Manufacturers who want to remain competitive in the U.S. and global marketplace must constantly take a big picture approach to growth that includes factors that extend far beyond labor costs.
A Positive Outlook for U.S. Manufacturing
In fact, a recent survey of senior executives worldwide found that China ranked as the most manufacturing competitive nation in the world in 2016, with the U.S. ranking second. By 2020, however, survey respondents expect those positions to reverse, with the U.S. in the No. 1 spot and China ranking second. Germany is expected to remain in the number three position.
While China has emerged in recent years as a global manufacturing powerhouse, changes in the Chinese economy-including increased labor costs, energy, and land costs-have narrowed the gap between producing goods in America and producing goods in China. In addition, China faces competition from other Asian-Pacific countries, including Japan, South Korea, and the cluster now known as MITI-V (Malaysia, India, Thailand, Indonesia and Viet Nam), or the Mighty Five. Of the BRIC countries (Brazil, Russia, India and China), only China remains as a top 10 manufacturing nation.
The North American cluster of nations, which includes the United States, Canada, and Mexico, remain at or near the top of all current and future rankings on competitiveness. The position rests in part on historically high levels of investment, including research and development (R&D), rich natural resources, talented labor pools, and strong industrial clusters. Industrial clusters include areas such as California's robust technology market; Washington State's thriving aerospace industry; Texas' rich energy industry; Michigan's rebounding automotive industry; and New Jersey's large pharma production, to name a few.
These findings are among those cited in the 2016 Global Manufacturing Competitiveness study produced by the U.S. Council on Competitiveness, a 30-year-old nonprofit founded during the Reagan administration to increase U.S. economic competitiveness in the global marketplace. The Council is comprised of CEOs of major corporations, university presidents, and the heads of national labor organizations.
The Council study noted 12 drivers of global manufacturing competitiveness, which take into account government and market forces. The top 12 drivers include, in order:
How and Why Did the U.S. Fall into Second Place? How Can the U.S. Recover to Make Outlook a Reality?
The ability to remain competitive can be a vicious circle. Rewards and compensation programs were often based on short-term achievements, meeting "this quarter's numbers." That kind of system prompts boards and shareholders to move activities to locations that offer the best deal, sometimes overlooking the sustainable, location-specific investments required to boost productivity. Those local investments include development of a skilled workforce, a commitment to R&D, the availability of local supplier networks, local educational institutions, and governmental incentives on the local and state level. Sometimes, relocating domestically or going offshore is not the right long-term answer and brings with it a new set of expenses and challenges. At the same time, other countries have become smarter, improved their infrastructure and technology, and offered U.S. manufacturers a viable alternative.
Then why are Council members confident that the U.S. will resume the No. 1 spot in manufacturing competitiveness? Again, there is no simple answer, but there rather a confluence of circumstances in the U.S. and other nations around the world.
The Harvard Business Review, in an article entitled "The Looming Challenge to U.S. Competitiveness," notes that America's system of higher education and its "entrepreneurial community" remains the world's most powerful innovation engine. In addition, the article noted that the U.S. system of democracy and its sophisticated markets and institutions foster competition, which in turn leads to innovation and productivity. And despite dips, and even recessions, the U.S. economy as a whole is "remarkably dynamic and resilient."
So the signs look good from the U.S. perspective, but what is expected to change across the globe, specifically in China? As noted earlier, costs in a number of key areas — labor, energy, and land — have risen in China. Rising fuel costs means trans-Pacific shipping rates have increased, while dependency on an extended supply chain — including inventory costs, quality control problems, travels needs, labor unrest, and natural disasters-are adding further complexity.
Additionally, China is facing competition from other South and Southeast Asian countries (the MITI-V). While those nations may absorb some manufacturing currently done in China, they remain far from catching up to the first-rate infrastructure, skilled talent pool, well-developed supply networks, and worker productivity of China's industrialized coastal zones. China's exports to North America may diminish, but China will remain a major low-cost export for Western Europe.
Trump's Impact on the Future of U.S. Manufacturing Ranking
The future of the American manufacturer cannot be discussed without considering the Trump proposals. Since President Trump was sworn in as our 45th president he has released numerous executive orders and presidential memorandum. Many of these are designed to help the American worker and some are specifically designed to help the American manufacturer. These include issuing orders to reduce regulation and control regulatory costs, streamlining and reducing regulatory burdens on domestic manufacturing and construction of American pipelines. Some of the orders; however, have been controversial and only time will tell how they will affect the American workers. These orders include the withdrawal from the Trans-Pacific Partnership, border security and immigration enforcement as well as the proposal to renegotiate the North American Free Trade Agreement and the border tax plan.
What does this mean to the American manufacturer? It means a big picture approach and careful, product-by-product analysis that includes supply networks and the total cost of production. The Boston Consulting Group (BCG) notes that in addition to labor rates, the analysis must include worker productivity, transit costs, time-to-market considerations, logistical risks, energy costs, and other expenses. Supply chains must remain flexible, dynamic and globally balanced, so that changes can be made when the time is right. Manufacturers should also weigh the advantages of producing goods close to their consumers, so customers will remain happy with inventory supplies and the timely delivery of new products.
Specifically, the ability to compete and win includes the:
Those who study the manufacturing industry and the issue of competitiveness concur that the U.S. will become an increasingly popular home for manufacturing once again, particularly for products consumed in North America. Made in America may once again be the dominant label seen in homes across the country.
Questions? Contact your Berdon advisor or Matthew Jahrsdoerfer, CPA, Berdon LLP, New York Accountants.