Warning:  This is a rant about the politics, truths, and lies of Manufacturing Jobs and it’s a long one!

I read a blog post this morning by Fred Wilson.  Wilson is a very successful, very wealthy venture capitalist in New York.  But he’s also wrong, or at the very least mis-informed when it comes to manufacturing.  I guess I struck a nerve, because I left a comment about Fred Wilson’s post on the post and it was deleted as spam even though it is clearly a legitimate rebuttal to the discussion.

He says:

I am bothered by the ongoing discussion about how the US has allowed China (and other lower cost countries) take our manufacturing jobs. That is true, of course. But it does not address the larger context which is that manufacturing is becoming more and more automated and many of these jobs will not exist at all anywhere in a few more decades.

… Blah, blah, blah

So while we can critique our leaders (business and political) for giving up on the manufacturing sector a bit too early, I think the US has largely played this game correctly and will be much better off than the parts of the world that have taken the low cost manufacturing jobs from us.

But we don’t hear any of our political leaders explaining this. I wish they would.

That sort of thing is guaranteed to get me ranting if I come across it in the right (or wrong depending on your perspective) mood.  I don’t delve into politics or current events here very much at CNCCookbook, but when there’s a broad and important discussion about our entire industry, I think it’s important to get some perspectives out there from within the industry.

There are some truths in the China Manufacturing discussion, but there are a whole lot more lies (Tweet This).  And with all due respect to Wilson, to expect the politicians to tell us the truth is expecting a lot more than we’ve seen in recent history.  In fact, I have to take issue with most of what Fred Wilson has to say on this topic.

Truths and Lies: What’s the Reality?

Truth: Labor is cheaper by hourly rate in China and some other parts of the world

There is little doubt about the hourly rates being lower, but they are rising rapidly:

China-Average-annual-Wages-in-Manufacturing

China’s Annual Wages in Manufacturing are Rising Rapidly…

Those wages amount to a $3.50 hourly rate for a 40 hour a week schedule, while the average US manufacturing wages were $19.50 per hour for the same period.

On paper, US wages are much higher, but the reality is that this is a half-truth because there is a lot more to labor costs than just the hourly rate.  For example, one could look at productivity.

Reality: Labor is much more productive in the US than in China

If we compute the cost to get the same amount of work out of the labor force, we get what’s called the “Unit Labor Cost”.  Simply put, if you hire someone who is cheap but doesn’t produce as much as a more expensive worker, you may save more money hiring the better worker than the cheap worker.

Here’s a graph of what’s been happening to Unit Labor Costs over time:

unit_labor_costs_chart

Note how China’s Unit Labor Costs have skyrocketed while the US has actually declined.  What this means is that productivity in the US has increased faster than wages while in China the opposite has happened.  In fact, China started out relatively even in 2000, and now China costs 3x in terms of Unit Labor Costs than a US worker (Tweet This).

All other things being equal, US manufacturing can be quite competitive, and there are a lot of other factors that weigh in on the side of domestic manufacturing:

  • Energy costs in the US are very low and our use of the energy is efficient relative to China.
  • Transportation costs to get the goods back across the ocean.
  • Communication costs when dealing with a shop floor on the other side of the world that speaks a different language and has different customs and standards.

Here’s a great chart of the energy expenses per unit cost of manufacturing:

energyperunitcost (1)

The trend is once again an unhappy one for China versus the US.  Speaking of energy costs, let’s consider an important truth about Global Warming and China.

If You Care At All About Global Warming or the Environment: Quit Buying Chinese-Made Goods

I’ve written before about this topic, and I’ll refer you to my article on China and Global Warming for details, but consider this:

US manufacturers are about 5X more efficient at limiting carbon dioxide emissions as China.  On average, if you spend your $1 on US-made goods, you’re going to save 5X the pollution.  At the same time, you’re helping to create jobs in the US.

In fact, I would argue that the single biggest contribution an individual could make to preventing global warming would be to buy American-made products.  (Tweet this on Twitter)

Truth: China Stole Our Manufacturing Jobs

China has done a number of things to manipulate the markets to make it easier for them to take manufacturing jobs.

Despite what anyone may claim, they subsidize their own industries to the extent that they have built entire Ghost Cities where nobody lives.  As Wired said in a recent article:

China is a marvel of urban planning, 137-square miles of shining towers, futuristic architecture and pristine parks carved out of the grassland of Inner Mongolia. It is a thoroughly modern city, but for one thing: No one lives there.

Well, almost nobody. Kangbashi is one of hundreds of sparkling new cities sitting relatively empty throughout China, built by a government eager to urbanize the country…

If they can build hundreds of empty cities, they can certainly subsidize their manufacturing to make it unfairly competitive.  After all, it is a communist country that can do all the centralized planning and control it wants.

Not unlike Japan before it, China has also manipulated its currency to an unprecedented extent that we’ve only recently begun to call them on the carpet for and reign in.  Here’s a graph from another article I wrote on the subject:

For years, China propped up their currency to create a nearly 2:1 advantage on pricing…

It’s true that China has worked hard to take over manufacturing, but it’s not the whole story.

