Manufacturing May Be Returning but Will Jobs Come With It?

I just had a fascinating discussion with the CEO of a Silicon Valley based product manufacturer.  No, the products are not designed here and built off shore, they are designed and built here in the costly Silicon Valley.  Here's the thing, he's making a killing.  How is that?  Your first thought might be that he has lower transportation costs and you would be partially right.  The fact is that he has been able to do it through very effective inventory control, being selective about the types of business he accepts, strict cash flow management and an emphasis on quality.  These four things essentially give him an ability to grow both his top and bottom lines very fast.  He has focused on delivering value to his customers and they are willing to pay for that value as well as very effective management of the operation.  What was interesting is that we both agreed that there will be a shift in bringing back manufacturing to the US but we also agreed that unfortunately, sustained growth in manufacturing jobs would probably not come with it.

The US has discovered large energy reserves that will contribute to lower energy costs.  Recent discoveries of large oil and natural gas reserves are driving substantial growth in that industry that are likely going to shift the trade balance equation as we start to export more fossil fuels.  This will drive increases in the production equipment necessary to support this industry which will spill over into a number of other industries such as telecom and transportation.  In addition, we will benefit from lower domestic energy costs which will make local manufacturing much more attractive because of the production and transportation costs.

Rising labor costs overseas are starting to eat away the inherent advantage of offshore manufacturing.  That coupled with the fact that companies have begun to realize that they have not been able to realize all of the labor savings at the bottom line.  This has been due to the longer than expected learning curve at bring these labor forces up to speed, persistent quality issues that have resulted in higher than expected costs of poor quality and the prior to issues have forced many companies to install local leadership teams to provide process and quality oversight.  These issues have caused a lot of companies to re-think their manufacturing strategies.

All this sounds great.  Not so fast.  Labor in America is still very expensive.  Consequently as factories are re-tooled they will depend on greater levels of automation.  The picture above will be more and more a thing of the past.  Products will be designed with automated assembly in mind as well as better and more flexible automation will remove more and more touch labor.  The end result is that future factory workers will be more focused on running, supervising and maintaining the machines versus building the products.  These jobs will likely pay well but there will be fewer of them and they will likely go to better educated workers.

I think that there is a good chance that the US economy will see better performance over the second half of this decade and that manufacturing and energy will lead the way.  The other aspect of this is that we need to immediately retool our education system to provide the necessary workforce or else many will be left behind and there is a real danger that immigration reform may lead to a lot of this workforce being imported from overseas if we can't provide it domestically.