The PSSI Blog

There is much debate today about what constitutes manufacturing and “the good jobs” in this country.  Many naively believe that more factories will cure the trade deficit and create jobs (in an economy already around full employment or, here in the Midwest, with jobs going unfilled).

“Die-hard conviction remains among many Americans that the more an economy manufactures, the stronger it is,” notes Michael Schuman a global business writer for several publications, quoted here recently in Bloomberg BusinessWeek magazine.

So with the help of Bloomberg and some recent studies, let’s set the record straight here.

First, while manufacturing is critically important (we may be biased as purveyors of manufacturing consulting and software, but it’s no less true), it now constitutes just 12% of GDP, versus more than double that 50 years ago.  But the idea that “we don’t make anything anymore” as recently touted by the President himself, is simply a fallacy.  The U.S. is a global manufacturing powerhouse, accounting for just under one-fifth of all production worldwide.  While that lags China’s 25%, it exceeds the shares of Japan and Germany combined.  We’re still highly competitive, particularly in the tech sector, and in hard to make products like jetliners and medical equipment, to name a few.

But in today’s world, the real value in making something, as Schuman and others have noted, is no longer in actually making it.  Companies today know that the real value of a product lies in its research and design elements, in product development, in branding, and in after-the-sale support services.  As an example, a study a few years ago by the Asian Development Bank pointed out that the actual assembly production proportion of an Apple iPhone (mostly performed in Asia) relative to its full retail value was only 3.6%.  The remaining 96.4% went to parts suppliers and to Apple, its creator.

And to that point, Apple’s margins overall are over 21% — from a company that is known for its manufacturing prowess but which, in fact, does virtually no manufacturing of its own.  Meanwhile, a typical offshore manufacturer that Apple contracts with posted just a 3.5% margin on sales.  And by the way, Apple creates lots of jobs without having factories, including 80,000 direct employees in the U.S. alone with plans to add more.

While more factories can, technically, mean more jobs on a local basis, studies show that workers who lose their jobs in plant closings take a long-term hit to their standard of living.  21^st century factories won’t create the number of jobs that 20^th century plants did.  Automation, advanced manufacturing, robots and the like mean we’re making a lot more with a lot fewer people.  Job displacement is a natural byproduct of technological progress, and has been for centuries.  But as old jobs die, new ones are born.  It’s important to remember that early on in our history, 90% of us were farmers; today it’s 3%.  As long as education and skills are developed with the future in mind, there are always likely to be new jobs to replace the old.  But then, that’s a whole other subject.

Meanwhile, let’s see manufacturing for what it is, and worry less about factory jobs that no longer exist and aren’t coming back, and more about the innovation, design, marketing and 21^st century product (and skills) development  — along with a healthy dose of free trade, we might add – that will create the innovative companies (think Apple, Tesla, Facebook) of tomorrow.

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As software providers, we focus largely on manufacturing (and distribution) clients, and so as a service to all we like to periodically report on trends and developments in the manufacturing sector, such as today’s post about a jobs program that helps Americans get back into manufacturing in a practical, no-nonsense kind of way.

A good start can be found at a workforce initiative in Louisville, Kentucky, called KentuckianaWorks, funded by several entities including local and federal agencies, along with JPMorgan Chase.  Recognizing that “manufacturing jobs are here and growing in numbers” but that unskilled assembly-line work has been replaced by advanced manufacturing jobs, KentuckianaWorks made a large commitment to support training for manufacturing (and other) jobs by designing a five-week “Certified Production Technician” training program, along with a two-week variation, for displaced workers aged 18-60.  Only a bit over half stick around to completion, but those who do find jobs quickly.  The program has already placed nearly a thousand graduates at an average of about $13 per hour.

The skills programs focus on computing and technical skills, as well as basic math and problem-solving – in other words, just want manufacturing managers say they are looking for today.  Meanwhile, over 80% of U.S. executives said in a recent survey that the skills gap will affect their ability to meet customer demand, and nearly as many claimed it would “make it more difficult for them to use new technologies and increase productivity,” according to a recent article in Bloomberg Businessweek.

