Skilling up for a US revival

As Australia prepares for a new round of sending manufacturing and service industries offshore, the United States is beginning to head in the reverse direction after decades of using cheap Chinese labour to cut costs. The US now realises that path has severe limitations and, as a result, American manufacturing is in the midst of a revival.

As this US manufacturing revival gathers momentum China will need to adopt different strategies, which will affect the demand for our commodities at a time of sharply rising supply. In addition, both President Barack Obama and Republican rival Mitt Romney plan to slash US corporate taxes to bring American money back home. Both the US manufacturing change and the plan to bring US money home will put long-term pressure on the Australian dollar (Obama and Romney's Australian reach, April 20).

But the US manufacturing revival faces a roadblock – the American education system. At a time of budget contraction the US must find the time and money to repair its broken education system in the image of industrial powerhouse Germany. The Germans are leading the world in understanding how to foster manufacturing and as a result they have very low unemployment rates.

Over the last decade, American manufacturers have been taking jobs away from highly paid US workers and handing them to low paid Chinese workers. The gulf between their salaries still exists in spades, but the gap is narrowing and the associated costs of offshoring are rising.

Wages in China, particularly its formidable manufacturing sector, are increasing. In fact they're increasing in almost all the cheap-labour manufacturing countries, especially Vietnam.

They haven't risen enough to come anywhere near the salaries of the American worker, but wages aren't the only cost you incur when you put the Pacific Ocean between your customers and your assembly line.

Earlier this month, Bank of America Merrill Lynch US economist Neil Dutta suggested there are three trends making manufacturing in America more competitive.

Firstly, rising wages in rival countries coupled with higher oil prices have made shipping a more expensive exercise, particularly sophisticated machinery that can't be thrown in a box en masse and hauled onto a tanker.

Secondly, the US dollar has lost almost a third of its value against the euro, pound and yen over the last decade, hurting imports from cheap-labour countries making exports more competitive.

Thirdly, domestic energy production has exploded in the US, bringing about those low gas prices that Australia's BHP Billiton is so concerned about. This gives local producers in the fabricated steel, transportation equipment, machinery and chemicals industries in particular a crucial advantage.

Australia's problem is that our dollar is high; our labour is less flexible than the US and we export our energy and local energy costs are rising. But with good management we can greatly improve productivity (Supervising a supermarket price war, April 26). And, just as we followed Americans in offshoring once we see that the Americans are going in the reverse direction, Australia will revise its strategies.

American manufacturing declined 41 per cent from its peak in June 1979 to its lowest trough in December 2009. The last decade was the most traumatic, with manufacturing's share of total US employment dropping from 13.2 per cent at the start of the millennium to 8.9 per cent in 2009.

With the revival, major American industrials United Technologies, 3M, Illinois Tool Works and Parker-Hannifin have issued encouraging profit forecasts after booking stronger than expected results.

And Wall Street is paying attention. The market broadly expects earnings on the industrial index to rise 13 per cent this year, ahead of the rest of the market at 9 per cent. A significant portion of revival relates to the stunning turnaround in the US automotive industry.

The Boston Consulting Group has concluded that the ‘reshoring' movement – when jobs come back to the US – could generate one million direct manufacturing jobs and another three million supporting jobs over the next several years. Some Chinese companies are even moving operations to the US in order to avoid shipping costs and anti-dumping tariffs.

But America is in the grips of a worsening skills shortage and the extent to which the US will be able to take advantage of this manufacturing shift depends on how much money between the public and private sectors can set aside to reshape their education system.

It's just like the balance sheet of the typical American household. Education is expensive in the US; and for many Americans it requires a second mortgage.

So far, that second mortgage has paid off. As shown in this graph from the Harvard Graduate School of Education, the employment requirements for young Americans have shifted dramatically towards the upper rungs of higher education. So have the salaries.

But fewer and fewer Americans can afford to participate in this system anymore and a growing chorus of US manufacturers are demanding vocationally training employees from age 16, rather than taking on 23-year old college graduates.

To capture those three strategic advantages the US needs to reshape its education system in the image of a country like Germany, where vocational training is not a dirty word.

That's the conclusion offered by the Brookings Institute and, as you can see by this graph, US manufacturers aren't going to lose work to the Germans due to wages. American manufacturing workers earn a lot less than a lot of nations, including Australia.

The point that Brookings makes is that Germany's famous education system allows vocational training to begin before high school ends, creating manufacturing employees with high skills. Coupled with a university system that more or less produces enough local graduates, it's a system that more efficiently meets the demands of a nation that takes onshore manufacturing seriously.

The quicker the US finds a way to better equip its workforce for more complicated products, the faster it will re-establish itself as a manufacturer.

Alexander Liddington-Cox is Business Spectator's North America correspondent.