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Can the U.S. Bring its Supply Chain Back Home?

As the pandemic era's supply chain disruptions worsen, business leaders are rethinking their offshoring decisions. But many worry there aren't enough Americans who still know how to make things. Harry Moser believes they've got the math all wrong.

Issue: Fall 2021

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Factory skills in the U.S. are hot right now. The boomlet ranges from small, artisanal operations like this leather goods shop in Portland, Oregon, to "smart factories" where people are combining machining with computer modeling and 3D printing. A General Electric executive calls the latter "a self-improving factory that never stops." Photo by Shawn Linehan

By TODD OPPENHEIMER

  1. Cutting Taxes and Regulations
  2. Playing Leapfrog
  3. The Hunt for Good Workers
  4. Will Reshored Jobs Last?
  5. Resources for More Information

Almost all of us have now read about, heard about, or directly suffered from the extraordinary shipping delays that have arisen during the COVID pandemic. Some of these hold-ups have been little more than consumer annoyances (that sweater that never arrives, the new bicycle for your 10-year-old’s birthday that’s been stuck at a U.S. port for weeks, floating on some container ship).  Others, however, have been extensive enough to seriously disrupt pillars of the American economy—industries such as construction, auto-making, and medical supplies.

Strangely, despite good prospects that the pandemic is gradually ending, the news and predictions regarding supply-chain troubles seem to only get worse. This does not bode well for the upcoming holiday season, when so many retailers hurt by the pandemic need to see their sales revive.

How can this have happened? The pandemic, it turns out, didn’t actually cause today’s shipping disruptions; it merely brought globalization’s longstanding weaknesses to the surface—and greatly aggravated them. (The vast interconnections behind this problem were well summarized recently by Peter Goodman, a New York Times correspondent, during an Oct. 15th episode of the Times podcast, “The Daily.”)

Boiled down to its essence, today’s supply-chain dilemma primarily stems from how business leaders evaluate different opportunities to lower costs. And, over the last few decades, moving factories overseas seemed like a great way to cut their costs. As we are now seeing, this was always a risky bet. But the money was so good, few executives could resist the gamble.

Today, Harry Moser often finds himself having to restrain from saying, “I told you so.” Moser is the founder of The Reshoring Initiative, a Florida-based organization dedicated to bringing manufacturing back to America. And he believes the reason that more business leaders don’t follow that path is that they don’t accurately do the math.

During your first meetings with overseas contractors, you’re likely to be shown some impressive prototypes, manufactured by a relatively skilled production team. By the time the second and third rounds of deliveries are made, the quality of the materials has declined. “The work isn’t being done by the A-team anymore,” says Harry Moser of the Reshoring Initiative. “The plant now has its C-team on the job.”

When the offshoring movement first began, way back in the 1960s, Chinese factory workers were being paid the abysmal wages often quoted by people like Bernie Sanders: an average of 50 cents an hour. But those wages have been rising every year—as China’s economy has grown, as its people have gotten richer, and as its manufacturing skills have improved.

Today, U.S. industries have to pay Chinese laborers an average of $7 an hour. That is still a meager wage, but when those labor costs get added to the troubles with doing business overseas—the constant miscommunications, the difficulty supervising production, the often substandard quality, the returns, the risk of intellectual property theft (read knock-offs), the cultural resistance to innovation, the frequent labor turnover, the long-distance shipping costs (and the carbon emissions that result), the delayed shipments from overseas to a market demanding increasingly fast deliveries (obviously exacerbated by the pandemic), the downside of minimal regulation in foreign countries, the political instability there, and the negative publicity that offshoring generates—all of a sudden, building a new U.S. factory starts to look pretty good.

In dollars and cents, according to The Reshoring Initiative, those extra factors add 15 to 25 percent to the cost of any item made in an overseas factory. So, in the end, maybe cheap Chinese labor isn’t so cheap after all.

Given offshoring’s many pitfalls, why didn’t American business leaders see them coming? It turns out that for many years, those pitfalls were somewhat hidden. During a U.S. executive’s first meetings with overseas contractors, Moser says, he or she is likely to be shown some impressive prototypes, manufactured by a relatively skilled production team. By the time the second and third rounds of deliveries are made, the quality of the materials has declined. And, as Moser puts it, “the work isn’t being done by the A-team anymore. The plant now has its C-team on the job.”

Light manufacturing skills like this—making a delicate watch band loop—may not be at the forefront of manufacturing’s high-tech future. But they can recreate one of the few business sectors where the U.S. can distinguish itself: in quality luxury goods, or what might be called “artisan industrial.” Photo by Romain Blanquart.

As this paradigm played out (making it clear that there’s still no free lunch), more and more companies started to “reshore” operations that they once gleefully offshored. Over the last decade, according to data Moser has compiled, the U.S. has gone from losing approximately 140,000 manufacturing jobs each year to regaining more than 1,000,000 jobs since Moser’s project first launched, in 2010.

