shift. 

  10. Barbara Jorgensen
    February 27, 2012

    Bolaji: I agree concentrating manufacturing in one region, whether it is the US or China, is risky. I also agree there is more to manufacturing than just salaries. In fact, that is one of the smaller costs of a typical electronics product–high-volume, low mix products are highly automated. So, manufacturing is actually a different discussion than jobs. Manufacturing such as the type I mentioned before–high-volume, low mix–can easily be brought back West because there is very little labor content. So the net result: yes, you can bring manufacturing back, but I don't think that many jobs will follow.

  11. arenasolutions
    February 27, 2012

    I agree with you that there is all kinds of risk in single sourcing anything (whether its parts or products or mfg man hours, etc.) There are all kinds of articles that talk about how outsourcing has influenced the U.S. economy in negative ways and I thinj a lot of people agree that mfg jobs should return to the states. But when it comes to the type of assembly work that we outsource to China, I wonder who in the U.S. would actually want those jobs? I am curious to hear what your 5 reasons are that jobs will come back – – because if there isn't incentive for manufacturers to do so, I wonder who will change their production methods?

  12. bolaji ojo
    February 27, 2012

    Arenasolutions, I will post the update to the blog on Tuesday. The outsourced assembly jobs can be done in the US and they used to be done here. The products that resulted from them also used to be sold worldwide and not just in the rich, developed economies.

    You are right that many of the assembly jobs won't find many takers here in the West but the wages they currently pay won't stay in the range they are now forever. They are moving higher and this rate will accelerate in coming years, jacking up the total cost of ownership to companies.

    I agree manufacturers need incentives to return certain jobs to the West. Some of the incentives are already being introduced or drummed up by Western governments concerned about employment conditions at home. As my follow up blog will detail, however, the greatest incentives will come from the marketplace and from the realization by companies that a single-source provider no matter how profitable today is inherently dangerous. I don't expect all jobs to migrate back but many will and it won't be just because of government incentives.

  13. Jay_Bond
    February 28, 2012

    I agree completely that manufacturing will return stateside. How much and when is a big question. We are headed for a global disaster if we put all of our proverbial eggs in a basket (China) and hope that nothing happens. There needs to be more focus on regionalization. I think the disasters in Japan and Thailand helped show how vulnerable we are and why we can't put all resources in one region.

    Once companies can figure out reasonable wages and find skilled workers willing to work, manufacturing will return. It will most likely not return to the levels it was, but any growth is positive.

  14. elctrnx_lyf
    February 28, 2012

    Your article sounds really confident that the manufacturing jobs will come back to US. But I'm really not sure how this is going to happen as the fundamental principles of businees is to reduce the operational expenses and increase the profits. Looking forward to see the future blogs on this topic !!!

  15. bolaji ojo
    February 28, 2012

    elctrnx_lyf, My confidence comes purely from looking at the numbers and from years of watching developments in the industry. Those who say the jobs won't come back are looking at the last 30 years of massive shift in jobs to the East but they seem to forget to look at the next 30.

    The system is supposed to be optimal and my feeling is that the current situation is not. But I will expand on this later.

  16. bolaji ojo
    February 28, 2012

    The main argument against my position has been that the economics won't work. Companies want to make as much profit as they can and therefore it makes sense for them to squeeze as much as possible from the current system. However, the same theory applies when you introduce too much danger into your operation. It may not make sense now but disaster doesn't provide any warning.

  17. Jay_Bond
    February 28, 2012

    Exactly. The issue with trying to squeeze everything dry and not prepare for the unexpected is you will face substantial losses and large set backs. If a company is just getting the momentum going in a positive way then all of a sudden slam on the brakes because of unforeseen circumstances, that company might not get a chance to move forward again.

    I understand everybody is trying to get the most for the least, but eventually that thinking will sink your ship. There are plenty of places state side willing to do what it takes to gain business.

  18. bolaji ojo
    February 28, 2012

    Eldredge, Raw materials and component sourcing issues will become a part of the China story for foreign manufacturers. You mentioned compliance in the regulatory environment and that is a big issue for China and manufacturers. How much of a role this will play in the market is uncertain. Companies may not care as long as it doesn't impact their operations but will respond if activists point this out.

  19. bolaji ojo
    February 28, 2012

    Jay, There's a troubling aspect for me in all this. Companies are increasingly managed for short-term gains and executives are responding to demands from investors to deliver those gains. Imagine what will happen to Apple if its revenue were to grow only 10 percent or less in coming quarters. It would be considered a shock and its stock will sink.

    The second part is the startling reality that company executives no longer believe they have any duties to their society but only to shareholders. My believe is that there is an intersection where these responsiblities meet and failure to mix them up is what has resulted in the overwhelming transfer of good, viable jobs to foreign shores.

  20. Eldredge
    February 29, 2012

    @Bolaji:

    You're right – and there is a line of reasoning that local environmental issues and policies are China's responsibility to deal with internally. I was actually coming more from a consumer angle, with regard to things like lead in paints and dangerous contaminants in pet foods, etc that have made headlines in the past. As a consumer, I need to be assured that the proper testing and due diligence is occuring, so that these types of issues are not a concern.

  21. bolaji ojo
    February 29, 2012

    Eldredge, These are very complex issues. I wonder at times how corporate executives navigate through them. As you noted, the consumer is the one at the end of all these and the impact of them need to be monitored closely.

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