• Strategy
  • The Economist

The Misery of Manufacturing

Why there is a new panic over manufacturing in the rich world.

What really animates the China-bashers, of course, is not the decline of manufacturing, but the loss of rich-world manufacturing jobs, as firms cut payrolls by using more sophisticated processes. In 1947, according to the Federal Reserve Bank of Chicago, 35 percent of America’s workforce were employed in manufacturing. By 2002, this figure had fallen to just 12 percent. With employment falling and output rising, America has enjoyed soaring manufacturing productivity, a feat repeated to some extent elsewhere in the rich world. On the one hand, NAM suggests that “manufacturing’s future in America is now in jeopardy”. On the other, NAM boasts that American manufacturing is “innovative, productive and efficient”. Which is it?

The Chinese facts are even more awkward. What alarmists really hear when they tune into the “giant sucking sound” (or whatever) of American factories disappearing into China is mostly the continuing stampede of its firms into other rich countries’ markets. Though growing rapidly, American manufacturing investment in China is still a trickle compared to the far larger flows into other rich countries.

Despite the pull of China’s cheap labour, firms find lots of reasons to keep lots of manufacturing at home. One is that, as rich-country factories employ fewer workers, labour costs no longer make or break decisions about where to put a factory. Frank Vargo of NAM, for instance, calculates that payroll costs account for just 11 percent of overall manufacturing costs in America. Because shipping costs and speedy distribution are more important than relative wages, Dell builds its computer-assembly plants near to its customers, both in rich and poor countries. Moreover, Mike Kilgore, a consultant with Chainalytics in Atlanta, says firms often underestimate the cost of overseas manufacturing, particularly those associated with transportation, extra inventory, and political and security risks. Meanwhile, growing demand for prompt delivery from retailers such as Wal-Mart in America and Carrefour in France also pulls manufacturing home.

Primitive mercantilist views about the piling up of foreign currency by a nation selling more than it buys from abroad still rule in parts of Europe, notably Paris. In Britain, on the other hand, the unions may find their latest campaign tough going. The Labour government of Tony Blair has, at least until now, cast off its old pro-manufacturing socialist bias and embraced the mostly neutral policies towards manufacturing of its Conservative predecessor. Amicus’s pleas over the 2,500 manufacturing jobs it claims are lost in Britain every week will probably fall on deaf ears in Britain, which despite slow economic growth still has more or less full employment — unlike America or Japan.

In Japan China is a favourite bugbear of nationalist politicians — and Japanese racists in general. Yet the ruling Liberal Democratic Party finds some of its baser instincts leavened by its desire to please big Japanese manufacturers, such as the car companies and electronics firms, which are finding both selling to and investing in China so attractive.

Hopefully, similar common sense will prevail in America, where big firms are indeed worried about growing protectionist sentiment towards China. But it may not. America’s presidential elections next year will follow a recession that has cost 2.7m jobs. Politicians will feel the sharp anger of thousands of smaller American manufacturers, from furniture firms in North Carolina to car-parts makers in the Midwest. These firms really are taking a beating from China. An early test of Mr Bush’s mettle will be how he handles a review of America’s steel tariffs, slapped on 18 months ago at the behest of its ailing foundries. Expect more fireworks.

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