Lie: Free Trade Is A Tide That Lifts All Ships, Including Ours

This is one we hear a lot whenever someone wants to put a policy through like NAFTA:

Free Trade is good, and while it may hurt a few, it will benefit the greater good.

Let me be perfectly clear–the sum of the GDP’s of the countries participating in the trade may increase due to Free Trade.  But some of the participant’s GDP’s may decrease.

Free Trade that helps the World but hurts the US has helped give away our Manufacturing Jobs.

You want to give me a bunch of complicated arguments from economists about this?  Great.  Let me refer you to my favorite Nobel Prize-winning economist Paul Krugman for his views on Free Trade:

In fact, the elite case for ever-freer trade, the one that the public hears, is largely a scam. That’s true even if you exclude the most egregious nonsense, like Mitt Romney’s claim that protectionism causes recessions. What you hear, all too often, are claims that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone.

Yet what the models of international trade used by real experts say is that, in general, agreements that lead to more trade neither create nor destroy jobs; that they usually make countries more efficient and richer, but that the numbers aren’t huge; and that they can easily producelosers as well as winners.

Pretty strong words there from a man who knows his stuff.  It’s worth Tweeting the money shot:

The elite case for ever-freer trade, the one that the public hears, is largely a scam. (Tweet This)

This drive for Free Trade has helped us to give away our Manufacturing Jobs largely to help the leaders of Big Companies and their Investors.  But it’s been devastating to the Man on the Street looking for work in Manufacturing.

Truth: Automation Has Eliminated Many Jobs From Manufacturing

There can be little doubt that automation has eliminated a lot of jobs from manufacturing.  By the way, almost any advancement in productivity will tend to eliminate jobs.  The shift from HSS tooling to carbide tooling meant that fewer workers could produce the same number of parts.

Reality:  The Robots Didn’t Take All Our Jobs.  They May Not Have Even Taken Many of the Jobs.

People like Andrew McAfee have made careers out of predicting that machines will eliminate virtually all jobs, and that this is inevitable.  People like Fred Wilson take this sort of thing as Gospel because they move in the orbit of people like McAfee.  As Venture Capitalists, they want to be keenly aware of which Megatrends can be ridden, and which ones may squash potential businesses they choose to invest in.

Always beware the argument that consists largely of projecting that some graph will continue just as it always has.  The world is littered with people who believed that and found out that they were wrong.

We can quantify the impact of automation in many ways.  Between 1993 and 2007 robots accounted for 10% of total GDP growth and 16% of labor productivity growth in manufacturing.  Even if we choose to view that impact as being totally negative on the number of jobs, how can a 16% increase in productivity be responsible for destroying an entire market segment of jobs?

The answer is that the Robots didn’t take all our jobs.  They may not have even taken many of them.

BTW, the same article concludes that automation has had a similar impact to the Steam Engine, which was generally thought to be part of the Industrial Revolution that created a huge number of new Manufacturing Jobs.

Let’s look at this a different way.  Why not look at Robot Adoption in various countries and see what impact that had on Manufacturing Employment.  Here’s a handy chart of adoption:

RobotAdoption

The Europeans are well ahead of the US on Industrial Robot adoption…

Now here we compare job loss predicted by robot adoption versus actual job loss:

RobotJobLoss

Predicted Robot Job Loss vs Actual Jobs Lost in Manufacturing…

It’s pretty clear that the predicted losses are often much higher than the actual losses, though there are exceptions.  The point is, the primary cause for the loss of these jobs is not robots and the dystopian future where there is no work because there are too many robots is long ways away.

The Robots didn’t take all our Manufacturing Jobs or even very many of them.  (Tweet This)

Truth:  Even With Substantially More Automation, There’s Plenty of Manufacturing Jobs Available.

The figures above suggests that automation reduces the need for jobs by less than 20%.  Let’s be extremely generous to the Robots.  Let’s assume it reduces the need for jobs by half.  Are there enough Manufacturing Jobs left to make it worth caring about this sector?

It isn’t going to take me very long to make the point.  Foxconn employs 300,000 workers just to manufacture Apple’s iPhone 5s.  If we cut that in half due to Automation, we could have 150,000 Manufacturing Jobs created here in the US–and that’s just for one product out of the tens of thousands US companies are manufacturing overseas.

Heck, we can divide the numbers by 10x and still have a meaningful and valuable number of jobs created if we focus on rebuilding Manufacturing in the US.

Lie: Companies Like Apple Say There’s Not Enough Talent to Do Manufacturing in the US

Speaking of Apple, if you’re going to tell a lie, it may as well be a whopper, I suppose.  Apple trotted this one out as they were being pressed on why they sent so much manufacturing overseas.  It’s an, “Even if we wanted to, we couldn’t because we can’t find enough talent to get it done.”  Their claim is that there aren’t enough skilled workers to do much manufacturing in the US, and that’s why they have to do it in China.