Over the next decade, well over 3 million manufacturing jobs are expected to become available as boomers retire and economic growth spurs work opportunities.  Those figures come from the Manufacturing Institute in Washington D.C. Yet a “skills gap” means that about 2 million of those jobs could go unfilled.

The KentuckyianaWorks program works with local manufacturers to help design their two courses.  Companies who have worked with KW graduates say that their basic training “sets them apart from other entry-level candidates,” so that once hired, employers can help employees expand their knowledge and increase the likelihood of continued employment and promotions.  Recruiters say that while not every hire works out, the success rate with these trainees is higher than with other hires.

In an era of increasing and often unrealistic clamor and hype about bringing back jobs, it’s programs like these that are helping to make manufacturing hiring a reality, and closing the gap between needed hires and the skills gaps too often found in potential hires.

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In our prior post we looked at some of the data revealed in a recent report by The Economist which highlights the changing complexity of manufacturing, including fewer jobs overall, muddled in part by the ways those jobs are accounted for – or often not accounted for – as we move up the manufacturing supply chain.  We noted that those higher-paying manufacturing jobs in the “rich world” still account for a sizable share of nations’ GDP, and how much of the intellectual property retained by countries like the U.S., Germany and the U.K. continues to account for much of manufacturing’s overall value-add.

Still, keeping those jobs, and the future of manufacturing, are topics ripe for debate.  Today we’ll finish up our two-part post with what a few of the experts think.

For one thing, we can turn manufacturing from a product into a service, as Rolls Royce pioneered in the 1980s by providing its engines, service and maintenance at a fixed price, bundled package, or “power by the hour.”  The result was more stable revenues and more locked-in customers.

More recently, machines are being equipped with internet-connected sensors (the Internet of Things, or IoT, of which we’ve written before), which can gather data on how machines perform in the real world.  The accumulated data provides a trove of knowledge from which manufacturers can sell additional services to clients, and entice new customers as well.

Yet another bright spot will be 3-D manufacturing.  Here, we’re not speaking about creating playful little plastic widgets or toys, but rather complex manufacturing tasks in which design and manufacturing can be tightly coupled to produce things from motorbikes to high fashion.

But the real key, experts agree, lies in education.  Companies who offshore assembly and production work often suffer from reduced product innovation. Opportunities to learn how to do things better on the home front are often lost.  This is the natural synergy of production, where design meets reality, and the shop floor can provide feedback to designers; break that bond, and innovation suffers.  But those high-value design and innovation jobs require skill, adaptability and education.  These jobs will change over the lifetimes of workers, and they will not provide the mass employment of the past.

So it’s important to start with modest expectations, as is noted by James Manyika of the McKinsey Global Institute.  Improved education to ensure engineers are in good supply would be a good start.  A recent Bloomberg BusinessWeek article noted that nearly 75% of U.S. graduate-level advanced degrees in engineering and computer science are now going to non-American graduates.

Vocational training, where Germany proves a world-class model, and retraining programs that create new skills or refurbish current ones among displaced workers, have never been more important.

One way not to benefit manufacturing as a whole, many argue, is to disrupt global supply chains, nor will threatening companies that seek to move jobs overseas or the companies that host them.  We are reminded that it’s not so much foreign nations that have replaced so many of our low-skill manufacturing jobs, but rather, the inexorable march of industrial innovation, just as it’s done for the past 200 years.  Thus, policies favoring line workers over investments in automation will only make our industries less competitive.

Better to focus on the advanced manufacturing opportunities that lie ahead (i.e., 3D, IoT and manufacturing related services, to name three).  Educating our young talent – and providing ongoing education and retraining for new skills – is where our best hopes lie.

The sooner our leaders figure out what our manufacturers already know, the more robust will be our manufacturing prospects in the next generation.

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“Manufacturing exerts a powerful grip on politicians and policymakers in the rich world.”  So note the editors of the The Economist in a January, 2017 article on the changing face of manufacturing.  Their point is that manufacturing is central to what most national and political leaders across the world believe is what they want, and what their nations need.

