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American Industry is On the Move

By Sebastian Mallaby 
Financial Times 
January 8, 2013

Last year Jeff Immelt, the boss of General Electric,
declared that outsourcing was "mostly outdated as a
business model". GE's venerable Appliance Park in
Louisville, Kentucky, is opening a string of new
assembly lines to build refrigerators, water heaters
and washing machines, bringing home jobs from
China and Mexico. President Barack Obama has
trumpeted this wave of "insourcing", while Hal
Sirkin of the Boston Consulting Group foretells a US
"manufacturing renaissance". Even as the news
from Washington reeks of heedless brinkmanship,
the news from the people who actually make stuff
sounds refreshingly hopeful.

How real is this renaissance? It is tempting to
dismiss it out of hand. Manufacturing has
experienced a steady relative decline in just about
all advanced economies. Between 1980 and 2010,
German manufacturing value added fell from 30 per
cent of gross domestic product to 21 per cent,
according to World Bank data, while Japan's fell
from 27 per cent to 19 per cent. But there are a few
exceptions. After its financial crisis in 1992, Sweden
boosted manufacturing value added as a share of
output and held on to the gains for more than a
decade.

The question is whether Sweden's conditions exist
in the US. The first requirement is a weak currency.
After its peak in 1992 Sweden's real effective
exchange rate fell 27 per cent, according to the Bank
for International Settlements. Since the dollar
peaked in 2002, it has fallen 21 per cent, enough to
make a major difference. In 2000 US wages were
almost 22 times higher than China's. By 2015 that
multiple will have declined to four.

The other Swedish ingredient is a productivity
boom. In 1995 Sweden joined the EU and opened
its economy to foreign investment. The country's
industrial champions responded by investing twice
as much in vocational training as their EU rivals
and restructuring aggressively. Between 1996 and
2009, this yielded a cumulative boost to
manufacturing productivity of 57 per cent,
according to the OECD. By contrast, Germany
managed only 17 per cent.

If Sweden sounds impressive, here is the surprise:
over the same period American manufacturers piled
up an even larger productivity gain of 69 per cent.
Again, competition contributed: the US joined the
North American Free Trade Agreement and the
World Trade Organisation, and its continent-sized
economy generates plenty of internal competition.
But in the US case, the impetus from trade and
competition has been powerfully reinforced by a jolt
from technology.

Despite much fashionable chatter, this is not mainly
about fracking. The new extraction technology has
cut the price of natural gas in the US to a fraction of
the Asian level, but, as the McKinsey Global
Institute observed recently, the industries that are
most energy-intensive are not actually very trade-
intensive. US paper mills and oil refineries will
enjoy the cheap gas bonanza but not much
production in these sectors is likely to shift to US
shores.

The more important technological jolt comes under
the heading of "big data". On Friday an exhaustive
survey of management practices at 30,000 US
manufacturing establishments was released. Two of
the authors, Nick Bloom and John Van Reenen, had
previously shown that US companies were, on
average, better managed than foreign rivals. A
striking conclusion of their study is that US
manufacturers continue to get better, particularly
when it comes to capturing and analysing data on
everything from customer behaviour to production-
line efficiencies. And there is plenty of scope to
improve further. A minority of survey respondents
embraced most state-of-the-art management
incentives and monitored performance against clear
targets. But a quarter of respondents adopted fewer
than half of these practices.

So the stage is at least half set for a US
manufacturing revival, even if obstacles - poor
education, poor infrastructure - remain. But what
might a revival mean? Not, unfortunately, a cure for
unemployment. Since a trough in January 2010, the
US has generated just over half a million new
manufacturing jobs but the bounce mostly reflects
the collapse during the recession. For an advanced
economy to create manufacturing employment
independently of a cyclical rebound is almost
unheard of. Even as it boosted manufacturing as a
share of output between 1993 and 2007, Sweden
lost almost a 10th of its manufacturing jobs.

But a manufacturing turnround is clearly desirable.
Precisely because manufacturing workers can be
displaced by machines, it is factories that drive
productivity: in the US, manufacturing accounted
for about 17 per cent of output between 1995 and
2005, yet contributed 37 per cent of economywide
productivity gains, according to McKinsey. Higher
productivity means higher pay for surviving
employees: American manufacturing workers are on
average paid better than American service workers.
And consumers benefit from the productivity
windfall. Since 1985 the quality-adjusted price of
US durables has scarcely budged while the cost of
services has more than doubled.

A US manufacturing renaissance is possible, not
certain. But Americans are right to celebrate the
early indicators - from Siemens, which has just
begun shipping US-made turbines to Saudi Arabia;
from Toyota, which exports US-made cars to 21
countries; and of course from that chief insourcer,
GE's Mr Immelt.

The writer is a senior fellow at the Council on
Foreign Relations and an FT contributing editor

Copyright The Financial Times Limited 201