At the end of 2015, U.S. manufacturing shrank for the first time in three years. Experts have pointed to the strong U.S. dollar and lower demand overseas as culprits. Even still, the news of a U.S. manufacturing recession comes as a bit of a shock. That’s because despite the greater decline of American manufacturing over the last three decades, there’s been lots of buzz recently about a resurgence of “Made in the USA,” goods—and not just for scoring political points.
Labor in China is becoming expensive, forcing companies to fret over production cost and supply chain risk. Many have investigated moving production closer to their most valuable markets, like the U.S.
On paper, this strategy offers many advantages. Let’s get into some of them before we ask the million-dollar question: Can they actually save U.S. manufacturing?
Near-sourcing to meet demand
Many U.S. consumers say they’d prefer to buy American goods. A recent survey by YouGov and GT Nexus captured their thoughts on where goods are made.
Some highlights from the study:
- U.S. consumers perceive U.S.-manufactured goods as more sustainable and ethical, because they’re subject to U.S. standards of production
- 45 percent of consumers would pay more for responsibly produced clothing and footwear
- 44 percent of consumers would pay more for responsibly produced over-the-counter pharmaceuticals
- 38 percent of consumers would pay more for responsibly produced furniture
Consumers want responsibly-made goods, and because they perceive U.S.-made goods as sustainable and ethical, it’s a competitive advantage to produce in the U.S. Moreover, the kinds of goods consumers now want—customized, authentic, personalized—also require companies to produce closer to market.
Personalized products like craft beer and genetic-based medicine are difficult to manage across vast distances and through many hands. Domestic production can make it easier to guarantee quality while speeding time-to-market by cutting transit time. This satisfies another aspect of modern consumer culture: The need for instant gratification, especially when it comes to delivery.
All these factors have made a return to domestic production appear promising. And yet, there are issues.
Bankruptcy, efficiency, and moving targets
American Apparel collapsed in 2015, filing for bankruptcy in October after eight years of decline. The clothing company had once built its fortune by designing edgy basics for hipsters that came plastered with the motto, “Made in USA—Sweatshop Free.” A combination of CEO scandals, lawsuits, debt and, importantly, a failure to acknowledge new consumer trends like fast fashion, brought it down.
It would be a mistake to generalize from American Apparel and say that all U.S. manufacturing is doomed. But there is an essential lesson in its downfall that applies across the board: “Made in USA,” alone, is not enough.
If you’re manufacturing anything today, be it clothes or tractors or medicine, you tangle with complicated production and distribution issues. Both mass production and customized production require adept and scalable manufacturing infrastructure, along with a skilled labor force to match. China mastered this a while ago.
Steve Jobs once famously responded to President Obama’s question of what it would take to make iPhones in the U.S. by bluntly stating “those jobs aren’t coming back.”
This was in 2010, and even though Chinese labor was cheaper than it is today, the reason for choosing China wasn’t solely cost. China had established a robust manufacturing infrastructure. Basically, the entire supply chain for a given product existed in China, from goods to parts to components. Enormous factories could ramp production instantly, mobilizing an always-ready workforce. Speed, scale and efficiency, as much as cost, contributed to China’s success. But now, in 2016, even China is facing challenges.
As Chinese labor costs push higher and its workforce ages, multinational companies have started looking elsewhere to set up shop. Reliable Chinese infrastructure is still appealing, but with emerging countries like Vietnam bolstered by foreign investment and the impending Transpacific Partnership (TPP), lower costs could outweigh that advantage.
To compensate, China is investing in automation. Chinese President Xi Jinping has even called for an “industrial robot revolution” in China. It’s a smart approach—if China can no longer compete on labor price, it can still make manufacturing more affordable through advanced technology. And there’s a lot of promising industrial technology that’s coming, like 3D printing, artificial intelligence and the Internet of Things (IoT). The next revolution in manufacturing will have to make use of these—and big data—to increase efficiency. Which brings us back to the U.S.
Reborn in the USA
If U.S. manufacturing is going to be viable, its factories and labor force will have to innovate dramatically too. Smart manufacturing will be a critical beginning, but to compete, U.S. producers will also need to use their proximity to markets as an advantage.
Here too, technology can help. The newest innovations in supply chains have to do with information sharing, whether it’s using transaction data to fund suppliers in new ways or creating global transportation networks that provide better visibility into orders and inventory.
By combining smart manufacturing with supply chain information technology, U.S. producers can create a strong infrastructure for making goods domestically. Workers will have to be on top of the latest advances, and have the skills to wield them, but if they can, then the U.S. can become a reliable production hub for many industries, stabilizing U.S. manufacturing against some of the larger globalization trends, like exchange rates and overseas demand, that have historically eroded it away.
Suhas Sreedhar is manager of supply chain & technology thought leadership, at GT Nexus. GT Nexus is the world’s largest cloud-based global commerce network on which over $150 billion annually in goods is managed for more than 28,000 businesses. Learn more at www.gtnexus.com.