You don’t need a crystal ball or tea leaves to see what 2010 will mean for manufacturing in the United States. All you need is a currency converter. The weak dollar will continue at least well into next year, and that means U.S.-based production will look more attractive to manufacturers.
Specifically, the U.S. can expect to see an increase in high-value manufacturing. That, in turn, will fuel demand for highly skilled workers, who will see their work bringing higher pay and respect. At the same time, manufacturers burned by the recession will be highly disciplined about focusing internal resources on core competencies and aggressively outsourcing other functions.
These are not sweeping predictions that will apply to all manufacturing sectors; but when the weak dollar is viewed through the prism of basic economic and business principles, certain trends are clear. Here is what we can expect in 2010.
1) Production will return to the United States.
The weak dollar is creating a more level playing field for manufacturers that have the flexibility to choose where to produce goods. The result will be that makers of high-value, high-precision equipment and parts will be inclined to look to the U.S. as a cost-effective option for manufacturing.
It is important to accept that manufacturers of low-cost, simple commodity products like household goods and toys have left the U.S. for good. Such manufacturing does not require highly skilled labor, so it’s easy for these companies to shift production to whatever market is cheapest. Their U.S. plants are long closed and probably torn down, so there is no U.S. production capacity for these kinds of products.
But for companies that make expensive, high-precision, high-tolerance products, the situation is different. Their model requires quality and cost. These manufacturers typically have capacity in more than one location around the world, and they can shift production based on a variety of factors.
Even when quality or exchange rates are not issues, manufacturers of critical components like having multiple locations as a hedge against events they cannot control. Consider political and regulatory shifts such as Venezuela’s government takeover of foreign-owned manufacturing operations in the past year. Even more unpredictable are natural disasters, such as the 1995 earthquake that struck Kobe, Japan, in the heart of that nation’s manufacturing region; a year later, 70 percent of plants had not returned to pre-quake production levels, hammering companies that lacked alternate sites.
But the largest single issue driving the “back to the USA” trend is simple; it’s about staying close to the consumer base. Long distances mean shipping takes longer, and time is money. The longer the supply chain, the more costs that are incurred. Shipping across multiple jurisdictions means multiple layers of regulation and bureaucracy – and often delay. When costs are close to equal at multiple locations, manufacturers choose the site closest to the end customer. That is the driver of the decisions by Japanese and other auto makers to open production plants in the U.S. in the past decade.
So, in 2010, look for a “back to the USA” trend among manufacturers of complex products.
2) In a flat economy, manufacturing must ramp up.
Economists and pundits are busy trying to identify the moment the recession ended, or will end. For manufacturers, the more important moment is when their inventories dried up.
The recession hit with stunning suddenness in 2008. Instead of a decline in sales over several months, manufacturers saw business plunge in a vertical freefall in a matter of weeks. Manufacturers cut workforces dramatically and quickly, but not fast enough to prevent unsold inventory from piling up.
As inventories have been drawn down, these companies are beginning to resume production. That scenario is playing out among many manufacturing sectors. And if the pundits are right and the recession is at or near its end, we can expect demand for manufactured goods to grow, prompting production to ramp up even more in 2010.
3) Highly skilled workers will be in demand – and can demand high pay.
Increased manufacturing activity, especially in high-precision industries, means that skilled labor will be in demand. And finally, 2010 may be the year that the lack of skilled workers, and the public-policy implications that poses, gets the attention it deserves.
U.S. manufacturers have been harping for more than a decade about the lack of skilled workers, but warnings have failed to resonate outside the industry. Even in 2008, as the recession was taking root, Advanced Technology Services conducted a study that showed that the skilled-labor shortage would cost American manufacturers an average of $52 million per year in recruiting, training and lost production.
Most Americans – and policy makers in state and federal governments – gave the warnings from ATS and others little credence. They scoffed: How could there possibly be a shortage of manufacturing workers at the same time American companies shuttered factories and took those jobs overseas? That made no sense at all to most people.
