US manufacturing may have finally reached a tipping point. After decades of low investment, outsourcing, and offshoring, the country has lost much of its production base and, more critically, much of its production know-how. Economists and policymakers argue that this loss of manufacturing is the natural progression of an advanced, post-industrial economy, but that misses the point. Other advanced economies—Germany and Japan, for instance—continue to have strong manufacturing sectors despite having higher wages than the United States. They have done a far better job at investing in advanced production equipment, applying smart technologies to factories and supply chain management, and maintaining the engineering and technical skills required to continue to increase productivity and move up the value chain.
Unless and until US companies recognize the importance of making stuff to their long-term success, understand the importance of and support highly skilled and highly paid manufacturing workers, and are willing to make the changes to their financial models and product mix to justify domestic production, not much will change. Before US manufacturing crosses the Rubicon, the country needs a broad-based consensus that manufacturing matters; with it the foundation for a national manufacturing strategy that both government and the private sector buy into.
Evidence of America’s failure are obvious. Manufacturing’s share of GDP has fallen to 11 percent from 18 percent in 1987, the number of manufacturers has fallen by 100,000 in the last ten years and, at less than 10 percent of total US employment, manufacturing now provides fewer jobs than health care, retail, and leisure/hospitality. The US has not had a trade surplus since 1975. Even trade in advanced technologies has been in deficit since 2002. The trade deficit with China alone has been setting monthly records recently, at nearly 34 billion USD in March. Industrial capacity in manufacturing declined every month from the end of 2016 to the end of 2021. Domestic manufacturers have not even maintained their share of the domestic market, with a few exceptions—food and beverage, oil and gas, paper, and printing. Productivity growth has been negative for the past decade and hasn’t grown consistently since 2007. Real wages have been stagnant for decades. The average real hourly manufacturing wage was 22.38 USD in 1980, compared to 22.40 in 2019 USD.
The US has lost manufacturing because too many managers, driven solely by financial goals, moved production abroad, failing to recognize the long-term implications to their business and the national impact of our shrinking manufacturing sector.
Although the recent pandemic revealed the extent of many of the weaknesses in US manufacturing, particularly the fragility of global supply chains and the nation’s dependence on foreign suppliers, these issues should not have come as a surprise to anyone. In a famous issue in 1986, “The Hollow Corporation,” BusinessWeek documented the growing trend by US companies to outsource production, becoming hollow corporations that may design or distribute but not actually make anything. After all, why invest the capital for upgraded or new factories when a supplier in Mexico or Asia would happily make those investments and provide products to exact specifications? Driven by their singular focus on shareholder value, and boosted by the emergence of cheap containerized shipping and an almost total lack of imagination and understanding of the benefits of domestic production, US manufacturers moved to Asia – first South Korea, Taiwan, Indonesia, and Malaysia, then to China, especially when China acceded to the WTO in 2001.
As these trends have continued over the past decades, US manufacturing has been studied, assessed, and dissected, with no end of recommendations to fix it. President Reagan’s Commission on Industrial Competitiveness and MIT’s Commission on Industrial Productivity, both in the 1980s, were formed in response to emerging trade deficits and stagnating productivity. Competing with Japanese industrial juggernauts—Toyota, Sony, Hitachi, and many others—was the major motivation at the time. These and other studies by a growing group of academics and Washington think tanks led to some federal initiatives, such as the Engineering Research Centers started in 1985, the Baldrige National Quality Award initiated in 1987, and the Manufacturing Extension Partnership (MEP) begun in 1988. All continue today. However, fewer than a quarter of all Baldrige Award winners have been manufacturers, and no manufacturer has won since 2012.
The private sector also responded then, though too little too late to shift the national trend. For instance, The Machine That Changed the World, first published in 1990, documented the Toyota Production System and led to widespread adoption of lean manufacturing, especially in the automotive sector. Formal quality programs became common, with prime contractors pushing ISO 9000 registration requirements to their suppliers. (MEP centers around the country focused on these two functions, lean and quality, as the basis for their assistance to small and medium-sized manufacturers.) Although these initiatives no doubt improved competitiveness by raising quality and controlling costs, committing to a long-term continuous improvement process has proven to be a challenge for all but a few manufacturers. Outsourcing and offshoring have continued to be a much easier way meet financial objectives. As a result, in a remarkably short period of time, Chinese production capabilities have grown across ever more sophisticated industries, while at the same time, US capabilities have continued to diminish as domestic companies hollowed out their production. Smaller suppliers have been caught up in the maelstrom, losing business as their customers have shifted to foreign, mostly Chinese, production.
