the rebirth of u.s. manufacturing: myth or reality?
DESCRIPTION
In this Executive Insights, L.E.K. Managing Directors Michael Connerty and Carol Wingard discuss five critical themes that are playing out across several manufacturing industries. One thing is clear — optimism about the future of U.S. manufacturing is relatively buoyant, as 68% of the executives surveyed agreed that U.S. manufacturing will experience accelerated growth in the next five years. L.E.K. discusses the trends in U.S. manufacturing and whether a renaissance is really on the rise.TRANSCRIPT
L E K . C O ML.E.K. Consulting / Executive Insights
EXECUTIVE INSIGHTS
INSIGHTS @ WORK®
VOLUME XVI, ISSUE 32
The Rebirth of U.S. Manufacturing: Myth or Reality? was written by Michael Connerty, a managing director in L.E.K. Consulting’s Chicago off ice and Carol Wingard, a managing director in L.E.K. Consulting’s Boston off ice. Research support was provided by Maria Gacek, a Chicago-based Industrials Specialist. For more information, contact [email protected].
The media has been full of reports lately about a renaissance
in U.S. manufacturing. The cheerleaders cite an array of
heartening examples, including a $4 billion investment by
Dow Chemical to boost its ethylene and propylene capacity
on the U.S. Gulf Coast; an announcement by Flextronics of
its plans to create a $32 million product innovation center in
Silicon Valley; and a decision by Airbus to build a $600-million
assembly line in Alabama for its jetliners.
These stories have prompted much talk about the “reshoring”
of manufacturing jobs to the U.S. from China and elsewhere.
Indeed, in his 2014 State of the Union address, President
Barack Obama hailed “a manufacturing sector that’s adding
jobs for the first time since the 1990s.”
But is this revival for real? A lack of detailed data has made
it difficult to assess what’s really going on within the U.S.
The Rebirth of U.S. Manufacturing: Myth or Reality?In an exclusive survey, L.E.K. Consulting looks beyond the hype to provide a more nuanced picture of the purported renaissance in U.S. manufacturing.
manufacturing sector — or to predict where it’s headed in
the foreseeable future. To help remedy this, L.E.K. Consulting
conducted a major survey of decision makers in 10 U.S.
manufacturing industries, including aerospace and defense
equipment, chemicals, industrial components, automotive
equipment and electronics. The
survey, which focused on large
companies with more than $500
million in revenues, also involved
in-depth interviews with high-level
executives about the factors driving
their decisions on where to locate
their manufacturing.
The picture that emerges from this research is less black
and white than either the cheerleaders or the naysayers
would suggest. Overall, we see a modest improvement in
U.S. manufacturing, but not a dramatic wave of reshoring.
More companies are investing in the U.S. or considering
it as a location for their new manufacturing facilities. But
this is essentially a rebalancing after many years in which
manufacturing shifted overwhelmingly to lower-cost nations
such as China.
As manufacturers continue to seek growth opportunities, they are finding it more important than ever to be closer to their customer base, whether they are OEMs or the end customers themselves.
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5. Business environment factors, such as taxes and
regulation, impact a region’s long-term attractiveness
Strong End-Market Demand
As manufacturers continue to seek growth opportunities,
they are finding it more important than ever to be closer
to their customer base, whether they are OEMs or the end
customers themselves. Proximity matters greatly for market
positioning and customer service levels; and cost is no longer
the dominant factor in determining where companies base
their manufacturing.
Our research shows there are five critical themes that are
playing out across a number of manufacturing industries:
1. Strong end-market demand is driving companies to
produce closer to their customer base
2. Low risk of supply chain disruption outweighs short-term
cost savings
3. Narrowing differences in energy and labor costs are
shifting regional priorities
4. Capabilities that foster innovation, differentiation and
speed to market increase regional competitiveness
Perc
ent
of
Res
po
nd
ents
0
20
40
60
80
100
Percent of respondents rating 6 or 7
Rapidresponsive-
ness tocustomers
Currencyrisk
Politicalrisk
TaxesLaborflexibility
Legal /regulatory
risk
Availabilityof
necessaryskills
Proximityto end
markets
Levelof IP
protection
Supplychainrisk
Energycosts
Proximityto raw
materials
Costof labor
Transpor-tation
cost, timeand risk
51% 23%37%42%44%44%45%45%46%47%47%48%50%51%
Very ImportantNot at all important
1 765432
Decreasing importance
Note: How important do you consider the following factors in determining the locations of your company’s manufacturing facilities?Source: L.E.K. survey (n=205)
Figure 1Criteria in Determining Location of Manufacturing Facilities
EXECUTIVE INSIGHTS
• Closer alignment between R&D and production can foster
rapid innovation
• Domestic assembly (or supply chain postponement) could
allow for end-market customization
Executives were also quick to note that having an in-depth
understanding of demand drivers is critical to making
manufacturing and supply chain location and sourcing
decisions.
