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Monumental Changes for Global Manufacturing

Recently, I was greeted with the news that US manufacturing has begun the new year with a bang. Preliminary estimates from Markit Economics reveal that the US manufacturing Purchasing Managers' Index (PMI) rose from 54.0 in December to 56.1 in January — the strongest manufacturing expansion since March 2011.

A PMI reading above 50 indicates manufacturing expansion. The January estimates not only show the fastest rise in new orders in 32 months, but they also confirm improvements in overall business conditions. Additionally, the numbers suggest further strengthening in manufacturing employment.

Chris Williamson, chief economist at Markit, said in a press release:

Global economic growth is reviving, meaning companies are seeing stronger demand from emerging markets such as China and India as well as parts of Europe, notably Germany. However, it is the domestic market that is clearly providing the main impetus to the upturn, linked to improved confidence in the future given more aggressive stimulus from the Fed and reduced fears about the fiscal cliff.

The US isn't the only country showing solid improvement in its manufacturing performance. HSBC said China’s manufacturing PMI rose from 51.5 in December to a 22-month high of 51.9 in January.

Though the world's top two economies are starting the year with great optimism, the high-tech industry recognizes that it will take much longer to identify how long-term growth (in these two nations and others) will impact manufacturing expansion plans.

Deloitte Touche Tohmatsu Limited's global manufacturing industry group and the US Council on Competitiveness recently released a report that predicts monumental changes. The report, based on a survey of 550 CEOs and other senior leaders at manufacturers around the world, says that emerging nations will become vastly more competitive as they persuade companies to start plants there during the next five years. China is expected to retain its position as the world's most competitive manufacturing nation, the report said, but India will supplant Germany in the No. 2 spot, and Brazil will replace the US at No. 3.

If we are to believe the predictions outlined in this report, Europe and North America, once the cornerstones of global manufacturing, are fading fast. By 2018, the majority of survey respondents expect Germany to fall to No. 4 and the US to fall to No. 5, only slightly ahead of South Korea — think {complink 4751|Samsung Electronics Co. Ltd.}.

Germany isn't the only European nation set to lose its competitive edge. The UK, France, Italy, Belgium, the Netherlands, Portugal, Poland, and the Czech Republic are all expected to experience a dramatic drop in competitiveness on the global manufacturing landscape. Poland will drop from No. 14 to No. 18, according to the report, and the UK will drop from No. 15 to No. 19.

The more traditional manufacturing nations hold some advantages — talent-driven innovation and advanced local economic, trade, financial and tax systems, for example — but the report said these factors may not be enough.

More than 80 percent of respondents agreed or strongly agreed that the US, Germany, and Japan are highly competitive in terms of talent-driven innovation. Only 58 percent said the same about China, and 40 percent said that about Brazil. More than 70 percent of respondents agreed or strongly agreed that Germany and the US were extremely competitive in their tax systems. These two countries (along with Japan) also scored well in terms of their legal systems, infrastructure development, and supplier networks. However, one area where emerging nations have an edge is labor. Ninety percent of global executives called China extremely competitive in labor costs and availability, and 87 percent said that about India.

If the projections laid out in this report prove accurate, talk of a revived US manufacturing base might just be that — pure talk. Certainly, for original equipment manufacturers in North America and Europe, ceding a high-tech advantage first to China and in the near future to countries like India, Brazil, Indonesia, and Vietnam will come with its own rewards and challenges.

In the US, manufacturing growth would boost the GDP, increase the number of higher-paying jobs, and advance research and development, to name a few critical benefits. That simply won't occur to the extent many had hoped.

Even in the face of obstacles, there is hope that enough high-tech manufacturing expansion will take place in the US to boost its economic growth in the years ahead. It might be best to hold on to whatever manufacturing we can realistically generate, rather than pining for what might have been.

14 comments on “Monumental Changes for Global Manufacturing

  1. Ashu001
    January 30, 2013

    Guys,

    On the one side we see the Chinese no longer desperate for Factory Jobs

    http://www.nytimes.com/2013/01/25/business/as-graduates-rise-in-china-office-jobs-fail-to-keep-up.html

    And on the other hand we see thanks to Record Levels of Youth Unemployment in America and Europe today more and more of our Kids are forced to Work Minimum Wage jobs (or in many cases even for Free);how about the Manufacturers start bringing those Jobs back home?

    The Global Manufacturers don't need to pay more than USD 10-12 /Hour initially while our Kids learn the trade and then with experience they can earn more.

    Sure,This won't amount to more than USD 25000-30000/annually but Something's better than nothing today.

    Atleast that will be less kids who are stuck on Welfare(or dependent on Mom and Dad).

    I am amazed no Global Manufacturers have'nt done more here(apple and Google's moves are hardly anything here).