Interestingly, while there was a surge in reshored jobs under the Trump administration, thanks to its tax cuts and deregulation, it looks like even more jobs are being brought back to U.S. soil under the Biden administration. In 2021, for example, the U.S. is on pace to reshore 220,000 jobs, an all time record, 38 percent higher than was achieved in the last year of the Trump administration.

Moser believes that in 2021, much of the reshoring increase has been caused by the subsidies and tax breaks Biden has offered to stimulate manufacturing of crucial goods, such as semiconductors and electric vehicles. Moser, who calls himself “a good Republican,” considers Biden’s forms of stimulus “superficial,” and thus lacking long-term power. One could also argue that cutting taxes and regulations isn’t a great long-term solution either. While that’s obviously a separate discussion, the fact that each president has felt the need to give U.S. industry a little extra help highlights the structural weaknesses in our economy—and our overdependence on other countries.

Some examples: According to the Reshoring Initiative’s most recent data, 80 percent of our pharmaceuticals come from overseas (primarily China and India), as do 97 percent of our antibiotics (mostly from China). Similar numbers show up in many other sectors, such as apparel and sporting goods. When trouble strikes, as the pandemic has, dependence on other countries can become very costly. In May of 2021, one industry analysis calculated that recent supply-chain disruptions have cost industry a stunning $4 trillion. Meanwhile, according to The Reshoring Initiative’s calculations, there are still three to four million manufacturing jobs overseas that could be brought back here—“a huge potential for U.S. economic growth,” Moser writes.

PLAYING LEAPFROG

Beyond any production problems overseas, the future of manufacturing is likely to be driven by a far bigger trend: the dawning of the age of the smart factory. This is the moment when today’s digital capabilities—for modeling software, remote control, prototype testing through 3D printing, even virtual reality—intersect with real machinery for making stuff. Some industry leaders describe the new factories following this model as “cyber-physical systems,” which will lead to a new age of manufacturing that the Germans call “Industry 4.0.”

Christine Furstoss, who is Technical Director of Manufacturing & Materials Technologies for General Electric, is so into these possibilities that she helped GE launch a program called the Brilliant Factory Initiative. “For you gaming fans,” she writes, “it’s like massive, multiplayer, online gaming meeting the real world of manufacturing.” Furstoss foresees an unprecedented range of efficiencies in this future, as computer modeling and 3D printing help factories speed up the testing of new components, eliminating waste in the process. “It would essentially create a self-improving factory that never stops.” With 3D printing, for example, “you can come up with a design, print it out in an hour, and then test it in an engine that runs at 2,000 degrees.” In some GE factories, she says, workers are already working with mechanical partners, called “co-bots.”

Boosterism or not, more and more companies seem to be making investments of this sort. GE has renovated factories in Louisville, Kentucky, and elsewhere that make water heaters, refrigerators, and washing machines—a move that, by 2016, had allowed the company to bring 1,300 jobs back from China. To underscore just how bright the future looks to GE, the company soon sold off its iconic appliance division to focus on a bigger project: upgrading 400 factories that make everything from jet engines and medical imaging scanners to power-generation equipment and locomotives. In February, 2021, BMW broke ground on a 67,000-square-foot training center in South Carolina with a $20 million investment. The same month, Moser writes, FANUC America, provider of CNC systems, robotics, and factory automation, formed a coalition with Rockwell Automation “to address the manufacturing skills gap with [credentialed] robotics and automation apprenticeship programs.”

This kind of activity suggests that American business leaders are starting to make an entirely new set of calculations. Yes, the U.S. might impose higher costs than the Chinese do for items such as labor and regulatory compliance. In the coming years, however, if that expense buys innovation, efficiency, and dominance of new markets, what’s not to love?

Should those calculations succeed, it will be thanks to what might be called the Leapfrog Principle of Economics. The pattern goes like this: After Henry Ford invented the assembly line, the U.S. dominated manufacturing for much of the coming decades. Then it was Asia’s turn, beginning with Japan. In the 1980s, when Japanese industrialists introduced new methods of efficiency and automation, its economies—which were further helped by a rise in the value of the American dollar—jumped over our greasy assembly lines, stealing our business in the process. Now, quite possibly, it’s our turn to retake the lead, with all the technical innovation pioneered in recent years by American entrepreneurs—as long as we can find enough workers with the right skills.

THE HUNT FOR GOOD WORKERS

No wonder countries like Germany and Switzerland have done better a job of keeping their manufacturing sectors healthy. “They get the B students, and they’re better trained,” Moser says. “We get the C and D students, and we don’t train them very well.”

Even though Moser is a Republican, he strongly disagrees with the party’s “rejection of an industrial policy.” His favorite ideas for policy makers? Lower the value of the dollar by 20 percent; replace the sales tax, which Moser calls “an inefficient mess,” with a value-added tax; and make “a massive investment” in a skilled workforce. Otherwise, he says, “the new factories will not be competitive.”