Unfortunately, the sentiment gets a bit cloudy when they talk about “bringing back” the jobs of yore.  As Bruce Springsteen once noted, “those jobs are going boys, and they ain’t comin’ back.”

The truth is, as always, a bit more nuanced.

For starters, manufacturing has not really gone away.  But it also hasn’t stood idle.  Indeed, there has been plenty of change in manufacturing – it’s just gotten a lot more sophisticated.  It’s the less skilled jobs that are not going to return.

Manufacturing has long offered among the most desirable wages, and its products often tend to be exports, which make it especially desirable in political circles.  In the early part of the prior century, manufacturing brought lots of good-paying, semi- (or low-) skilled jobs.  That’s all changed, of course.  And as the Economist article points out, those changes included the advance of I.T. and the underlying ability to allow firms to unbundle the different tasks from design to assembly to sales so that “it became possible to coordinate longer and more complicated supply chains, and thus for various activities to be moved to other countries, companies or both.”

In the 1940s, one in three non-farm American jobs were in manufacturing.  Today it’s one in eleven.  Even in manufacturing-intensive Germany, it’s one in five.  Over time, as manufacturing became more productive and prices dropped, its share of GDP fell too.  Over time, more jobs moved overseas – but these were mostly low-skilled jobs, it’s worth noting.  The complicated work stayed home, while the “routine work was easily moved to poor countries,” and cheap labor.

So in a very real sense, the promise to bring jobs back rings hollow.  Low and semi-skilled jobs are not going to return to America, or the most developed nations, because they were not simply shipped abroad.  Rather, they were “destroyed by new ways of boosting productivity and reducing costs” which only served to heighten the distinction between routine labor and the rest of manufacturing.

But here’s the thing: today it is said that one-sixth of all manufacturing jobs are found in “the rich world.”  But those workers produce two-thirds of the final value of today’s manufactured goods.  Most of the low-value work shipped overseas involves final assembly that “adds little to the finish product’s value.”  For example, assembly of Apple iPads in China accounted for just 1.6% of the retail selling price.

In the U.S. the 11.5 million higher-value jobs that officially count as manufacturing jobs were, according to Brookings Institute, outnumbered by two to one by jobs in manufacturing-related services down the supply chain, after accounting for the outsourcing of accounting, logistics, HR and IT services that were once counted as “manufacturing” jobs in an earlier era.  In short: that’s a lot of manufacturing related jobs – the good ones – which we still retain.  That’s about 33 million U.S. “manufacturing” jobs, all told.

So the next time you hear someone bemoan the loss of manufacturing jobs, or herald a new era of returning jobs to America, keep in mind: the best manufacturing jobs continue to remain in the U.S. and other developed countries —  even more so when you count the related supply chain jobs.

But keeping these well paid jobs is the real and continuing task at hand.  And to see what that will take, we’ll add a few opinions, and some Economist commentary, in our next post, as we conclude this look at manufacturing today.  Stay tuned…

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Contrary to what you may have heard, manufacturing is flourishing in America.  The problem is that factories don’t need as many people as they used to because machines now do so much of the work.

This fact was most recently pointed out in an article by Paul Wiseman, who writes about the economy for the Associated Press.  We bring his comments on manufacturing to your attention today — as we often comment on the topic – given that the majority of our ERP clients are in manufacturing, and deeply invested in the subject.

A few facts: Manufacturing employment peaked around 1979 in this country.  Since that time, we’ve lost about 7 million jobs, even though actual factory production more than doubled since then, reaching almost two trillion dollars last year (just below the record year set in 2007).  That makes the U.S. number two in manufacturing in the world, second only to China.

It’s popular today to say that many of those jobs have been lost to ‘global trade’ and other countries’ theft of those jobs.  And indeed, many of those jobs have been lost to trade, especially to China, since China joined the World Trade Organization in 2001.  Foreign, low-wage competitors have gutted some industries, like textiles for example.

