#12 – Inside Our Industry – Five Myths About Manufacturing

The headline to this recent Washington Post article caught our eye. If you are in any way tied to the manufacturing sector, you have undoubtedly heard all these myths. Now you can see some of the facts/statistics that prove that these are indeed, myths.

Five myths about manufacturing
By Kasra Ferdows, August 28, 2020

Despite the much-touted rise of the service industry, manufacturing remains central to the world economy: It generated $13.8 trillion in economic value worldwide in 2019, according to the World Bank, representing 15 percent of the world’s gross domestic product. Its distribution across the globe is a source of never-ending political debate. For example, the pandemic has brought fresh urgency to the discussion of whether the United States should bring more of its manufacturing back home (particularly for drugs and medical equipment). Yet myths about this sector persist — and they can lead to expensive subsidies, friction between nations and higher prices for consumers.

Myth No. 1 – Most new factories are built in low-cost countries.

The conventional wisdom holds that manufacturers are fleeing the developed world. According to IndustryWeek, that’s because the United States is “one of the most expensive places on earth to make a product.” A CNN article from February says that in the 1990s, as the dollar’s value rose, “domestic manufacturing firms cut costs, and that often meant finding cheap labor overseas.”

But while it is true that manufacturing jobs have declined in the United States (from 18.1 million in 1998 to 13.5 million in 2018), and the sector’s share of GDP continues to fall (from 16.1 percent in 1997 to 11.2 percent in 2017), U.S. manufacturing output rose from $1.38 trillion in 1997 to $2.18 trillion in 2017 (roughly a 60 percent increase). And according to the United Nations Conference on Trade and Development, foreigners have been building and acquiring factories in the United States more than in any other country. In 2019, foreigners invested $101 billion in the United States to build “greenfield” facilities (meaning new ones, not repurposed structures) — about half were factories, and the rest were power plants, telecom networks and other infrastructure projects. That was significantly more than the comparable Chinese figure of $62 billion.

The United States also appeared alongside Britain, Germany, the Netherlands, France, Canada and Spain in a 2018 ranking of the most attractive countries for manufacturing, compiled by the Brookings Institution. Rich countries, already home to a great deal of manufacturing, remain competitive.

Myth No. 2 – Trade wars and the pandemic will bring back manufacturing.

Conflict with China and the shock to the economic system from the coronavirus have produced a “goal writ large: bring supply chains home,” says NPR’s Marketplace. According to the Wall Street Journal, “The Trump administration and semiconductor companies are looking to jump-start development of new chip factories in the U.S. as concern grows about reliance on Asia as a source of critical technology.”

But despite such discussions, “there is no evidence of any coronavirus-induced rush by companies to return operations to the United States,” as an article in the May issue of Foreign Policy put it. And if Trump’s China tariffs have had an effect, it’s mainly to encourage companies to move plants to places in Southeast Asia, like Vietnam. You see the same pattern in other industrialized countries. An annual survey of large German companies by the Fraunhofer Institute found that, between 2006 and 2015, for every company that re-shored production, three offshored factories.

Far from retracting their manufacturing presence abroad, U.S. companies are likely to expand it — in part to meet demand from the millions of Asians who are entering the middle class. Companies need factories close to these consumers so they can respond to the desire for ever-faster deliveries.

Myth No. 3 – Most factories will soon be fully automated.

Manufacturers are “considering turning off the lights,” writes a Forbes columnist — embracing factories “that rely so little on humans that they can run with the lights off.” During his brief run for president, New York Mayor Bill de Blasio described, in Wired magazine, a completely automated factory run by the Japanese company FANUC as a harbinger of the future — and said American workers needed new protections.

But a survey of more than 100 leading U.S. manufacturers by AT Kearney and Drishti Technologies found that human beings “still perform 72 percent of manufacturing tasks” and produce three times the value that machines do. Full automation is often too risky, too inflexible or too expensive to be feasible. This was confirmed in a recent survey of 221 large manufacturers by Gartner, a research and advisory firm. Looking ahead to 2025, fully 79 percent “see their manufacturing operations as being composed of human driven, manual processes augmented with digital ones,” it said.

Companies are learning what Tesla’s Elon Musk discovered: In 2018, after reversing course and replacing robots with humans at his Fremont, Calif., factory, Musk tweeted that “excessive automation at Tesla was a mistake … Humans are underrated.” Even with rapid advances in technology, we are unlikely to see many fully automated factories for years to come.

Myth No. 4 – China makes everything now.

“China is the world’s factory, more than ever,” the Economist declared in June, while Investopedia suggests that “China has become known as ‘the world’s factory’ because of its strong business ecosystem, lack of regulatory compliance [and] low taxes.” According to the World Bank, China’s $3.9 trillion in manufacturing output in 2019 surpassed that of any other country.

But if you correct for its immense population, China looks far less dominant. Per capita, the United States produced 2.4 times the value of manufactured goods: $6,564 per person vs. China’s $2,710. Japan produces three times more per capita, Germany 3.3 times more and Switzerland a whopping 5.6 times more.

Is China perhaps exporting more of what it produces, thereby earning the “world’s factory” nickname? In 2019, China exported $2.3 trillion worth of manufactured goods, which is 60 percent of its $3.9 trillion in manufacturing output; that’s about the same percentage the United States (in 2018) and Japan (in 2019) — and less than Germany, South Korea and many other large manufacturing countries. These nations are holding their own when it comes to supplying the world.

Myth No. 5 – 3-D printing will soon change all the rules in manufacturing.

A survey by EY, a consultancy, declares that “vastly more companies are using [3-D printing] technology — and that manufacturing will never be the same again.” Even back in 2013, Harvard Business Review was proclaiming that “3-D Printing Will Change the World.” And if you listen to the most enthusiastic pundits, you might imagine that you will soon be able to fabricate most products you need on a 3-D printer at home or at Staples. If they are right, the implications will indeed be profound. “Additive manufacturing” — another term for 3-D printing — could make production more local, transform some “manufacturers” into designers and providers of software, revamp entire supply chains, and require new systems for regulating trade and protecting intellectual property.

But so far, most of this is hype. Yes, 3-D printing is being used to produce prototypes, spare parts and limited quantities of some products, such as dental and medical devices and aerospace components. But even though the world market for products made by 3-D printing is expected to exceed $40 billion by 2024, that’s a relative drop in the overall manufacturing bucket — less than 0.3 percent. Traditional manufacturing will remain the principal way the world makes most things for at least a few more decades.

Source

Kasra Ferdows is the Heisley family chair professor of global manufacturing at Georgetown University’s McDonough School of Business.