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I came across a recent article called “U.S. Manufacturing Crown Slips” that immediately caught my attention. An excerpt from the article reads: “the U.S. remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production. Last year, the U.S. created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the U.S. staying ahead despite a steep fall in factory production due to the global recession. If China does become the world’s biggest manufacturer, it will be a return to the top slot for a nation which – according to economic historians – was the world’s leading country for goods production for more than 1,500 years up until the 1850s, when Britain took over for a brief spell, mainly due to the impetus of the industrial revolution”.1
Is this the end for the U.S. manufacturing industry? No way. To support this conclusion, below are five important facts from the National Association of Manufacturers:
1. The quantity of manufactured goods produced in the United States has kept pace with overall economic growth since 1947, as both GDP and manufacturing have grown by about seven times.
2. The United States still has the largest manufacturing sector in the world, and its market share (around 20 percent) has held steady for 30 years.
3. Productivity growth is higher in manufacturing than in other sectors of the economy.
4. Due largely to outstanding productivity growth, the prices of manufactured goods have declined since 1995 in contrast to inflation in most other sectors, with the result that manufacturers are contributing to a higher standard of living for U.S. consumers.
5. Manufacturing still pays premium wages and benefits, and supports much more economic activity per dollar of production than other sectors.
With that said, let’s take a look at what’s ahead for the manufacturing industry in 2011. The Institute for Supply Management (ISM) reports that U.S. manufacturing is on the rebound and poised to see real gains. ISM reports that a wide variety of manufacturing industries, including transportation equipment, computer and electronic, products, fabricated metal products, machinery, and miscellaneous manufacturing will see much better conditions in 2011. I have also reviewed a number of industry surveys, one of which business executives of manufacturing companies were asked a series of questions regarding their company’s plans for 2011. Here are some of the results:
• Nearly 60 percent plan to expand operations in the coming year.
• Nearly 60 percent expect revenue growth.
• The majority project a strengthening of exports and imports.
In addition to surveys, industry reports, and direct observations of a variety of manufacturing clients, I also believe it’s important to monitor the status of indicators. For example, Gross Domestic Product (GDP) has rebounded since January 2009 and is on the rise:
Purchasing Managers Index (PMI) shows faster growth in the overall economy and in the manufacturing sectors:
MANUFACTURING AT A GLANCE
OCTOBER 2010 |
| Index |
Series
Index
October |
Series
Index
September |
Percentage
Point
Change |
Direction |
Rate
of
Change |
Trends*
(Months) |
| PMI |
56.9 |
54.4 |
+2.5 |
Growing |
Faster |
15 |
| New Orders |
58.9 |
51.1 |
+7.8 |
Growing |
Faster |
16 |
| Production |
62.7 |
56.5 |
+6.2 |
Growing |
Faster |
17 |
| Employment |
57.7 |
56.5 |
+1.2 |
Growing |
Faster |
11 |
| Supplier Deliveries |
51.2 |
52.3 |
-1.1 |
Slowing |
Slower |
17 |
| Inventories |
53.9 |
55.6 |
-1.7 |
Growing |
Slower |
4 |
| Customers' Inventories |
44.0 |
42.5 |
+1.5 |
Too Low |
Slower |
19 |
| Prices |
71.0 |
70.5 |
+0.5 |
Increasing |
Faster |
16 |
| Backlog of Orders |
46.0 |
46.5 |
-0.5 |
Contracting |
Faster |
2 |
| Exports |
60.5 |
54.5 |
+6.0 |
Growing |
Faster |
16 |
| Imports |
51.5 |
56.5 |
-5.0 |
Growing |
Slower |
14 |
| OVERALL ECONOMY |
Growing |
Faster |
18 |
| Manufacturing Sector |
Growing |
Faster |
15 |
|
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These are just a couple of the indicators that manufacturing has “turned a corner” and is preparing for a comeback. Will manufacturing ever return to the level of intensity as previously seen? For this, I’m not sure. Several of my clients, along with the industry in general, repeatedly state “we are cautiously optimistic.” Credit remains tight and cash is still king. These operating principles are leading the typical manufacturing company to hold tight on hiring and expansion plans.
Even though the manufacturing industry is making positive strides, there are still quite a few leading concerns:
• Increasingly sophisticated technologies and processes require a more educated work force. Studies indicate that the U.S. is not keeping pace with global competitors in the development of the skills needed. As a note, over 50 percent of engineering degrees are granted to foreign students and the majority of them return home after graduating.
• Rising costs for corporate taxes, health care and pensions,
regulations, utilities and tort litigation add almost 18 percent to a manufacturers’ costs relative to our major trading partners.2 The U.S. now has the second highest corporate tax rate among our major trading partners, trailing only slightly behind Japan.
• The U.S. is losing import market share to both Asian and European competitors in the Asian marketplace. This is an indication of the sustained large U.S. trade deficit in manufactured goods.
The buzz word for 2009 and 2010 would have to have been diversification – hands down. Multitudes of manufacturing companies looked at markets outside of their core area. Medical devices and defense/aerospace were common destinations. Most companies who did explore diversification markets would have to agree that “if it was easy, everyone would be doing it.” Transitioning to different markets takes resources and a serious commitment. I tell my clients that it’s at least a two-year roadmap to position themselves in the market, understand new industry territories, and become capable of maneuvering within the structure (terminology, regulations, expectations, connections, etc.) of the market.
When working with my clients on market strategies, the “D” word always surfaces. They ask should we “diversify”? Personally, I don’t like that “D” word. I tell them the word needs to be “distinguish”. They must be able to effectively present what distinguishes their company from the competition. Things such as high quality, on-time delivery and quick response don’t cut it on their own. After all, everyone makes those claims. Just try to remember… “where’s the beef?”
1 FT.com
2 nam.org
Alan Lund is a Consulting Principal at UHY Advisors MI, Inc. based in Southfield, Michigan. Alan holds a BS degree in mechanical engineering from Iowa State University. Lund can be reached at alund@uhy-us.com.
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