But as Wiseman points out, research shows that that “automation of U.S. factories is a much bigger factor than foreign trade in the loss of factory jobs.”  A study from Indiana’s Ball State University last year found that trade accounted for just 13% of lost U.S. factory jobs.  The majority, 88%, were taken by robots and other “homegrown factors that reduce factories’ need for human labor.”

Simply put: we’re making more with fewer people, as Howard Shatz, a senior economist at Rand Corp. has noted.  For example, GM now employs only one-third of the 600,000 workers it had in the1970s, yet produces more cars and trucks than ever.  In steel, the U.S. has lost 265,000 jobs since 1997 – a 42% plunge – while production has actually surged by 38%, thanks to super-efficient mini-mills that make steel mostly from scrap.

And the robot revolution is only the beginning.  Boston Consulting Group predicts 10% growth in industrial robots per year in the 25 largest export nations for the next ten years – a big increase over today.  One silver lining in the employment implications has been that increased use of robots coupled with higher labor costs in China and developing nations means reduced incentive for companies to chase low-wage labor around the world.

Even better, companies are rethinking where they manufacture (especially after earthquakes and tsunamis in Japan disrupted auto parts shipments, and a large Korean shipping firm went under).  So companies have been returning to the U.S. for production, “capitalizing on savings provided by robots, cheap energy and the chance to be close to customers,” notes Wiseman.

In conclusion, it appears the global scramble for cheap labor is fading.  It’s being replaced by more intelligent use of current resources, including robots, closer to home.  And thus, the real manufacturing jobs of the future will go to those best able to program, manage, repair and otherwise thoughtfully deploy the equipment and the supply chains that will be at the heart of the new manufacturing.

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Being that we are interested, like our customers, in all things manufacturing, we’ll veer off-topic just a tad today to share what’s revealed in a recent study entitled “Advanced Manufacturing in the United States: Toward Diversified Industries and an Educated Workforce,” released by the Center for Business and Economic Research at Ball State University and as reported by Michael Hicks, the Center’s director to The South Bend (Indiana) Tribune.

While the details pertain to one Midwestern state (Indiana) the principles are applicable, we think, to the manufacturing sector overall, particularly here in the Midwest.  Among the report’s findings:

• A high school diploma no longer carries the weight it once did in the manufacturing field (no surprise there, right?), which is “relying less on blue-collar production workers and more on college graduates with technical training” according to the Tribune.
• Jobs in (Indiana’s) advanced manufacturing sector now commonly require at least a two-year associate degree, and…
• Those jobs are quickly moving off the production floor – and now involve watching displays, doing laser tests and quality control analysis.

The report goes on to point out that the term “advanced manufacturing” refers to the use of technology to improve products and processes, and applies to areas that “consistently improve production techniques with new technology.”

Advanced manufacturing jobs account for 53% of all manufacturing employment in Indiana, the study found.  From 2010 to 2013 Indiana’s share of advanced manufacturing jobs climbed by nearly 2%.  The study also found that traditional blue collar jobs have declined over the past decade, as high-volume, repetitive production in factories is increasingly being done by machines instead of humans.

The Center for Business and Economic Research also notes that Indiana has nearly a quarter million jobs in advanced manufacturing plans, of which:

• 17.4% are STEM (Science, Technology, Engineering, Math)-related occupations
• 24.7% are “white collar” jobs
• 57.8% are “blue collar and other” occupations

Increasingly, the study finds, advanced machinery has created opportunities for skilled positions that require a college education.  Even the more traditional blue collar jobs now require a two-year degree, coupled with a willingness to learn and change, and to work in much more technical, STEM-related work.

As a result, the Center’s director, Michael Hicks recommends “that high schools focus not just on college preparation but on exposing kids to technical training who aren’t thinking about college,” noting that schools today need to do a better job exposing students to career opportunities that require technical training.  He notes that Indiana is roughly on a par with other states in this regard – and implies that improvement is needed.  The Center’s report can be found here.

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