Insider Trends in America's Manufacturing Sector
Optimism about American manufacturing is back, with a rising number of manufacturers bringing operations back to home shores and discovering more innovative and cost-effective ways to operate, according to theMFGWatch Q4 ’11 Survey .
MFG.com ’s review of North American suppliers and OEMs/buyers of manufacturing goods and services shows increasing stability in the supplier markets; a drastic decrease in supply chain disruption drastically decreased-at a record low since Q4 2009-and more buy-side product manufacturers taking measures to mitigate their supply chain risk, becoming less affected by disruptions.
This all bodes well for reshoring, a strategy that is gaining rapid recognition in all genres of manufacturing. According to the survey, there is a 3% uptick in reshoring back to North America, now at 22%. The amount of manufacturers researching reshoring has increased by 7% to 33%, and with fuel prices, shipping costs and intellectual property protection being the most important factors threatening sourcing strategies, producing materials at home is looking like a more desirable solution to American manufacturers across the board.
While we should be encouraged by this activity-says trade analyst and MFG.com CEO Mitch Free-there are still some trends holding the domestic manufacturing industry back. Among them is a sustained increase in concern over access to capital –up from 22% in Q2 to 26% in Q3 to 35% in Q4 2011-as well as a continued low hiring rate, which may indicate a workforce skills gap and struggle to find qualified labor.
What does this mean for 2012? For a start, we can expect manufacturers to add capacity at a rate of 45%-- a historic high. Fifty two percent of respondents are not considering exporting at this time, though, and more education needed on the benefits of exporting for small business. In addition, operating costs will continue to be a major concern in 2012.
In a recent interview withQualityMagazine, Free took some time to explain what steps manufacturers should be taking to improve their global presence, just who is reshoring and how optimistic we should be about it.
Quality Magazine: What kind of education do American manufacturers need? What could we be doing that we aren’t?
Mitch Free: The size of the markets abroad with an appetite for American products is getting bigger every day, as a true middle class is emerging in countries like Brazil, Russia, India and China. Yes, a low percentage of small and medium sized businesses in America are selling their products outside of North America.
American companies have had the luxury of being in a market (America) of 300 million people that were constantly gaining prosperity, that all speak the same language, use the same currency, live by the same laws, are of the same culture. Contrast that with companies based in Europe where the countries are small, often about the size of a U.S.-state and the languages, culture and laws are different for each country. Doing business internationally is second nature to European companies. And look at China--its wealth was not created from the internal market; it has been created from exporting all over the world.
American companies have to learn how to market and sell their products abroad. For manufacturers, being dependent on the U.S. market is a very risky strategy. They need to start diversifying their revenue globally.
There really is no education that will take the place of on the ground experience. The best way to start is to simply go spend some time in the markets of interest to your company. Visit potential customers and ask a lot of questions; meet with trade associations; attend trade fairs; hang out with locals and start building relationships.
QM: Are enough manufacturers coming back to make a significant economic difference?
MF: Based on what we observe in the MFG.com marketplace, we do think that there is enough reshoring happening to make an economic difference. It’s not going to be overnight; it will take awhile. One of the limiting factors to acceleration of reshoring is simply that the manufacturing capacity just doesn’t exist in America like it did 20 years ago. A large swath got wiped out when we moved en masse to low-cost country sourcing. The factories shut down; the skilled manufacturing workers went to other industries and the best and the brightest stopped pursuing careers in manufacturing. We have a capacity and talent shortage that will gate the pace of reshoring.
QM: What types of manufacturers are typically reshoring? Are there certain types of companies that we need to embrace reshoring more than others-ie, bigger companies or tech companies, for instance?
MF: Reshoring is most attractive to companies that are shifting their business models to allow some degree of configuration or customization by their customers, as opposed to mass producing a one-size-fits-all product. Also, advances in manufacturing technology have allowed production to become highly automated and reduce the labor content. There will always be a place in the world where labor is highly educated and much less expensive than in America; we can’t compete of labor cost. We have to compete by leveraging technology and by moving away from commoditized product offerings. Consumers like options and variety and will pay a premium for it.
QM: This appears to be relatively slow progress-yet progress nonetheless. Should we be encouraged or discouraged by this?
MF: We should be encouraged. As I mentioned, there are gating factors related to capacity and skilled labor in America.
QM: The Manufacturing Watch Fourth Quarter Survey reveals concerns over a sustained increase in access to capital, which is up from 22% in Q2 to 26% in Q3 to 35% in Q4 2011. Is this a surprise?
MF: We consistent hear that access to capital and a shortage of skilled labor are the greatest challenges facing small and mid-sized manufacturers.
QM: What does this mean for the future?
MF: We interpret this to mean that companies see are optimistic and want to begin growing again. However, the fact that so many are not considering exporting indicates that they are hoping for the “good ole days” to come back. That is concerning. I hope is not a strategy.