I wrote about this nonsense in my Smoothspan business strategy blog back in 2013 when it came out.  Here’s what Tim Cook said:

All the remaining American tool-and-die makers–a key profession in preparing to make high volume products–could hardly fill the auditorium in Rancho Palos Verdes where the event was held, Cook said. In China, those skilled in that trade would fill several cities, he added.

Mr Cook, I don’t know how large your auditorium was, but the world’s largest indoor stadium seats 50,000 while the Bureau of Labor Statistics claims there are some 74,000 Tool and Die Makers in the US as of their 2015 numbers.  Talk about telling whoppers.

If there aren’t enough of these people, it’s hard to understand how we have the most amazing Aerospace, Defense, and Oil and Gas Manufacturing Industries in the World.  Something tells me that people capable of building Stealth Fighters can manage to make iPhones too.

Apple is starting to see a tiny glimmer of light, building small manufacturing facilities here and there, but these are a drop in the bucket.

What’s The Answer?

I hope by now you see why I’ve gone on ranting this way–most of the conventional wisdom about Manufacturing Jobs and Offshoring is wrong.  We can have a healthy, vibrant, and growing Manufacturing Sector–perhaps now more than ever since many of the factors that put us here are in decline.  Doing so would create many welcome jobs in an economy that still is not really recovered from the Great Recession.

We know we should, even the politicians are talking about it a bit, but how can we accelerate the Manufacturing Sector?

Roll Back Some of the Free Trade

We don’t need an all-out trade war, but a little bit of protectionism can go a long way.  We need to get smarter about rolling back some of the Free Trade in ways that will accelerate job creation in the Manufacturing Sector.  Most importantly, we should penalize those who compete unfairly with us–they’re not good trading partners.  We should start with China.

Reduce Penalties on Small and New Businesses

Small businesses create most of the jobs in our economy, and particularly new businesses.  Anything we can do to make their job easier is going to help everyone.  Small businesses pay a disproportionate amount of the penalties our Government imposes on every business.

Let’s take one example–Sarbanes Oxley.  Many of you may not have heard of it.  This was legislation created in the wake of Enron to prevent future Enron’s.  Mostly what it does is to make it much harder for a company to go public on the stock market.  Companies today have to be much larger before they can go public.

How can this matter for Small Business?  For starters, the likelihood a business can go public down the line will affect it’s ability to raise capital along the way.  If you don’t think Manufacturing Companies can go public, have a look at Proto Labs which is doing very well.  It’s really nothing more than a very fancy Job Shop when you look under the covers.

We live in a Manufacturing Technology Renaissance from many perspectives.  Innovation takes capital and yet it’s very hard to come by for the Manufacturing Sector.

Or consider programs like Obamacare that add cost to every worker.  Those that thinks this can’t possibly affect employment because it affects every company are just flat out wrong.  The cost has to come out somewhere, particularly when you must compete globally.

A last statistic to note:

The annual cost of regulations on businesses overall is about $8,088 per employee.  The cost of regulations on small businesses (those with fewer than 20 employees) is $10,585–a significantly higher drag on their competitiveness and ability to create more jobs.

This information is from the US government’s Small Business Administration.

Why would we penalize the principal jobs growth driver?

Improve Access to Capital

If you ever tried to apply for an SBA Loan, you’ll know it is a political pork barrel cunningly designed to favor only those voters who the politicians in control want to favor.  Why not create a special program to help Small Manufacturing Businesses gain access to capital?

Given how much more efficient these kinds of businesses are at creating jobs, and how much more efficient they are at putting capital to work, a program like this would pay for itself in no time.

Educate More Skilled Labor

The rate at which we can add skilled labor to the pool of talent will ultimate govern our ability to grow the Manufacturing Sector.  We hear politicians like Bernie Sanders talk about making education completely free.  This is a plan that some estimate will cost state and Federal government some $70 Billion a  year–probably too much to afford.

But what if we made Community College programs relevant to Manufacturing Jobs free or nearly free?  That would cost a LOT less and would rapidly add more skilled labor to the workforce.  That’s a plan worth looking into.

Make the Big Cos That Were The Worst Offenders Foot the Bill

We’ve seen that China was not alone in plundering our Manufacturing Jobs.  Big Companies and those that benefit from them (their executives, owners, and shareholders) helped.

We’ve also seen that Small Business pays a disproportionate share in many ways.  They don’t get to offshore their jobs.  They pay more in regulatory expenses per employee.  Their access to capital is much scarcer.

We love to favor the Big Companies.  We’re proud as a Nation when we can point to companies like Apple or General Motors.  But the truth is, we need to be proud of our Small Businesses because they’re really who built this country.

We have a progressive income tax, so why aren’t we making corporate taxes progressive?  In particular, why not make Big Co’s pay a disproportionate share of things like Obamacare?  What if they had to pay the entire Small Business Obamacare burden?  Moreover, what if we let them offset that burden based on how many jobs they create in the US rather than overseas?

We’d see change in a hurry, that’s what.  And couldn’t we use a faster rate of change?  I’d like to hear what you think in the comments.

 

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Truths and Lies About China and Manufacturing: A Rant
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