Many companies are continuing to invest in
manufacturing outside the U.S. — particularly in
emerging countries — because they need to be close to
their customers in these important growth markets. For
example, we expect more companies to manufacture
in China as a way to meet burgeoning demand from
Chinese consumers — a trend that could be described
as “in China, for China.” One manufacturing executive
in our survey stated: “Though we started manufacturing
in China and India as low-cost alternatives and sold
those products to U.S. customers, we’ve now adopted
the policy that if you don’t have local markets in China
or India, then you don’t move it there — you keep
production near where the demand is.“
At the same time, we are also seeing a rise in the trend
of “near-shoring.” For example, many manufacturers are
basing their production in Mexico as a low-cost means
of capturing the growth in U.S. demand. So the overall
picture is truly nuanced.
According to our survey findings, industrial
manufacturing, chemicals and automotive companies
were most likely to project U.S. manufacturing growth
for their industries due to their high value for greater
responsiveness to their customer base, including OEMs
(see Figure 1).
One executive from an electrical equipment and
components manufacturer stated: “Our goal is to
produce in or near the countries where we sell the bulk of our
core products. This is more for market positioning rather than
for cost reasons.” Many executives voiced similar reasoning
in their company’s decisions as a number of common benefits
were cited:
• Proximity to the customer base allows for better
positioning in the markets being served, including access
to premium segments that demand shorter lead times
• Demand forecasts can be more accurate and done for a
shorter horizon
Automotive
17%
4.2
IndustrialManufac-
turing
40%
5.0
Aerospace&
Defense
23%
3.8
Overall
39%
Other*
34%
4.1
Energy /Oil & Gas
63%
5.6
Chemicals
64%
5.6
0
20
40
60
80
100
Perc
ent
of
Res
po
nd
ents
Percent of respondents rating 6 or 7
Strongly Agree Strongly Disagree
7 123456
Note: Measures the impact of the discovery of shale gas on U.S. manufacturing competitiveness, by industry; *Other industries consists of packaging, construction equipment, electronics manufacturing, electrical equipment & components, and metals & miningSource: L.E.K. survey (N=205)
Average rating
4.7
Figure 2Importance of Shale Gas by Industry
L E K . C O ML.E.K. Consulting / Executive Insights INSIGHTS @ WORK®
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the competitiveness of U.S. manufacturing in the chemicals
industry (see Figure 2).
An executive at an energy equipment manufacturer told
us: “For industries like chemical processing or metals
manufacturing, energy costs are a much bigger deal than for
machined and electronic goods, and could certainly cause
companies to relocate.” To cite just one example, the U.S. is
now one of the world’s lowest-cost producers of plastic resins.
By contrast, energy costs are less important in industries like
furniture, electronics and textiles, so manufacturers in these
areas are less likely to reshore to the U.S.
In the past, a key driver for companies to move their
manufacturing out of the U.S. was to save money on
labor. The difference in labor costs is still significant, but it’s
narrowed as wages have risen elsewhere. In the U.S., the
average hourly manufacturing wage was $24.40 in 2013.
In China, it almost doubled from $1.90 in 2008 to $3.50 in
2013. But the strengthening of China’s currency has further
eroded this cost advantage, and U.S. manufacturers have also
Page 4 L.E.K. Consulting / Executive Insights Volume XVI, Issue 32
EXECUTIVE INSIGHTS
Managing Supply Chain Risk
Executives often cited the twin themes of customer proximity
and supply chain risk in the survey. While proximity to end
markets is an important means of improving customer
responsiveness and boosting revenue growth, it also enables
OEMs to reduce the risk of the supply-chain disruptions that
often occur when manufacturing overseas (see Figure 1).