Moser’s pleas for more investment in a skilled workforce stem, of course, from America’s much talked about “skills gap”—the mismatch that has occurred because industry needs more skilled workers than our schools have been producing. For proof, Moser cites a recent study by Deloitte, which found that of the 3.5 million manufacturing jobs that are expected to open up over the next decade, more than 2 million of those jobs will go unfilled.

In an era when our colleges graduate more and more students each year, how can this be? The reason, Moser argues, is that as America’s middle and upper classes get wealthier, too many students are studying subjects like literature or the arts that allow them to “follow their dreams,” when they could be learning trades that lead to steadier, better paying jobs.

This of course reopens a longstanding debate about the value of studying the arts and the humanities, which offer all kinds of sometimes hidden value, even for jobs in industry. Overall, however, workforce facts can’t be denied. In just one of many pieces of evidence, The Reshoring Initiative produced a YouTube video showing that of those who get associate’s degrees (which often include technical training), 80 percent earn more than the median income of their counterparts with bachelor’s degrees.

More than a few manufacturing leaders are starting to connect the dots on this picture. Oklahoma recently developed a whole new trade school program devoted to the next wave of automation. At one point, Tech Shop—an initiative that created high-tech shop classes for youngsters and adults—had 10 thriving centers around the country, along with one in Paris, one in Abu Dhabi, and another in Tokyo. (In 2017, the venture abruptly closed, declaring bankruptcy, but was soon repurchased for revival as Shop Build.)

During Tech Shop’s heydey, Mark Hatch, the venture’s CEO, said he had people come in all the time, just for the fun of building some new gizmo. A week later, when their invention was finished, so many people liked what they had made they were able to “start companies the next day.” In Los Angeles, another initiative launched by the National Toolmaking and Machining Association has been training people for tomorrow’s factories for years, landing high-paying jobs for graduates even in the depths of the recession.

The problem is that all this activity still lives in the job market’s shadows. “People still have this image of 1950s style factories,” says GE’s Furstoss. “Dirty, boring places where your days are full of piece-work.” American culture doesn’t exactly help the situation. Everywhere one turns, it seems, the people being glamorized in America are celebrities, financiers, and other big winners in the “new” economy. No wonder countries like Germany and Switzerland have done a better job of keeping their manufacturing sectors healthy. “They get the B students, and they’re better trained,” Moser says. “We get too many of the C and D students, and we don’t train them very well.”

WILL RESHORED JOBS LAST?

While all these job opportunities sound enticing, haven’t we been here before as well? The history of the American labor market is littered with promises of new booms in one industry or another, only to see those jobs fade away the next decade. Remember the booms and busts of the oil industry in one state after another? Or the chronic call for more engineers?

There is growing evidence, however, that the factory reshoring movement might have legs. One reason is that America’s financial stability might literally depend on it.

If the U.S. doesn’t bring back jobs like this watch assembly operation, at Shinola’s new plant in Detroit, Moser fears the U.S. will eventually take China’s place as the world’s grunt country — doing the work that no one else wants to anymore. Photo by Romain Blanquart.

“The ultimate success of reshoring will be if we can eliminate or minimize the trade deficit,” says Moser. Like many economists, Moser is alarmed at the slowly ballooning level of debt the U.S. has started to carry. Not coincidentally, in his view, the growth of that deficit closely matches our offshoring activity—starting relatively small in the latter decades of the 20th century, then rising dramatically from 2000 to 2007, after President Clinton loosened our trade relations with China. Today, despite four years of business-boosting policies by the Trump administration, our trade deficit stands at $678 billion—the largest in the world, and still growing. While the U.S. pays no interest on that debt, the larger it gets, the more it weakens the dollar—and the more other countries lose confidence in our economy. “If you keep that up, Moser says, “eventually the U.S. dollar isn’t worth anything, and the dollar collapses.”

At some point, Moser believes, the U.S. will be forced to reshore jobs here just to survive. This grim scenario leaves him with yet another set of unorthodox predictions.

In Moser’s view, a significant new wave of jobs will come back to the U.S. in one of two ways. The first is “the smart way—getting ahead of the manufacturing curve in all the ways that people like Furstoss envision. The second is “the painful way—we continue letting events take care of themselves, while suffering more and more each year from growing trade deficits. If the latter scenario unfolds, Moser fears we will trade places with China and become the world’s new grunt country. “And the Chinese will send their dirty laundry here to be done by Americans.”

The more likely possibility, of course, is some muddled combination of the two: a little advanced planning, a lot of laissez-faire. Now, however, the U.S., and the world as a whole, face daunting challenges for industry on many increasingly desperate fronts—our aging infrastructure, our growing renewable energy needs, and the rapidly worsening consequences of climate change, just for starters. Once the depth and scale of these problems eventually sink in, maybe our political and industrial leaders will finally begin to pursue the “smart way” to bring jobs back to our shores.

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