Murmurings about whether the American manufacturing renaissance is driven by much more than an explosion of cheap shale gas recently made their way into the pages The Atlantic. The so-called ‘insourcing boom’ is a real phenomenon, but it has neither demonstrated itself to be substantial or sustainable and is vulnerable to the relative weakness of the United States and growing strength of China.
Two highly respected writers, Charles Fishman and James Fallows, explain in the magazine a compelling story that suggests the three-decade trend of American manufacturing outsourcing isn’t just slowing, but showing signs of reversing.
The headline case is the decision by General Electric chief executive Jeffrey Immelt to rekindle production at the enormous Appliance Park manufacturing site in Louisville, Kentucky. By doing so, the 56-year old isn’t just burying some of the legacy of his legendary predecessor, Jack Welch, but questioning the core business case that has increased profits for US manufacturers since he was in his mid-20s.
"The very scale of the place seemed to underscore its irrelevance,” Fishman writes of Appliance Park. "Six factory buildings, each one the size of a large suburban shopping mall, line up neatly in a row. The parking lot in front of them measures a mile long and has its own traffic lights, built to control the chaos that once accompanied shift change. But in 2011, Appliance Park employed not even a tenth of the people it did in its heyday. The vast majority of the lot’s spaces were empty; the traffic lights looked forlorn.”
Appliance Park is just one of countless historic manufacturing bases that have been slowly turned into ghost towns across the US. In no small way this has been because of the rise of China on the back of cheap labour, which has in turn produced its own set of ghost towns. But that’s another story.
Immelt was actually trying to sell Appliance Park just four years ago but couldn’t find a buyer. Now it’s being slowly resurrected, and not just for show.
The GE boss has pumped $US800 million into restarting sections of Appliance Park. The poster-child of American outsourcing conglomerates is looking at manufacturing an increasing number of products domestically.
Some of these products are new and thus need close attention. Others are currently being made in China and Immelt is ordering them home.
On the face of it $800 million may as well be measured in nickels and dimes for a company that takes in $US150 billion in revenue every year. But it’s almost impossible to argue this isn’t a significant decision that says a lot about the limitations of outsourcing and the advantages of making things in America.
The argument that Fishman and Fallows deliver in separate stories, very convincingly, is that it's not only the lower cost of US energy (shale gas), as well as the recently reduced wage burdens in the US and growing wages in China that is slowing or reversing the outsourcing boom. The argument is that there are peripheral advantages of making things in your own backyard.
Fishman tells the story of a Geospring water heater that suffered from a needlessly complicated and fiddly assembly, increasing not just the time it took to produce but also the materials that went into it.
When there’s a Pacific Ocean and language barrier between your designers and your assembly workers, cost reductions and design shortcomings are harder to identify. But if a mid-level manager knows a sharp guy called ‘Frank’ on his own floor who has a knack for finding ways of using less copper wiring without compromising the product, you could more easily identify cost savings from a materials and labour point of view. Plus, Frank might have a future beyond the assembly line.
GE has realised all these benefits in some cases and managed to pay for production in the US before factoring in shipping costs. Let me repeat that – they’re getting shipping costs from mainland China to the west coast of the US wiped out in some instances, and some, by doing their thing in the US.
Those who can remember the labour battles that resisted the outsourcing boom, a phenomenon that touched the Australia and England as much as the United States, will know these arguments are nothing new. Unions and academics were telling us organisations would become less agile and their products would be less reliable… but cheap as chips.
‘Frank’ would be replaced by someone in China who is both unrelatable and unable to offer a solution for the unacceptable number of faulty products finding their way to American shores. You can try a rival manufacturer down the road, but his workers are just as unskilled.
The conclusion we’re asked to contemplate is that US manufacturing renaissance is based on more than BHP Billiton’s shale gas, which disproportionately aids petrochemical manufacturers that use the gas as feedstock and heavy equipment makers that appreciate the cheap energy. Could this be the long-awaited realisation that cheap Chinese labour was a false promise for products that are either complicated, or have the potential for innovation?
American manufacturers, beyond GE, are indeed bringing jobs home. Still, to call it a renaissance is terribly premature.
While it’s true that the American manufacturing sector outperformed the US economy in 2010 and 2011, output actually shrank in 2012. If you call that a renaissance, you mustn’t mind a gamble.
According to a joint report from the Citizens for Tax Justice & the Institute on Taxation and Economic Policy released late last year, General Electric was the second largest recipient of tax subsidies between 2008-10 – $US8.2 billion to be precise. In the last three years, GE has put away profits of $US36.7 billion.
This puts into perspective how much $US800 million is and how much GE is contributing to US jobs, as well as government coffers. With over $US16 trillion in federal debt, the prospect of more government subsidies for GE to encourage repatriation of jobs is pure fantasy.
China also owns 40 per cent of its adversary’s debt. This gives America’s chief labour manufacturing rival a crucial window to invest in upskilling its work force so the cost advantage isn’t outweighed by a skill disadvantage.
That’s far easier said than done, but China isn’t under pressure in this respect. The US is finding it hard enough to fill current positions within its borders, let alone jobs returning from a corporate foreign profit exchange program.
In the brilliant Davis Guggenheim documentary Waiting for Superman (2010), we discover how America’s education system hasn’t adapted to the differing skills sets demanded by the modern US economy.
With a still uncomfortably high unemployment rate, undermined by a lack of workforce participation brought on by worker dejection, we’re continuously told that American corporates have jobs to fill but no qualified Americans to do it.
From time to time we’ve heard excuses, like the fact that a high mortgage underwater rate has reduced workforce mobility. That’s a legitimate phenomenon.
According to Waiting for Superman, there will be 123 million high-skilled American jobs to fill by 2020 but only 50 million Americans qualified to do them.
It just goes to show that if a fully-fledged US manufacturing renaissance does exist, one that extends beyond the shale gas boom, Americans won’t get the larger pay cheques this boom provides unless US companies are willing to pay the training costs.
Alexander Liddington-Cox is Business Spectator's North America Correspondent.