We in manufacturing failed to make our case, and we are paying the price. We failed to explain the difference between low-skilled jobs that were easily transported to low-wage countries, and the high-skilled jobs that do – and will – remain. The elite manufacturing multi-skilled technician will be skilled in hydraulics, robotics, electrical and computer science.
Even more distressing, some manufacturers contributed to their own woes by reacting to economic swings by truncating, or even eliminating, in-house apprenticeship and training programs.
Now we are about to be hit by a new wave of trouble in the form of retiring Baby Boomers who will take their skills, and ability to teach, with them. Retirements coupled with a lack of pipeline of new workers will increase demand for skilled people, even if the economic recovery is slow.
To be sure, there is a bigger public-policy issue here that the nation needs to address. That has to do with our cultural bias in favor of academic education instead of vocational training. High school graduates are pushed to enroll in college even if they have no interest or aptitude in that kind of education. Vocational or skills training has been treated as a lesser education. High schools focus on college-prep courses, often not even offering the kinds of math and mechanical classes that could position teens to enter highly skilled trades.
We certainly can hope that American parents and policymakers come to their senses and place appropriate value on highly skilled jobs. But we in manufacturing need to do a better job to demonstrate the value these jobs deliver and the respect they should generate. We need to demonstrate that these jobs deliver good wages, job security and career paths.
None of this is likely to help manufacturers desperately seeking workers in 2010. So, what can we expect?
First, we can expect a significant ramp-up in pay, linked to the numbers and types of skills individuals bring to the job. Second, we can expect to see renewed emphasis on training programs, whether it’s re-establishing formal apprenticeships, internal classes, or partnerships within industries or with third parties. And third, we can expect companies to look to shift the problem to somebody else’s shoulders.
4) Outsourcing will ramp up along with the economy.
The recession has been a reality check for most businesses, including manufacturing. The lesson is that all companies need to focus their resources on core competencies, which are the things your customers value about what you sell. Anything else is ripe for outsourcing, and rightfully so.
For example, an aerospace manufacturer values vendors who make high-precision, reliable parts. This manufacturer doesn’t care what kind of equipment maintenance system the vendor uses. A food processor’s customers want safe, high-quality, appealing food at a reasonable price. The customers don’t care what kind of payroll system the processing company uses.
That doesn’t mean payroll systems and equipment repair are not critical. Of course they are critical. They simply are not core to the value the manufacturers’ customers see. So it’s logical that manufacturers focus internal resources and energy on building and maintaining those core competencies and outsourcing other functions, however important.
“Outsourcing” is not a code word for moving business offshore; it merely means paying a vendor to do the task. In many cases, the work still needs to be done locally, on-site. That is particularly true for any functions that directly support production.
Outsourcing gives manufacturers two advantages: It strengthens customer relationships and offers rapid flexibility. By outsourcing functions that are not customer-facing, companies ensure that its representatives are focused on things customers do care about. It means company leaders spend their time addressing customer issues, not back-office or behind-the-scenes issues.
And, outsourcing helps manufacturers respond nimbly to shifting markets. It’s easier to expand a vendor’s work than to interview and hire additional employees when demand spikes. And, it’s easier to cut vendor budgets than to lay off workers when demand shrinks.
So in 2010, expect manufacturers to continue to put a high priority on lean, highly focused operations and to outsource “non-core” functions. These functions include equipment maintenance and repair; information technology design, management and maintenance; and training and education, particularly cross-training.
With the shortage of skilled labor, how will the vendors meet demand? The short answer is: That isn’t the manufacturers’ problem.
The longer answer is: Vendors are unlikely to enter a market without a plan in place to address growing demand. For example, while manufacturers cut back on training programs, vendors that handle IT, maintenance or repair work have been ramping up such programs. While manufacturers have implemented layoffs and early retirement programs, vendors have cherry-picked those available workers.
So, expect 2010 to show signs of a potentially robust manufacturing sector. To fully realize that potential, all of us in manufacturing must better demonstrate the long-term value of the jobs we create, and push for programs and policies to ensure there are people ready to fill those jobs.
About the author:
Jeff Owens is the president of Advanced Technology Services Inc., a leader in outsourced production equipment maintenance. For more information, visit www.advancedtech.com.