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Manufacturing is Changing, and Change is Good

The Brookings Institution, a Washington, D.C.-based think tank, recently released a report on geographic trends in American manufacturing. The group’s follow-up commentary notes that manufacturing is spreading out well beyond the “traditional” presumed locations in the United States, and that we are seeing a lot of manufacturers gravitating towards one another geographically. In a nutshell, the American Midwest is no longer the place for American manufacturing, but one of many; and manufacturers seem inclined to stay clumped together in like industrial ecosystems, wherever that happens to be.

Source: Brookings

The article is reluctant to be too optimistic when it talks about the potential resurgence of manufacturing in America, but we’ve all seen some signs that things are looking up. For a moment let’s assume that American manufacturing is on the upswing, rather than just appearing to be, and ask ourselves why.

For years, conventional wisdom in manufacturing has suggested that the only denominator in any major business decision is cost. Manufacturers have historically outsourced overseas because of cost, because of the implication that labor in other countries is cheaper. As it happens, this seems to have been a somewhat lopsided approach to decision-making. First of all, cost savings in labor are often eliminated by other costs, everything from freight to local government taxing. More to the point, though, it is becoming increasingly hard to prove with un-spun numbers that it really is cheaper to manufacture elsewhere. Sure, American workers in many cases earn a higher wage than their counterparts, but it is wrong to zero-in on that one line item to the exclusion of expertise, infrastructure, convenience and a host of other factors.

Manufacturing is a target for the low-wage solution, and time and again we’re seeing that it shouldn’t be. What about manufacturing jobs make them a “logical” choice to fob off on the lowest-paid worker? Why does no one ever say, “Let’s outsource our R&D efforts, because salaries over there are lower?”

No one says that because R&D is perceived as precious, advanced, and worthy of protection; and for some reason manufacturing often is not. That’s a view that firms around the world are going to have to change if they hope to stay competitive, because manufacturing is no more a throw-away job than R&D is. But more on that another time, for now, assuming that manufacturing really is in resurgence in the U.S. – it seems that companies are beginning to recognize that.

According to Brookings, the geographical spread of manufacturing in America is due in part to so-called “High Road” incentives: public policy initiatives that encourage companies to pay that higher wage in America on the logic that American workers, better trained and more experienced, will return the favor with greater innovation and superior processes. Manufacturers are moving to regions that have adopted High Road policies, regions which historically may not have had much of a manufacturing base.

Whatever the reason, as long as the jobs stay in America, it’s a net win for the U.S. economy, and history will demonstrate that the logic behind High Road policies is sound. Globalfoundries elected to build a new semiconductor fab in Malta, New York for a host of reasons, but among them was the realization that the entire community had rallied behind the idea of landing the fab, and whole sub-industries from new college curricula to small-town economic growth, were developing as a result. Had Globalfoundries chosen to put its new facility in Bangladesh or Mexico, it would have gotten… a fab. In New York, it gets all the power and promise and ideas of American workers, and American ingenuity. The (presumably) higher wage its workers will make is a small price indeed compared to the more intangible, but no less significant, benefits the company and community will reap long-term from its decision.

What are those benefits? Again, you build a fab in China, you get a fab. You build one in Malta, New York, the jobs the fab creates means more teachers are hired at local schools, more courses at local colleges, and a growing R&D infrastructure builds from the opportunities. A few more firefighters are on the rotation downtown. A new barber shop opens. Nice stores begin to dot small-town Malta’s main street. The city becomes a nicer and nicer place to live. And Globalfoundries sees higher productivity and more innovative solutions at its New York fab than it could ever hope to see elsewhere. A few bucks more an hour is nothing.

We have argued for a long time that manufacturing appears to be dwindling in the United States, but at the same time, study after study shows that productivity is up. And innovation – new products, new processes, new ideas – that’s clearly doing very well. Think of all the advancements we’ve seen in just the past decade; it can’t be argued that innovation has stagnated because manufacturing jobs are down. So why the disconnect? It’s because manufacturing is changing – hundreds or thousands of individuals working on a line are less and less the norm. That approach is no longer optimal in America, where workers are more skilled and more capable; in China and other economically developing nations, it still makes sense to put a thousand people on a line than a hundred people behind computers.

Of course, that’s small comfort to the nine hundred people who are no longer employed because the paradigm of American manufacturing is changing. This is what leads to the perception that “manufacturing” is doing badly in America: fewer people are working in it. In truth a strong argument could be made that manufacturing as a concept is doing fine; but for a century we’ve perceived manufacturing as thousands upon thousands of people doing a small part of a large job. The whole paradigm is changing and that many people are no longer necessary. Thus it’s not enough to simply acknowledge that manufacturing is improving, we need to help those who have been left behind by its evolution.

Presumably there was a time when serious, ponderous articles were written about the collapse of the buggy whip industry. The rise of the automobile meant that fewer people were using horses and buggies to get around. There was less need to whip the horses and therefore less need to make buggy whips. And so a lot of people whose career it had been to make those horse-encouragement tools found themselves out of work. As always, the solution wasn’t to bring back the horse and buggy, the solution was to help the people whose lives had been impacted find new opportunities for the future. That means enhanced training, enhanced job placement, and new mechanisms of support for hardworking individuals left out in the cold by progress.

High Road policies are surely part of the reason manufacturing is moving from its traditional home in the American Midwest. But manufacturing is also simply expanding – new things are being made in new places. And like all industries, manufacturers tend to gravitate toward areas where incentives are plentiful and others of their own kind already exist. Corporate ecosystems are common, because they allow for a shared pool of expertise, resources, and secondary support. It will be interesting to observe manufacturing over the coming decade, to see how (or if) these manufacturing ecosystems sprouting up in traditionally non-manufacturing areas change regional economies.

But as intriguing as the core message of Brookings’ latest report may be, we can also take encouragement from what it doesn’t explicitly say: that manufacturing is changing, and change is good.

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