Friday, December 14, 2012

A Brighter Future for Manufacturing

The CEO of GE, Jeffrey Immelt, has written on the subject of outsourcing production of goods to other countries that it is:
"....quickly becoming mostly outdated as a business model for GE Appliances."

That rather encouraging remark is provided in an article by Charles Fishman in The Atlantic: The Insourcing Boom. Fishman provides background on GE’s changing views on domestic manufacturing.

GE has had a large manufacturing facility in Louisville, Kentucky called Appliance Park. Begun in 1951, it grew to a peak employment of 23,000 in 1973 before a long downturn began. Hourly workers numbered only 1,863 in 2011. GE had planned on selling the facility along with its appliance business in 2008, but could find no takers. Immelt has clearly had a change of heart since then.

"Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. ‘I don’t do that because I run a charity,’ he said at a public event in September. ‘I do that because I think we can do it here and make more money’."

GE is in the process of bringing back home products that have been made in other countries.

"On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory."

"On March 20, just 39 days later, Appliance Park opened a second new assembly line, this one in Building 5, to make new high-tech French-door refrigerators....These refrigerators are the latest versions of a style that for years has been made in Mexico."

"Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013. Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States. And Appliance Park already has new plastics-manufacturing facilities to make parts for these appliances...."

The reason for this decision by GE is based on its demonstration that these types of goods can be designed and produced better and cheaper in the US.

"So a funny thing happened to the GeoSpring [water heater] on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up."

"GE wasn’t just able to hold the retail sticker to the ‘China price.’ It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299."

More detail on GE’s experiences and Fishman’s description can be found in Manufacturing Returns Home and Companies Relearn How to Make Things.

GE was able to build a better product more cheaply by reintroducing the product design people to the product production people, including line workers. By working together on the design and production they relearned how to make things efficiently.

"GE is rediscovering that how you run the factory is a technology in and of itself. Your factory is really a laboratory—and the R&D that can happen there, if you pay attention, is worth a lot more to the bottom line than the cost savings of cheap labor in someone else’s factory."

Other companies seem to be reaching the same conclusion as GE. For example:

"The transformation under way at Appliance Park is mirrored in dozens of other places, with Whirlpool bringing mixer-making back from China to Ohio, Otis bringing elevator production back from Mexico to South Carolina, even Wham-O bringing Frisbee-molding back from China to California."

The traditional paradigm of focusing on mass production efficiencies and low labor costs had favored remote manufacture in low-wage areas. Product demands are now shifting in a fundamental way that favors local design and production. Low per-unit costs are being superseded by the requirements for rapid design turn around, innovation, and product specialization for specific markets.

"Just a few years ago, the design of a new range or refrigerator was assumed to last seven years. Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years. This phenomenon is not limited to GE. The feverish cycle of innovation and new products beloved in the electronics world has infected all kinds of consumer categories. Products that once seemed mature—from stoves to greeting cards—are being reinvigorated with cheap computing technology. And the product life cycle is speeding up—many goods get outflanked by ‘smarter’ versions every couple of years, or faster."

"The addition of high-tech components to everyday items makes production more complicated, and that means U.S. production is more attractive, not just because manufacturers now have more proprietary technology to protect, but because American workers are more skilled, on average, than their Chinese counterparts. And the short leap from one product generation to the next makes the alchemy among engineers, marketers, and factory workers all the more important."

It has become dogma in some circles to write off manufacturing as an area for national investment. This viewpoint is based on the ever-increasing productivity that yields fewer and fewer jobs per unit output. If not many jobs can be created, we should invest in service industries because they will ultimately provide greater employment—or so the argument goes.

Laura D’Andrea Tyson provided an excellent counter to that contention in a New York Times article: Why Manufacturing Still Matters.

Not all jobs are created equal. We have lost employment mainly in the mid-level jobs and traded them for lower wages in service areas.

"....on average manufacturing jobs are high-productivity, high value-added jobs with good pay and benefits. Even though the premium on manufacturing wages has been declining over time, it remains significant. Between 2005 and 2010, average weekly earnings in manufacturing were about 21 percent higher than average weekly private non-agricultural earnings."

GE’s experience indicated that by continuing to manufacture in the factories of others they were beginning to lose not only the capability to produce on their own, but also the tools needed for innovation and design.

"....manufacturing matters because of its substantial and disproportionate role in innovation. Few economists dispute the importance of innovation to the growth of living standards, but few acknowledge the strong links between innovation and manufacturing."

"A strong manufacturing sector supports the key building blocks of the nation’s innovation ecosystem — its skilled scientific, engineering and technical work force, its research and development, its ability to identify technical challenges and provide creative solutions."

"Although manufacturing is only about 11 percent of gross domestic product, it employs the majority of the nation’s scientists and engineers, and it accounts for 68 percent of business R.&D. spending, which in turn accounts for about 70 percent of total R.&D. spending."

"American leadership in science and technology remains highly dependent on R.&D. investment by manufacturing companies, and the social returns to such investment are substantial, far exceeding the returns to the companies that fund it."

An article in The Economist also discusses the changes occurring in the manufacturing sector. It provides this chart for perspective.

The claim is made that there is a natural trend towards less manufacturing as a country becomes wealthier. This data is not exactly consistent with that assumption. Countries like Germany and Japan have to be considered wealthy and they have chosen far different paths. Manufacturing moves to lower wealth countries when it is seeking the lowest wage. That trend seems to be over. As the cost of labor becomes less important and technology and innovation become more important, perhaps the manufacturing of the future will be directly correlated with a country’s wealth. We need to be ready to play in that game.

The article also provides us with further insight into the importance of manufacturing to the economy by indicating that we undercount the employment that is associated with that sector.

"If one counts the workers in supporting services and those who provide raw materials, total American manufacturing employment was 17.2m in 2010, rather than the official 11.5m."

We should be doing everything we can to support our manufacturing sector. We must find ways to create higher paying jobs. It is better to create one job that earns $24 an hour than three jobs at $8 an hour that require subsidies from Food Stamps, Medicaid, and the Earned Income Tax Credit for survival.

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