    Come back to America-You will find a Very receptive Labour Force here.

    America is open for Business.

  2. bolaji ojo
    January 30, 2013

    The pendulum indeed swung too far when we began moving manufacturing to low-cost regions but a correction is never too far off and one may be happening now in manufacturing. It is my belief that balance will be restored. Balance. Not a return to the old days and not entirely to the old ways.

  3. Taimoor Zubar
    January 30, 2013

    @Bolaji: I agree. Just as you said, the correction will take place and market forces will tend to bring the companies back to the US. With China becoming highly competitive, the low cost advantage has almost been lost and the economic incentive to invest in US manufacturing is actually there.

  4. Ashu001
    January 31, 2013

    Bolaji,

    This is something which confuses me no end.

    I have been tracking Labour Force Participation Rates,Demographic Trends as well as Average Wages very closely for the last three years.

    And it became obvious(since the Beginning of 2011);that American Labour is now Competitive with Chinese Labour.

    Especially thanks to both the One-Child rule in china and the fact that the Chinese tend to save more than the Americans;today's Young Chinese workers are much less likely to work for the same wages that their parents worked forin the 1980s and 1990s.

    In contrast,Most Young Americans are overloaded with Debt(including College Debt burdens;where Collecting Agencies are starting to harass them bigtime) and their parents can't really help them out that much.

    Still why have'nt we seen more Global Manufacturers come back to the US(&employ more)?

    If you employ Americans today;you won't have to worry for Annual Payrises for atleast the next 3 years or so;In contrast the Chinese are over-demanding and want Pay-hikes every single Year!!!

    It amazes me no end that its the Chinese Manufacturers which are now seriously looking at expanding in Southern parts of America as well as in Southern Europe.

    Waiting desperately for the day when Cellphones come with the “Made in America” Tag.

    Regards

    Ashish.

     

     

  5. prabhakar_deosthali
    January 31, 2013

    With the invasion of first by the Japanese and then the Chinese into the US manufacturing sector a whole US generation has now grown with first with Made-in_japan and then  made-in-China products.

    Is this new US generation geared up to grab those blue collar jobs again or will the migrant people from China, India will grab these job opportunities in US is the question.

  6. bolaji ojo
    January 31, 2013

    Ashish, Researchers have confirmed that the labor differential between high-cost countries and low-cost nations has been shrinking and may not be high enough to be the leading factor for outsourcing manufacturing to China. Other factors are involved, including some that I've pointed out in previous blogs. Some of the conditions under which products are made in China (workers' hostels, for instance) would never be allowed in the United States.

    As some of these differences disappear under the close monitoring of labor activists and human rights observers, many companies will be reconsidering their outsourcing strategies and may begin shifting production back and closer to end customers. The labor pool you referenced will be useful at that point. I don't expect a complete shift away from China but the move is inevitable.

  7. Ashu001
    January 31, 2013

    Prabhakar,

     

    If you read this article from the New York Times;You realize that American Citizens have NO CHOICE.

     http://opinionator.blogs.nytimes.com/2013/01/26/the-rise-of-the-permanent-temp-economy/

     

    Selected Quotes from the Article-

     “

    A quarter of jobs in America pay below the federal poverty line for a family of four ($23,050). Not only are many jobs low-wage, they are also temporary and insecure. Over the last three years, the temp industry added more jobs in the United States than any other, according to the American Staffing Association, the trade group representing temp recruitment agencies, outsourcing specialists and the like.

    American employers have generally taken the low road: lowering wages and cutting benefits, converting permanent employees into part-time and contingent workers, busting unions and subcontracting and outsourcing jobs. 

    They have to take whatever the market offers them(as is becoming increasingly evident from all the Jobs Data).

    America does'nt have Half the Safety Net(which a Bankrupt Europe provides) nor do most Americans have any Savings leftover for a rainy Day.

    On the contrary they are all tied up in immense Debt.

    Check this article out from FICO to get an idea of the kind of insurmountable Debt Burden;America's students are under today(its beyond Stunning).

     http://www.scribd.com/doc/122817403/FICO-Student-Loans

     

    Once again I will retierate;Americans have no choice but to take whatever is offered to them;even if it means that leads to more Blue Collar Jobs.

    As for the Immigrants(whether they be Chinese,Indian or Mexican);most of them are going to be dissapointed in America as  American citizens start competing for the same jobs which were previously leftover for them.

     

     

  8. Ashu001
    January 31, 2013

    Bolaji,

    Many Thanks for your awesome Insight!

    But You still have'nt answered what I was asking clearly(maybe I was rephrasing my Question wrongly);So let me re-phrase it again.

    “When Do you See Big Ticket Manufacturing Jobs returning to the US?”

