By Zach Gietzen (Research Lead), Anitej Bhaskar and Esha Varchasvi
Since the industrial revolution and the invention of the steam engine, manufacturing has been the lifeblood of industry and one of the most important economic sectors. Over the centuries, it has evolved from manual labor and basic machinery to highly automated processes driven by cutting-edge technology. This transformation has not only revolutionized the efficiency and scale of production but has also redefined the profitability and sustainability of manufacturing operations. Today, concepts such as smart factories, robotics, and 3D printing, as well as geopolitical factors are reshaping the manufacturing landscape, creating new opportunities and challenges for businesses worldwide.
The fall of American Manufacturing:
Since 1990 the number of American manufacturing jobs dropped by approximately 27%, as China began to open to western markets, the implementation of automation in a broader variety of functions, and the economy began to take a downturn.
Source:FRED
The graph above shows the significant loss leading into the minor revival we are beginning to see; however, it is unlikely that we will ever have as many manufacturing jobs as we did before the year 2000. This is due largely to advancements in automation which allowed companies to increase production with less human labor and outsourcing to countries with lower labor cost to lower overhead.
Source: Fred
The graph above shows the drastic increase in production, combined with the graph showing loss of manufacturing jobs in the United States, it's clear to see just how efficient advancements in automation technology allowed the manufacturing industry to slim down employment and increase efficiency.
In recent years there has started to be a large case for bringing manufacturing back to the United States, especially for critical electronic goods (i.e. anything that uses semiconductors or smart technology). A quote from the Biden administration in an executive order said the following, "Our nation is falling behind its biggest competitors on research and development (R&D), manufacturing, and training. It has never been more important for us to invest in strengthening our infrastructure and competitiveness, and in creating the good-paying union jobs of the future,"
The Rise of China and Cheaper Labor:
For the last decade China has been one of the worlds manufacturing superpowers. Most people are familiar with the infamous “Made in China” Label found on many of their household products, which is not surprising considering China produced 28.4% of global manufacturing output in 2023 according to the United Nations. However, recent geo-political issues with China have inspired many countries to impose sanctions and look for alternatives to the manufacturing powerhouse.
Source: Statista
Many companies are exploring alternative manufacturing locations in countries that offer similar low labor costs and already possess well-established manufacturing industries. Among these options, India and Mexico emerge as two of the most promising alternatives. Particularly for the American market, there's a significant focus on Mexico, primarily due to its proximity, which can lead to time and cost savings in shipping goods to their destination in the United States. Many automotive OEMs are building factories or adding to pre existing facilities to ramp up production for the American market.
Source:Tetakawi
Source: Fred
The graphic above shows a massive uptick in Mexican production starting in 1995 and skyrocketing after the pandemic. This trend of nearshoring production facilities into Mexico comes with a host of benefits, such as building the product closer to the end consumer and having a workforce that is in a similar time zone. This trend will largely benefit the supply chain and reduce the chance of disruptions. The CEO and founder of Nowports, a digital based freight forwarded based in Latin America has said “Companies that set a foot in Mexico will have greater visibility, shorter delivery times, and influence the quality of their products”. However despite all of the attention that Mexico is receiving, The levels of Foreign Direct Investment have remained relatively stagnant.
Source:Delloite
Having a lower FDI isn't necessarily bad, however it shows that companies are still hesitant to put all of their faith into Mexico as the next manufacturing superpower. Similar to Mexico, companies are also looking toward India to pick up some of the business that will be leaving China due to geopolitical risks. One notable example being Apple, who are aiming to produce “A quarter of the worlds iPhone” at a new facility in Karnataka, which is in the south of India. This new facility will be Apples test un to see whether or not India could be capable of producing iPhone at a similar cost and quality as the Chinese campus in Zhengzhou which currently accounts for over half of the worlds iPhone production.
Furthermore, there's a growing trend towards relocating the manufacturing of critical electronics to the United States. This shift is a consequence of the aftermath of the pandemic and recent challenges with China. The current landscape underscores the importance of America's ability to fabricate and innovate its own chip technology, reinforcing its position as an R&D powerhouse over the past few decades.
The American Automotive Industry:
The automotive industry in the United States has experienced a consistent pattern of highs and lows over the past four decades, with notable disruptions such as the COVID-19 pandemic. Despite these fluctuations, the industry began to recover shortly after the pandemic, with numbers returning to previous levels and showing signs of growth.
Source:FRED
The United States still has more than 50 automotive manufacturing plants that employee around one million people. According to Statista in 2023 alone, approximately 15.5 million new vehicles were sold to consumers including 12.4 million light trucks which also includes SUV’s. That number is a 12.4% increase from 2022 according to Wards Intelligence.
American Computer & Electronic Products:
The U.S. computer and electronic products sector (NAICS 334) has shown substantial growth, better captured by the value of shipments rather than industrial production, given the latter's quality adjustments. From 1995 to 2022, shipment values ranged from $20 billion to $48 billion, reflecting the sector's economic vitality. In 2022, semiconductor sales from American companies amounted to $275 billion, demonstrating the industry's robust performance amid changing economic landscapes. Unfortunately, only around 12% of the worlds semiconductors are fabricated in the United States (SIA, 2023).
In recent years, it has become apparent that the United States needs to invest in semiconductor factories on American soil. Countries like China and South Korea have put themselves at a significant advantage in the semiconductor industry by having localized plants and a heavy emphasis on this technology for the past few decades. Looking to the future, U.S. semiconductor firms have invested a grand $58.8 billion into the research and
development of semiconductors and American fabrication facilities.
Source:FRED
Seen above is a graph from the federal reserve showing the change in production of products that fall under NAICS code 334.
Industries in decline:
On the other hand there are many industries that have left America and show no signs of returning. In industries such as textiles, primary metals, furniture, and many others, automation can be easily implemented or other countries may offer the advantage of cheaper labor. These sectors are not critical to the manufacturing of other products, categorizing them as commodities. China is the world's largest producer of cotton, which facilitates the domestic production of textiles using locally grown materials. After 1980, when China opened its borders to foreign investment, the country became an ideal location for setting up factories. This was largely because the majority of the population was living in relative poverty following the "Great Leap Forward," making labor very cheap.
Source:FRED
Above is a graph showing industrial capacity of the American textile industry since 1980. The industry had peaked in 2000 and has undergone signficant decline since, showing no signs of returning in the future. As of 2022 China produced 43.6% of all the worlds textiles and exported $148 billion worth of textiles while the U.S. only exported $14 billion. The cost of labor advantage is the biggest reason China dominates in many low tech manufacturing capacities.
Conclusion
While the American manufacturing sector has undergone significant changes, recent investments in domestic manufacturing capacity for high-tech products signal a positive trajectory for the economy and manufacturing sector. These investments enable the United States to stay competitive in the semiconductor industry, a crucial aspect of modern technological advancement. While it's true that many low-cost consumer products are no longer made in America, the country's focus on producing high-quality, valuable components positions it for technological superiority and supports research and development efforts. Additionally, these sectors offer stable, well-paying jobs for American factory workers, a significant advantage over many other countries.
Comments