Remanufacturing America’s Factory Sector

by | Aug 6, 2014 | Thought Leadership

Remanufacturing America’s Factory Sector

by | Aug 6, 2014 | Thought Leadership | 0 comments

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Ron Bloom could not have picked a better time to start his work as President Barack Obama’s point man on manufacturing policy. I believe the opportunity exists for this nation not only to sustain the manufacturing capacity it has managed to keep, but to restore much of what has been lost. It would be innovation on a grand scale. 

Innovation is a process that starts with understanding what customers want and need and, through a series of practical steps, progresses to new products and services that meet those needs and wants. Bloom should frame his assignment as a challenge to develop an innovation strategy for the manufacturing sector. 

We have heard a lot over the past couple of decades about how the U.S. economy is changing from manufacturing to service. The numbers bear it out. Since 1969, the number of manufacturing jobs in this nation has plummeted from 26.5% of all workers to about 10% today. These are (or were) the jobs that a person could hold over the long haul, that offered decent pay and benefits—a chance to own a piece of the American dream. Conventional wisdom says those jobs are gone forever, outsourced to low-wage, low-regulation nations. I don’t agree. 

An important part of an innovation strategy is timing, moving when the moment is right. It is equally important to have the courage to make a strategic move when conventional wisdom says there is no hope. Stephen Burnett, a marketing professor and associate dean for executive programs at Northwestern University’s Kellogg Graduate School of Management, where I teach, has written that one of the important lessons of the recession is that when it ends—as it will—we should not expect things to simply go back to the way they were. That is where opportunity lies for U.S. manufacturing. 

All Eyes on Schenectady Jeffrey Immelt, CEO of General Electric (GE), has been saying a lot lately about the importance of reversing the outsourcing of factory work. He calls for a doubling of the manufacturing labor force to 20%, and is doing his part. GE is building a plant in Schenectady, N.Y., to convert railroad engines from diesel to hybrids. Another GE factory, in Louisville, will boost employment by making hybrid electric water heaters that had been manufactured in China. 

Here’s how other manufacturers could reassert themselves. First, the main reason American companies have moved manufacturing to other nations is simply that it’s cheaper to make goods elsewhere. Labor, benefit programs, environmental regulations—all less than in this nation. Publicly held companies aren’t being un-American by going offshore. They are doing what their shareholders demand. Give a CEO and his board a way to manufacture in this country that makes as much financial sense, or more, as doing it overseas and I believe they will. 

So let’s consider the new realities, starting with labor. According to the Bureau of Labor Statistics, just under 12 million nonagricultural workers are unemployed in the U.S. About 2 million are people who lost manufacturing jobs. About 10 million came from other sectors, with 3.9 million of them losing jobs in retail, wholesale, and leisure industries, which typically pay lower wages. Also, and I’m not saying I like this, employers in this country have largely shed the need to pay pension and health benefits to their workers. 

Fighting Counterfeiting So in this country, as a result of the recession, there is a large and well-educated labor force with a superb work ethic ready and willing to take manufacturing jobs if they were to be available. 

Let’s assume that the cost of labor in this new generation of American manufacturing will be somewhat less than in the good old days. But it will still be much more than wages paid in developing nations. There will have to be other reasons to put these jobs back in America. There are. 

Legal environment is one consideration. Recently there have been news stories about Farouk Systems, which makes a popular hair iron based on ceramic heating technology. It is moving its manufacturing from China to a new $23 million, 500,000-sq.-ft. facility in Houston, where it envisions 1,200 to 4,000 new jobs. Assemblers will be paid about $8 per hour. Labor in China is cheaper, but Farouk was spending $500,000 each month to fight counterfeits and it wanted more control over manufacturing and distribution. 

Political Risk Is Key Delivery time and expense are important, too. Mellish & Murray is a fourth-generation, family-owned metal-fabricating firm in Chicago that is enjoying success because of the speed at which it can deliver a high-quality product and respond to a customer’s needs for small changes. Farouk also noted that by relocating, it will also be much closer to its primary market. And Emerson Electric (EMR) is reportedly moving production of appliance motors to the U.S. and Mexico from Asia. 

Another factor, of course, is political risk. These are not stable times. Physical risk and corruption are issues that affect the cost of overseas manufacturing that would not be issues if manufacturing were done within U.S. borders. 

Let’s assume, for the sake of moving the innovation process forward, that the factors for manufacturing in America are improving while those favoring overseas manufacturing are declining. What could ultimately tilt a CEO to reopen a shuttered U.S. facility? Subsidies. 

Upstate New York Wins Over the past couple of decades, as manufacturing capacity moved steadily abroad, cities, states, and the federal government developed any number of subsidies designed to encourage the growth of the service sector to take its place. So the idea of underwriting employers isn’t new. But its emphasis on manufacturing would be. 

Upstate New York recently beat out Dresden, Germany, for a new plant being built by the German microchip maker Global Foundries. New York provided about $1.2 billion in incentives to land the 1,400 jobs and $88 million annual payroll. There will be another 5,000 indirect jobs with an additional $290 million in pay. 

Those indirect jobs are important. But it is the manufacturing facility that provides the core. Take it away and the indirect jobs disappear. Somehow the U.S. let itself be deluded into thinking that it didn’t need the core—another of the lessons of the Great Recession. 

A National Conversation As I look around the country it is clear that the conversation about the remanufacturing is getting under way. What’s needed now is to make it a truly national conversation. That could be done by gathering together in one place leaders who would be stakeholders in the rebirth of manufacturing—corporate leaders, labor leaders, experts in channels of distribution, energy, political risk, and others who collectively could put together a document clearly describing the roadblocks to remanufacturing in the nation and strategies for overcoming them. 

The U.S. economy needs a strong manufacturing base. We’ve largely lost it. The turbulence of the global economy has brought this nation the opportunity to rebuild the sector. It would be innovation on a grand scale.