The Manufacturing Boom on Our Doorstep
By Morgan Housel
The Motley Fool
Foxconn, the big Chinese manufacturer of Apple (Nasdaq: AAPL ) and Hewlett-Packard (NYSE: HPQ ) products, is thinking about building manufacturing plants in the United States, according to DigiTimes.
The move might be symbolic, driven more by public relations than by financial gain. But dig deeper, and you get the feeling that this could be the start of something new.
"Over the next 15 years, another 1.8 billion people will enter the global consuming class and worldwide consumption will nearly double to $64 trillion," a recent McKinsey & Co. report begins. That means more manufacturing. And a good chunk of it will take place in the United States.
Some background here. There's a common misty-eyed perception that American manufacturing is in deep decline. In terms of production, it really isn't. As recently as 2010, America was the world's largest manufacturer (depending on how it's calculated, China may have overtaken the U.S. in manufacturing output last year). Even adjusted for inflation, America manufactures about twice as much today as it did in the 1970s.
And all signs point to continued growth. Two big forces will drive it. First, we're in the early stages of a big energy boom that has driven the cost of natural gas down to decade lows. Since natural gas is difficult to transport, prices tend to be regional, meaning our low prices provide a big competitive advantage over other nations. Natural gas in the U.S. currently costs $3.30 per million BTUs. In Europe, it's $10.60. In Japan, $16.70. Last month, BlackRock (NYSE: BLK ) CEO Larry Fink talked about a CEO who moved a factory from Germany to the U.S. solely because of lower natural gas prices. "This shift in energy cost has the potential to rewrite the economics of [manufacturing] industries," McKinsey writes.
Second is a changing wage dynamic between China and the United States. Chinese wages are growing much faster than productivity, while in the U.S. it's the other way around. Add it up, and you get this, according to a report by the Boston Consulting Group:
Our analysis concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U.S. where factories are likely to be built. Factor in shipping, inventory costs and other considerations, and -- for many goods destined for the North American market -- the cost gap between sourcing in China and manufacturing in the U.S. will be minimal. ... When all cost are taken into account, certain U.S. states, such as South Carolina, Alabama, and Tennessee, will turn out to be among the least expensive production sites in the industrialized world.
This is all great news for American manufacturing, and it will very likely usher in a manufacturing boom.
But here's what it probably isn't: good news for manufacturing employment.
While the real production value of manufactured goods has doubled since the 1970s, manufacturing employment has declined by more than 5 million jobs.
The reason is productivity. It simply doesn't take as many bodies to manufacture a given level of goods today as it did in the past. Automation and robots today do what people did three decades ago. My favorite example of this is the story of a U.S. Steel (NYSE: X ) plant in Gary, Ind. In 1950 the plant produced 6 million tons of steel with 30,000 workers. In 2010 it produced 7.5 million tons with 5,000 workers. Or consider the auto industry. In 1990, the average American auto worker's share of total auto production was 7.15 vehicles per year. By 2010 each worker was producing 11.2 vehicles annually. Here's how Neil Irwin of The Washington Post put it:
In the newest factories, one can look across an airplane hangar-sized floor and see only a small handful of technicians staring at computer screens, monitoring the work of the machines. Workers lifting and pushing and riveting are nowhere to be seen.
That's the new manufacturing industry -- high output, low headcount. So even as the U.S. faces a manufacturing boom, "manufacturing cannot be expected to create mass employment in advanced economies on the scale that it did decades ago," McKinsey writes. You may not even notice it, in other words.
Instead, what we're likely to see is a fairly small group of engineers, accountants, designers, and high-skilled machinery workers fill the ranks of the new manufacturing boom. Here's Irwin again:
While machines have gotten very good at building cars, they can't design a car or develop a marketing plan. ... In other words, the manufacturing worker of the future is more likely to have a graduate degree and wear a suit or a labcoat to work than to have only a high school education and carry a lunch pail.
Which brings us back to the Foxconn plant. As DigiTimes writes: "Since the manufacturing of Apple's products is rather complicated, the market watchers expect the rumored plants to focus on LCD TV production, which can be highly automated." Exactly.