In a remarkably short period of time, Chinese production capabilities have grown across ever more sophisticated industries, while at the same time, US capabilities have continued to diminish as domestic companies hollowed out their production.
Keep in mind that for most of the 21st century, this offshoring of production has been celebrated as globalization delivered strong financial performance. And keep in mind that China has delivered on what American executives wanted most—cheap production of almost everything. Current hand-wringing that China has not played by the rules, or that China may surpass the US, should not obscure the fact that American companies played a large role in building modern China and happily transferred technology and expertise to meet their financial goals.
The US has lost manufacturing because too many managers, driven solely by financial goals, moved production abroad, failing to recognize the long-term implications to their business and the national impact of our shrinking manufacturing sector. The nation has not only lost high-paying jobs and companies that have supported communities, it has also lost the knowledge and productive capacity needed to manufacture many products. Almost all consumer electronics, for example, are made in Asia. The United States no longer has the supply chains or the production know-how to produce common devices such as smart phones and large flat screens. Most US microchip firms are “fabless”—the chips are actually made in Asia. Even semiconductors that are made here are packaged in Asia. And the chip fabs that remain here have fallen behind the current state of the art, now dominated by TSMC in Taiwan. Overall, the only advanced manufacturing industry with a US trade surplus is aerospace, and even that industry has stumbled.
The problem now is that the loss of production capacity and production know-how is so pervasive across so many industries that any fix will take years, and it is far from clear that private businesses want to change. For all the talk of reshoring or near-shoring production, there is precious little evidence of a discernible trend. Maybe high shipping rates would change the location calculus, but those have dropped substantially from recent peaks. Maybe some policy change or new government initiatives, as currently being considered in the Congress, would rebuild domestic manufacturing, but they haven’t in the past four decades. Maybe advances in technology and the emergence of Industry 4.0 will make domestic production competitive, but the US lags in investments in the technologies that enable Industry 4.0.
Unless and until US companies recognize the importance of making stuff to their long-term success, understand the importance of and support highly skilled and highly paid manufacturing workers, and are willing to make the changes to their financial models and product mix to justify domestic production, not much will change. Government policy cannot overcome the inexorable force of profit maximization, regardless of the negative impacts on national well-being and sovereignty. We may rapidly be reaching a point where government is forced to manufacture critical technologies for defense or health because private companies are too hollow to supply them. Perhaps a harbinger, Governor Newsom just announced plans for the state of California to manufacture insulin. Wouldn’t it be ironic if government-owned production were to become the only viable option for rebuilding American manufacturing?
So what can be done? First, we need a broad-based consensus that manufacturing matters. Based on that consensus, we need a national manufacturing strategy that both government and the private sector buy into.
So what can be done? First, we need a broad-based consensus that manufacturing matters. Based on that consensus, we need a national manufacturing strategy that both government and the private sector buy into. The danger is that developing such a strategy will get bogged down in the same tired themes of picking winners and losers or government overriding the market. But it is important to remember that the market has driven manufacturing offshore to the detriment of the nation, and that successful sectors, like aerospace, have benefitted from strong government support. Second, to keep things manageable, start with critical technologies. Although defining critical technologies has been tried before with little success, surely recent experience with shaky supply chains can inform identification today. Then act. Supporting domestic semiconductor fabrication—and packaging—is a good place to start, though conditions on public subsidies to ensure return on the public investment should be carefully considered. Other critical technologies, parts, and components can be gleaned from recent assessments of defense and other supply chains. Guaranteed procurement contracts should be sufficient to ensure domestic production, but if government-owned factories are the only option, at least in the short term, so be it.
There is a range of other areas that need to be part of the process of rebuilding American manufacturing. Ensuring needed skills are readily available, including practical (as opposed to theoretical) engineering skills, taking fulling advantage of national R&D spending by manufacturing what we invent here, and reassessing existing policies and programs with clear metrics that cannot be gamed by program managers and consequences for not meeting those metrics. New initiatives will require imagination, recognizing that tax credits are not always the answer. Practical public and private initiatives, working together to rebuild productive capacity in critical, foundational, and high-value output can make a difference. The longer we wait, the harder the task will be.