    Or for that matter;

    “When Do you see more manufacturing Jobs Generated in US than in China(Annually)”?

     

     

     

  9. bolaji ojo
    January 31, 2013

    Ashish, Let me put on the analyst's cap to answer your question. Big item (volume) manufacturing won't return to the US immediately and perhaps not at all unless a major catalyst (China implosion, geo-political disturbance, major natural disaster or war) sparks a resurgence in US manufacturing. A manufacturing shift requires many factors to support it, the foundation of which is the supply chain but the most important of which is the “will” of executives to make the move.

    That “will” is sorely lacking currently. As you said in a previous post, the labor force is available.

    But it's not only the location of work that is changing. The nature of employment is too and this is impacting manufacturing. Employers would rather use contract workers (whether in the US or overseas) than have thousands on the payroll. The payoff for companies is they don't have to pay benefits and can adjust expenses as necessary — easy lay offs, easy hire, right?

    In this context, the idea of having huge manufacturing in the US is therefore not being impacted by China alone but by our intense focus on reducing costs, maximizing profits, etc. Will manufacturing return the way it used to be? I doubt it.

  10. Ashu001
    January 31, 2013

    Bolaji,

    This is not exactly very comforting news for the vast majority of Kids Unemployed in the US today.

    What will it take to change the will of thes executives?How about Extra Fines for not hiring within the US?

    Thanks

    Ashish.

  11. bolaji ojo
    January 31, 2013

    Ashish, This is not a disaster. In fact, I see some positives in it so long as we are proactive in our response. Companies are being run by professional managers with — in most cases — hardly any sense of responsibility to employees beyond the immediate paychecks or to the society at large beyond lip service over environmental obligations, etc. Most executives want to “maximize shareholder value,” which is jargon for the most profit and highest sales.

    If it is a sole proprietor or family owned business, there's a bigger attachment to loyal, trusted and long-serving employees. Such owners often would rather settle for smaller profits on an interim basis than wield the cutting axe immediately there's a slowdown. They may also keep a less profitable shop because it's part of the fabric of the community. That is hard to maintain with professional managers.

    In other words, what you are asking for cannot be legislated. Sorry.

    How should people respond? I suggest employees take greater responsibility for their career, understand that they have “permanent interests” but that there are no “permanent” jobs. Parents, therefore, have to take greater interest in their children's career choices and also help them select professions that offer them greater employment diversity.

    Further, I think we may as well embrace the outsourced culture. Most of the jobs that will be created in future will not require being attached to an employer. We'll have an environment of “skills for sale”. That's fine with me. So long as I know that's what I need to do to take care of my family.

     

  12. Ashu001
    February 4, 2013

    Bolaji,

    Everything you are saying here,Fits right in with an Article I recently read from the New York Times-Called the rise of the Temp Economy.

    http://opinionator.blogs.nytimes.com/2013/01/26/the-rise-of-the-permanent-temp-economy/

     

    The other issue that bothers and worries me immensely is one of Robotics.

    Today we are increasingly seeing more and more Jobs get lost to automation Globally.

    Its beyond Stunning,some of the advances taking place today.

    Like this

    http://singularityhub.com/2013/01/22/robot-serves-up-340-hamburgers-per-hour/

    http://www.technologyreview.com/news/509296/small-factories-give-baxter-the-robot-a-cautious-once-over/

    http://www.cbsnews.com/8301-18560_162-57563618/are-robots-hurting-job-growth/

    When even the Chinese are saying Robots are cheaper than Humans;what are we gonna do???

    http://usa.chinadaily.com.cn/epaper/2012-12/06/content_15992180.htm

     

    Not Good News all around;Is it?

    I mean-Not everyone is flexible enough to get Good Quality,High Paying jobs in today's environment.

    Honestly I don't have the perfect the Solution to these Questions.

    Just worried.


  13. bolaji ojo
    February 4, 2013

    Ashish, I'm working on a project on this subject. I have the same concerns as you but I'd prefer to see it as one more step in the evolutionary process. When we discuss evolution, people don't concern themselves much about the losers — the species that became extinct. We are around now, aren't we? We are the descendants of the survivors! The same thing will happen in the workplace: winners will claim trophies. The thing to do is be prepared.

  14. Ashu001
    February 5, 2013

    Bolaji,

    This sounds like a very exciting project!

    I have a feeling the world is going to look very different Ten-Twenty years from today(remember that movie;where the Haves lived a life with High-Tech stuff all around them and the Have-nots lived in the Desert??)

    Usually the easiest solution for Social Upheaval is War on a massive Scale.

    Will we see the same one here?

    Not sure.

    I have a strong feeling that Rising Energy prices (for Crude Oil);will pay a big part in the equation(whether we have more automation or not).

     

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