There is a lot to be said about the U.S. economy today. Phrases such as “manufacturing is on the decline” and “worker productivity has been slowing down” are all too common now.
To address the former, the U.S. economy is often described as having three phases. A booming agricultural U.S. economy lasting through the 1800s was followed by a shift to an industrial and manufacturing economy. Recently, as of the late 1900s, the U.S. seems to have lost its edge in manufacturing and turned to services, an industry portrayed as intangible and possessing low barriers to entry.
However, the story is a bit more nuanced. With the onset of the 1800s, both the industrials and services sectors began to grow at similar rates and sizes. The turning point occurred after World War II, when wealth grew in the United States and manufacturing became focused around efficiency. This led demand for services to grow to meet the needs of those wanting to spend their wealth, while reducing the demand for manufacturing workers, given optimization. This funneled much of the workforce into services, slowly making the sector less productive while also decreasing the U.S.’s ability to manufacture.
In order to further understand the manufacturing sector of the U.S. today, the sector must be defined. Traditionally, manufacturing is associated with “non-durable” manufacturing, or mass, short-term, often commodity production. We have seen this type of manufacturing shift overseas. Regardless of whether this can be won back or even if we want to win this back, the answer is very likely a resounding no. With a global shift to lower cost nations, it is hard for the U.S, where cheap labor and materials are not as abundant, to also compete in this space. Furthermore, as a forward-looking nation, the U.S. would rather like to compete in R&D, technology, and skilled advancements. Therefore, tax cuts and stricter trade policies are not necessarily the solution to the slowdown in manufacturing and worker productivity.
“Durable” or “deep skilled” manufacturing, on the other hand, although also seeming to be on the decline in the United States, can be made a core competency of the country. Why? Manufacturing must occur somewhere, just like agriculture. However, unlike agriculture, which is based on land available in a given nation, manufacturing is mobile and depends on the trained workforce and capital available. Whichever nation is most efficient can become a manufacturing hub. Currently, the Midwest U.S. is one the most competitive areas in this space – through 1) the low cost of real estate, 2) consistent and cheap electricity, and 3) easy accessibility given the network of roads and seaways, connecting a majority of the U.S. population. Most other nations lack these two components, providing the U.S. with an opportunity to capitalize.
Deep skilled or specialized manufacturing includes items of longer lives, such as automobiles, aircrafts, medical equipment, and the precision machinery/tooling needed for production. As deep skilled manufacturing requires more capital expenditures, it would be advantageous for the U.S. to further its involvement in an industry with higher barriers to entry. Higher skilled manufacturing for the world currently takes places in nations such as Japan, Germany, and Switzerland.
The question now becomes one of how to attract and increase skilled manufacturing in the United States.
In order to expand any industry operating at full efficiency, adding more skilled workers will inherently multiply output. By investing in developing a skilled workforce, the U.S. will not only increase output and have a “durable” output, but also become a nation that can afford to use relatively higher paid labor compared to “non-durable” manufacturers. However, nations around the world are becoming similar in price of labor and availability of resources.
Therefore, training the U.S. workforce in specialized manufacturing is key to differentiating. As mentioned earlier, jobs lost to automation and cheap foreign labor cannot come back. Utilizing skilled jobs is the alternative. As opposed to the stigma around manufacturing jobs as low-paid factory jobs, these new specialized manufacturing and engineering jobs are significantly better paid and require further education. Also, these jobs cannot be easily replaced in the next six to ten years, given the high training cost. In fact, companies in this space currently face a dearth in labor supply and are often forced to recruit those in the 50+ demographic or those fresh out of college, given that very few workers in the generation between had entered this sector for reasons mentioned earlier. The need arises now to re-train the 50+ demographic, to accustom them to new technologies, and then having them train those new to the field using both new and existing knowledge.
Since many existing training programs do not provide sufficient training for success in the field, the United States needs a revamp in this space. Unlike other nations, where governments sponsor similar programs, we must look to the private sector to make an impact. The Golden Corridor Advanced Manufacturing Partnership works with high school students in Illinois while the City Colleges of Chicago is constructing a manufacturing teaching center. Companies have begun to take charge, and we need to expand upon this to grow our skilled manufacturing base. If the government could offer subsidies to companies hiring interns for a duration of 3+ years, companies would be incentivized to simultaneously increase output and train new workers, while also capturing the “tribal knowledge” of older, experienced people and bridging the education gap.
Another aspect is investment in deep skilled manufacturing in the United States, as investment is an additional driver of output. The private equity industry traditionally seeks out faster returns, with an investment time horizon of typically three to five years, based on short term turnarounds or improvements. With these expectations, private equity does not see manufacturing as a very attractive investment sector. However, deep skilled manufacturing can offer the same returns of ~20% annually, but consistently and over the long term.
How can we funnel investment to manufacturing and give this advanced sector a much-needed boost? A difficult but eventual route is to convince investors to believe in the value of sustainable, long-term, and higher overall returns, which the innovative technology of manufacturing in the U.S. can boast – banking on, again, developing a stronger, specialized workforce.
Some investors have already begun paving the way.
In early 2013, Warren Buffet’s Berkshire Hathaway bought out Iscar, a producer of metal cutting tools based in Israel. Buffet had described Iscar as one of its five most profitable portfolio companies, outside its insurance holdings. In 2011, Buffet acquired Lubrizol, a specialty chemicals provider. Other Buffet industrial holdings are included with the International Metalworking Companies. Announced late 2017, China Investment Corp and Goldman Sachs have partnered to invest in manufacturing, industrial, consumer, healthcare, and other U.S. industries. Lynn Tilton, founder of Patriarch Partners, has made various investments across the manufacturing space. Tesla, as another example, has been investing in unique projects in the space, relying on specialized manufacturing.
The United States has a long way to go but is positioned well to reverse the manufacturing slump and take on a leading role in the deep skilled manufacturing space. Re-shoring focuses on training our human capital not only through education, but also, more specifically, through the pass-down of veteran knowledge.
Figure: A-1 Tool, a steel polishing company, has had to find help in hiring