A funny thing's happening to manufacturing in the United States: It's still happening. Last year, for the first time this century, total U.S. manufacturing employment grew; it will grow again this year. Profits hit records last year, after tanking in 2008. GM and Chrysler have given taxpayers handsome returns on the public investments that saved them. BMW's Greenville, South Carolina, factory is the company's second biggest and a major exporter.
Today manufacturing in the United States stands at a place where a Renaissance and a Dark Age are equally possible. What will make the difference mostly has to do with decisions made by companies, not by Washington, Beijing, or Brussels. The question is, Do companies consider manufacturing a strategic capability–a weapon–or a necessary evil–a cost?
Here’s the astonishing fact: The U.S. can competitively produce fully 94% of the manufactured goods consumed in America. So says a new study, which my Booz & Company colleagues did with the University of Michigan’s Tauber Institute for Global Operations. The operative word is “can”: U.S.-based factories can compete for this 94%, which includes a lot of stuff currently being imported. The challenge: turning the right to compete into a right to win. The not-yet-published study goes on to say that half of that 94% is at risk–it’s a toss-up, a close-run thing. (Note: This analysis is for manufactures consumed in the U.S. As exporters, American-based factories have a higher bar, which fewer industries can clear. In the long run, though, the song has it right: If you can make it here, you can make it anywhere.)
So, how can you tip the balance?
All kinds of push-me, pull-you factors enter into decisions about where to site a plant. Manufacturing wants to be regional, even local–that is, with short supply lines and distribution channels. Manufacturing also wants economies of scale–that is, to be massed in one place. Those two desires can conflict, or you can make trade-offs, producing part of a product in huge plants near raw materials, then adding custom details in small shops close to buyers. Some manufacturing needs few workers but tremendous capital investment; chemicals are a good example. Other industries are very sensitive to labor costs and much less dependent on physical assets. Some needs highly skilled labor, some less skilled, and some need both, like electronics. Some is time-sensitive and needs to be produced very close to consumers (printing newspapers), some less so (printing textbooks).
The math in these equations has been shifting to favor domestic production for some time, due to high fuel prices, rising Chinese wages, a relatively weak dollar, a hyper-strong Euro and a slowly rising RMB, among other things. The result: Industries like aerospace, medical equipment, chemicals, food and beverages, semiconductors, tobacco, coal, and petroleum fall squarely in the domestic-production-for-domestic-consumption camp. You can forget about most furniture, and computer production, textiles, and clothing. (American-made socks exist, but that’s a niche, not an industry.) In the middle is a vast array of industries-auto parts and assembly, plastics, primary and fabricated metal, pharmaceuticals, electrical equipment-where the pendulum of advantage can swing either way.
As a nation, America can continue to drive down wages relative to world standards-but wouldn’t you rather live in a high-wage country? The country can write off “low-value” work-but we have learned too well that other nations can compete in high tech. What really matters are factors over which companies themselves have considerable control:
Don’t neglect the advantages you already have. Sharp-penciled management and continuing investment are needed to keep competitive edges well honed. The story about the end of manufacturing in the U.S. has too much credence, even in executive suites. People forget that the American manufacturing sector has actually grown in the last decade (though its percentage of global output has shrunk). Sure, global is where the growth is, but home is humongous: U.S. manufacturing alone is bigger than the entire Brazilian economy.
Think about business eco-systems. Smart companies imbed themselves in clusters, which provide petri dishes for new business models, magnets for specialized talent and intermediary businesses, and environments that attract customers. Clusters create competitiveness, whether in high-tech in Silicon Valley or high fashion near Milan. Check out the Cluster Mapping Project(registration required) of Michael Porter’s Institute for Strategy and Competitiveness. It provides extraordinary data that demonstrate, as Porter, Mercedes Delgado, and Scott Stern say, “Industries participating in a strong cluster register higher employment growth as well as higher growth of wages, number of establishments, and patenting.”
Put your head of manufacturing at the table when strategy is developed. More often than not, a company’s top manufacturing executive has a lot to say about the execution of strategy but little about its development. He (usually he) is one step removed, like the Chief Information Officer and head of HR. The almost-inevitable result: What’s called “manufacturing strategy” becomes cost management in fancy dress. The company’s competitive position is not articulated with enough granularity or rigor. Goals and costs are defined too narrowly. There’s too little discussion of product coherence-that is, which products, built where and how, will most naturally thrive given the company’s market position and capabilities. The trade-offs inherent in manufacturing (between scale and scope, between cost and flexibility, etc.) are made after the fact and one at a time, and therefore sub-optimized. By the time decisions come to the head of manufacturing, it’s too late to do anything other than make the best of you’ve got.
The best of what you’ve got will get us more of what we’re getting. Now’s the time to be the best we can be.