Small makes it big

I’m not quite sure whether to trust the veritable cascade of good news about U.S. manufacturing. After all the bad news we heard from 2008 to mid-2010, this good news is a bit disorienting. 

The Great Recession left manufacturing a seeming smoking ruin, but the sector has grown for 20 straight months as of this writing, and, in terms of growth rate, is well ahead of the overall economy. It’s one of the few sectors leading the U.S. out of the recession. 

Of course, a lot of that growth is just making up for the catastrophic drop in manufacturing output during the downturn, but there may be something else happening as well.

The current upturn may be the beginning of a long-term reversal of fortunes in U.S. manufacturing. According to a new report by The Boston Consulting Group, the era of widespread offshoring of manufacturing from the U.S. to China is ending. By 2015—driven by productivity growth and relatively low wages compared to other developed countries—the U.S. may be slightly ahead of China in producing manufactured goods for sale in North America. Rapid wage growth in China and currency trends should push reshoring along.

The BCG report also noted that the products now more attractive to produce in the U.S. include those made in small lots and those that involve multiple design changes. 

That analysis matches up well with other changes taking place in U.S. manufacturing. While the U.S. has suffered well-publicized losses in market share in highly visible industries, such as auto manufacturing, and the complete loss of share in others, such as consumer electronics, less-visible but still vital small- and medium-scale manufacturing is assuming growing importance in the U.S. economy.

For example, in 1980, 50 percent of U.S. manufacturing jobs were in firms with 5,000 or more employees, according to the Bureau of Labor Statistics. After years of decline, that share fell to 35 percent in 2009. But the share of manufacturing jobs in firms with less than 500 employees increased from 33 percent in 1980 to 41 percent in 2009. The share of jobs in firms with less than 100 employees grew from 46 percent to 53 percent from 1992 to 2008. 

One explanation for this trend is that, compared to China and other competitors, the U.S. still has a comparative advantage in early to medium-stage product R&D and manufacturing, when having effective information networks, highly skilled employees and the ability to make rapid design changes are vital. Once a product becomes a commodity, the price of labor becomes a much bigger factor and many of these jobs still end up abroad.

According to some observers, new technology and flexible business models are making it cheaper and easier for small U.S. businesses to manufacture specialized and customized products. Also, the weak U.S. dollar and rising overseas costs are making U.S. manufacturing cost-competitive. Growing overseas markets, many of them in Asia, are creating more export opportunities for U.S. manufacturers. Finally, the Internet is improving the ability of small manufacturers to identify new customers and reach, sell to and support them.

Of course, none of this is big news in the metalworking industry. The industry still includes tens of thousands of small machine shops that are better at producing small-to-medium lots of parts than big manufacturers. And hundreds of small cutting tool manufacturers turn out high-quality products that meet exacting standards. But it is a promising development for the metalworking industry that more of its customers may be staying put here in the U.S., and that new companies and new markets, such as micromanufacturing, are being developed that may boost the industry in the long term.

Anything involving a system as complex as the U.S. economy is subject to change—sometimes rapidly—and further growth in manufacturing is not guaranteed. But for now, it feels good to be part of a feel-good story.

—Alan Rooks, Editorial Director