A group vice president and general manager for a leading
manufacturer of precision machine tools stated: “We don’t
have the ability to get a lot of visibility and long lead times,
and it is risky to make long-term bets on inventory; so trying
to minimize those risks and manage our inventory costs also is
a really big deal (with a long supply chain).”
Indeed, shortening the supply
chain can reduce risk and have a
number of related financial and
customer benefits such as shorter
lead time, increased flexibility,
enhanced efficiency and customer
responsiveness (e.g., ensuring on-
schedule production, fewer shortages
and errors, minimizing obsolescence
and inventory, and avoiding delays in
reaction time).
Narrowing Differences in Energy and Labor Costs
Costs are just one component of a
more complex equation, but they
clearly remain a significant factor.
Thanks to the fracking boom that has
revolutionized oil and gas production
in the U.S., the country now possesses an abundance of
inexpensive energy. As a result, the U.S. is an increasingly
attractive location for manufacturers that are energy
intensive or that can use natural gas as a primary input.
Clear winners include chemicals and petrochemicals (such
as plastics), and also sectors that serve those industries. In
our survey, 64% of the respondents “strongly” agreed that
the discovery of shale gas in the U.S. has positively affected
0
20
40
60
80
100
Perc
ent
of
Res
po
nd
ents
Note: *Other industries consists of packaging, construction equipment, electronics manufacturing, electrical equipment & components, and metals & miningSource: L.E.K. survey (n=143)
IndustrialManufac-
turing
OverallOther*Energy /Oil & Gas
AutomotiveChemicalsAerospace&
Defense
New equipmentdesign and prototyping
Reverse engineering of back-catalog parts
New componentdesign and prototyping
Reverse engineering for other purpose (e.g., cost estimation)
On the factory floor
Other*
Figure 3Uses of Additive Manufacturing (3D Printing) by Industry
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closed the gap somewhat by enhancing their productivity and
their use of automation. According to the global business
director at a welding equipment manufacturer, fierce overseas
competition “has forced the evolution of the industrial base in
the U.S., where many industrial manufacturers have become
lean [and] automated to survive.”
Technological advances in the manufacturing process have also
reduced the importance of labor costs as part of the overall
cost structure. For example, in the transportation equipment
sector, labor costs represented 31% of manufacturing value
in 1991. By 2011, this figure had fallen to 21%. This shift
from labor-intensive to technology-intensive manufacturing
processes has made the U.S. more competitive and diminished
the benefit of outsourcing to lower-cost countries. The
ongoing shift into more technology-based manufacturing cuts
across segments. A case in point is an electrical equipment
and components manufacturer who states: “We are currently
investing heavily in U.S. operations, specifically to improve
existing tooling to increase output and efficiency.”
In the future, many commoditized
products will continue to be made
offshore. In the U.S., we expect
a growing emphasis on more
sophisticated manufacturing,
including the use of 3D printing to
accelerate product development.
Currently, adoption for manufacturing processes is low,
but is anticipated to grow once capabilities improve for
scalable metallic additive manufacturing (e.g. powder metal).
This cutting-edge technology holds particular promise for
the type of complex, low-volume products developed in
industries such as aerospace and defense. However, the pace
of continued advances in 3D printing will depend in part
on expanded training and development of a skilled
workforce (see Figure 3).
Innovation, Differentiation and Speed to Market
In an acutely competitive environment, capabilities
that foster innovation, differentiation and speed
to market increase their regional competitiveness.
A corporate strategist for one manufacturer told
us: “It’s tough to get the same quality level and
cycle time to serve your customers if your supplier
networks are far away.” As manufacturers seek
growth in local markets, they find that they must
tailor some of their products to those markets and
become faster at getting products to market in order
to thrive. As an energy equipment manufacturing
executive stated: “The ability to meet customer
demand when they need it is very important. If you
don’t have that product available quickly, you will
lose the sale.” The CEO of a manufacturer in the
automotive industry added: “We hesitate to put a
0 20 40 60 80 100Percent of Respondents
Note: *No difference means the response was within +/-10% of the overall average response Source: L.E.K. survey (n=64)
HigherTaxes in U.S.
Supply Chain Infrastructure Stronger
Outside of U.S.
Shortage of Key Manufacturing
Skills in U.S.
