Opinion: Dispelling myths about manufacturing

April 30, 2013

Recent months have brought more signs of recovery in the manufacturing sector, including new hiring, surging exports and a spate of stories about manufacturers “reshoring” jobs that had once been done overseas. Surely a manufacturing renaissance is underway?

Yes, manufacturing is entering a new era of rising global demand and innovation that will benefit U.S.-based manufacturers that can ride these trends. And, yes, factors, including energy, that determine where a manufacturing site is located are shifting in ways that could put more factories in the United States. As the economy recovers and firms innovate to make U.S. manufacturing more competitive, we should see manufacturing exports rise, gross domestic product grow and hiring continue. But the effects of this renaissance cannot be as sweeping as they might have been in the past. Manufacturing can and will help drive recovery and it will lead the nation in research and development, as well as exports. However, expectations regarding job growth require moderation. Manufacturing can’t have the same effect on employment as it had at its peak — about 25 percent of all jobs were in manufacturing in the 1950s. It’s just not big enough as a share of the economy and modern plants need relatively few additional workers to raise output. To understand this more nuanced view, it helps to dispel some myths.

Myth 1. All manufacturing companies need the same things — low-cost labor, access to raw materials and markets, and a favorable business environment.

In fact, manufacturing is diverse. The conditions for success vary a lot between industries such as autos and apparel or between steel and high-tech. Motor vehicles and machinery fall into a group we call “global innovation for local markets” — businesses that require substantial investments in R&D to improve their products, but ones that also build products in or near consumer markets because they must be tailored to local preferences and regulations. This is the largest group, accounting for 35 percent of U.S. manufacturing value added and 31 percent of U.S. manufacturing employment. The next-largest in terms of employment is “regional processing,” which includes food products and is even more tightly linked to end markets to meet local tastes, ensure freshness and limit shipping costs. The smallest in terms of share of value added and the second-smallest in jobs, is “labor-intensive tradables,” including industries such as apparel and footwear.

Myth 2. Trade and offshoring drove the decline in manufacturing in the U.S.

If we look at what happened to the 5.8 million manufacturing jobs that disappeared from 2000 to 2010, we see that the most important factor was productivity growth that outpaced output growth, resulting in the loss of 3.7 million jobs. Trade and offshoring — moving jobs overseas — directly affected 1.3 million jobs, about 20 percent of the decline. It was not the main driver of job loss. More than 700,000 jobs were lost to falling demand and other factors. Rising productivity is a source of GDP growth, but when productivity outpaces growth in output, employment suffers.

Myth 3. Manufacturing employment means assembly line work.

As manufacturers invest in machinery to raise productivity, fewer manual laborers are needed, and the mix of job types shifts. Depending on the industry, 30 to 55 percent of manufacturing jobs are in service-type functions, such as engineering or marketing. If we count the service jobs manufacturers create — in trucking or IT services, for example — we find that 4.7 million service-sector jobs are directly linked to manufacturing. If we also count 1 million jobs in primary resources (iron mining, for example), we see 8.9 million manufacturing-related jobs are in service roles versus 7.3 million in production.

Myth 4. Manufacturing employment can someday return to historic peak levels.

Today, manufacturing accounts for about 9 percent of employment, down from its heyday of 25 percent in the 1950s. It is not a reflection of weakness on the part of U.S. manufacturers, but a result of America’s economic evolution and the growth of other parts of the economy. As wealth rises in any country, consumers have more money for services such as travel and entertainment, and the service sector starts to grow faster than manufacturing. Manufacturing output continues to grow, but services GDP and employment grow faster. South Korean manufacturing employment peaked at 28 percent in 1989 and has fallen to 17 percent; German manufacturing went from 35 percent of employment in 1970 to 18 percent in 2008. U.S. manufacturing is alive and well — and well-positioned. U.S. manufacturers are on or near the leading edge of new technologies for designing and building the products of the future. These range from 3-D printing to advanced robotics.

As manufacturers continue to expand, they will need to be more flexible and agile, anticipating where demand will be and using multiple factors (not just unit labor cost) to decide where to expand. In U.S. plants, there will be well-paid jobs for high-skill workers who can program robots, and for people who can use big data to raise quality and discover new market opportunities. Critically, manufacturing will continue to underpin U.S. competitiveness, making outsize contributions to productivity, innovation and trade.

Manyika is the director of the McKinsey Global Institute, McKinsey & Co.’s business and economics research arm. George is the director of McKinsey’s Operations Practice.

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