International Facilities Serve Customers
Outside of U.S.
U.S. EconomicUncertainty and
U.S. Fiscal Risk
Lower WagesAbroad
Regulatory / Legal / Environmental
Uncertainties in U.S
Averag
e Ratin
g
4.9
3.5
3.9
4.2
4.7
4.8
4.8
Not at all important Very Important
1 765432
Figure 4Factors Hindering U.S. Manufacturing from Achieving Growth
American companies often have a competitive advantage when it comes to producing technologically advanced, differentiated goods that require precision manufacturing and rigorous quality control.
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L E K . C O MINSIGHTS @ WORK®
component or product that requires high, stringent control in
many developing countries.”
Indeed, American companies often have a competitive
advantage when it comes to producing technologically
advanced, differentiated goods that require precision
manufacturing and rigorous quality control. As a corporate
strategist at one U.S. manufacturer put it: “Overall, the
harder the skill required, the closer to home we keep it.” It
also helps that the U.S. is known for its strong protection of
intellectual property rights.
Business Environment and Regional Attractiveness
Executives in our survey were keen to point out the
importance of the business environment their companies
are operating in as a critical factor
affecting long-term regional
attractiveness. Companies are
continually assessing the tradeoffs
between factors such as end-
market proximity with exposure
to domestic taxes or regulation.
On the positive side for the U.S.,
its stronger laws and institutions
relative to developing economies
provides companies with greater
intellectual property (IP) protection
and higher safety standards.
IP protection is particularly
important for manufacturers
where proprietary product designs
are critical differentiators to their
customers. However, executives
cited that high corporate taxes and regulatory uncertainty
are the two biggest factors hindering U.S. manufacturing
from growing faster. The CEO of an industrial equipment
manufacturer told us: “Taxes, regulations, future changes
to energy policy, and health costs are strong headwinds to
moving back to the U.S.” (see Figure 4).
Some executives also raised concerns
that the U.S. might not have enough
skilled labor to meet demand as
manufacturing becomes more
sophisticated and technology driven. This is especially true
in the automotive sector where one CEO told us: “The U.S.
simply lacks well-qualified engineers and the workforce to be
competitive in the fields we operate in.”
One message from our survey is clear: optimism about the
future of U.S. manufacturing is relatively buoyant. When we
asked decision makers if they agreed with the statement that
“U.S. manufacturing within your industry will experience an
accelerated growth rate over the next five years,” 68% of
the respondents either “strongly” agreed or “somewhat”
agreed. By contrast, 20% either
“somewhat” disagreed or
“strongly” disagreed. Likewise,
33% “strongly” agreed that their
industry will see higher investment
in onshore manufacturing by
U.S. producers than in offshore
manufacturing over the next five
years, while only 12% “strongly”
disagreed. Asked if they believe
that the U.S. is “undergoing a
manufacturing renaissance,” 23%
“strongly” agreed and only 6%
“strongly” disagreed (see Figure 5).
In general, we don’t expect
many companies to close their
existing facilities in China and to
reshore them in the U.S. But we
do expect many companies to
locate new manufacturing facilities
0
20
40
60
80
100
Strongly Agree
Somewhat Agree
Neutral
Strongly Disagree
Somewhat Disagree
Perc
ent
of
Res
po
nd
ents
Note: Strongly agree = percent of respondents rating 6 or 7 (on a 7 point scale), strongly disagree = percent of respondents rating 1 or 2 Source: L.E.K. survey (N=205)
Likelyaccelerated
U.S. manufac-turing
growth innext 5 years
Higherinvestmentin onshorevs. offshoremanufac-turing??
U.S.undergoinga manufac-
turingrenaissance
Figure 5Expectations of U.S. Manufacturers
Page 6 L.E.K. Consulting / Executive Insights Volume XVI, Issue 32
One message from our survey is clear: optimism about the future of U.S. manufacturing is relatively buoyant.
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L E K . C O MINSIGHTS @ WORK®
and expand existing ones in the U.S., particularly in sectors
such as aerospace and defense, industrial manufacturing,
oil and gas, and the automotive industry. The bottom line
is that companies will locate close to where their growth is
originating. This doesn’t amount to a renaissance or a new
dawn. But after decades of decline, it’s a welcome advance.
L.E.K. Consulting / Executive Insights
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