A Nation of Manufacturers
The United States is a nation of builders. American renown is not a result of our prowess at financial engineering, legal sophistication, or perfection of leisure activities. Rather we are the nation who makes things that are excellent, ingenious, and better. We do this not as a function of aristocrats, oligarchs, or state-owned enterprises, but of the people—the men and women spread across small, medium, and large cities who constitute our manufacturing economy.
Our manufacturers are far more extensive than the large corporations whose names are on the equipment, structures, and vehicles we are most familiar with. Those corporations rely upon a massive network of small-medium-sized businesses who come together to produce the materials, parts, and services that constitute these end items. As of late 2019, there were approximately 291,000 manufacturing establishments operating in the United States, just under 99% of whom are small-medium businesses with fewer than 500 employees.1 These companies are an integral part of every state and county, and form the core of the American community, economy, and identity.
We are a nation of manufacturers, and our position as a nation exists because we have the intellect, foresight, discipline, and skill to build.
Implications of Globalized Manufacturing
For the past generation we have increasingly relied on others to build for us. Recent decades have featured a confluence of political, technological, and economic developments that have incentivized organizations to globalize supply chains and relocate manufacturing centers to developing economies with lower labor costs.
The magnitude of the offshoring movement and China’s displacement of the U.S. as the dominant global manufacturer can be measured in a variety of ways. International trade was almost 35 times higher in 2010 compared to 1980,2 and by 2019 China accounted for nearly double the U.S.’s share of global value-added manufacturing (28.6% vs. 16.6%).3 China produces 4.4 times more machine tools and consumes 3.4 times more machine tools than the United States each year, a metric that is often correlated with manufacturing indicators.4
There have been significant implications of this to the American manufacturing economy that extend beyond the well-documented devastation of the “Rust Belt” region. China’s rise has come at the cost of U.S. economic productivity and manufacturing jobs, and the U.S.-China trade deficit is estimated to have been responsible for 3.7 million American jobs between 2001–2018 (over 75% of which were in the manufacturing sector).5 While manufacturing remains the 5th largest employment sector in the U.S.,6 it has fallen out of favor with many Americans. According to a 2017 survey, “less than 30% of parents would consider encouraging their child to pursue a manufacturing career.”7 As a result, in addition to losing jobs we are losing the ability to fill the jobs that we have. A 2018 study estimated that 2.4 million job openings in manufacturing (half of all open positions) will go unfilled between 2018–2028 due to a lack of skilled workers.8
Not only are jobs unfilled, but our machines are being drastically underused. A 2019 survey estimated that manufacturing machines in the U.S. are only operational one fourth to one third of the time (25.2% in Q3 2019).9 This remarkable statistic speaks to the deep inefficiency in the U.S. manufacturing sector, and how damaging this is to business owners who invested in these machines.
In some areas this has become a slippery slope. In the search for increasing share prices and cheaper goods, we have come to rely on other nations to build. By relying on other nations to build, our manufacturers have suffered. Suffering manufacturers results in fewer businesses remaining operational, fewer jobs, and less attractiveness to the next generation to train and work in the manufacturing sector. This, in turn, leads to more companies choosing to rely on international partners to build, and the cycle continues.
Strategic and Social Repercussions
There are two primary categories of risk associated with the decline of American manufacturing.
The first is strategic. If the generational skills and competencies needed to build are accumulated elsewhere, the result is that the future will likely be built elsewhere. This may already be happening. In his excellent essay “It’s Time to Build,” venture capitalist Marc Andreesen noted, “When the producers of HBO’s ‘Westworld’ wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin—they went to Singapore.”10
Ceding the future to be built elsewhere is not merely an issue of national prestige. It contains meaningful economic and national security implications. As the U.S. Department of Defense appropriately noted, “Nations that cannot make cannot innovate. Without the ability to design, make, and employ advanced machine tools, a nation is at the mercy of others for critical capabilities.”11 This is such a significant issue that the DoD produced a special instruction for procurement officers in November 2020 titled “Diminishing Manufacturing Sources and Material Shortages Management.”12
The second category of risk is social. When we shift the economic benefit of manufacturing overseas, we necessarily take that benefit from our manufacturers. This means less business, fewer jobs, and worse economic outcomes for American manufacturers. Instead of economic productivity being distributed across the country, it becomes concentrated, creating a greater disparity between the beneficiaries of the globalized system and everyone else. Concentrated economic outcomes leads to social and ultimately political dislocation—there is a sense that if you can’t make a living by being an excellent builder in America, something is wrong, and someone is at fault. We will continue to see that dislocation play out on the national stage.
Our ability to build is an essential element of the American identity. While it affects small businesses, jobs, and middle American communities in a very real and tangible way, it also affects the nation more broadly at the identity level.
Risk, Technology, and the Changing Strategic Landscape
Fortunately, the forces that have driven offshoring are changing and, as a result, we are beginning to see a resurgence of American manufacturing that will accelerate in coming years. There are two main factors that are driving this trend: risk and technology.
Geopolitical risk is changing the calculus for supply chains. The posture of corporate supply chain strategists over the past 30 years has been to optimize for efficiency (profit margins) over resiliency (assured delivery). An “efficient” supply chain is one that prioritizes low costs and profitability, while a “resilient” supply chain is one that prioritizes assured on-time delivery.
In normal times this is not an either/or dilemma. Rather it is a continuum with thousands of tradeoffs that executives constantly evaluate as they balance efficiency and resiliency. However, as there have been very few truly disruptive events in the recent era of globalization, many companies have oriented more towards efficiency. As such, they have sacrificed elements that make supply chains more resilient such as redundant suppliers, broader vendor bases, and localized facilities in more politically stable regions.13
Recent events viscerally demonstrated the flaws in this strategy and are causing all companies to reevaluate their global supply chains. The first driver of this revaluation was the U.S.-China trade war that began in 2018.14 Trade tensions with China will continue regardless of who serves as the President of the United States. China is no longer a rising power—it is a risen power—and this will affect the U.S.-China trade dynamic going forward.
The second driver is the supply shocks that resulted from the COVID-19 pandemic. COVID-19 is the first truly disruptive event of the post-Cold War globalization era for supply chain planners. Many companies have been and continue to be exposed, as companies miss parts needed for customer deliveries and nations realize they are unable to manufacture relatively simple items like protective equipment. According to a recent study 33% of supply chain leaders have moved or plan to move some of their operations out of China in the next 2–3 years, and 31% of executives plan to nearshore part of their production back to the Americas in the next year.15
Industry 4.0 and Decreasing Economics of Offshoring
Technology is also changing the calculus for global supply chains. New technologies are rapidly being introduced into the manufacturing sector—to the extent that many analysts believe that we are in the early phase of a fourth industrial revolution (also referred to as Industry 4.0).
Industry 4.0 is characterized by the integration of digital technologies such as robotics, industrial internet of things (IIoT), cloud computing, and advanced data analytics into manufacturing machines and processes. Analysts estimate that $650B have been invested in the industrial application of these technologies since 2012, but that 68% of organizations are at only between the “Awareness Stage” (not doing anything) and the “Early Adoption Stage” (proof of concept implementation).16
These technologies make manufacturers more efficient and productive, and in doing so they inevitably reduce the cost of labor as a percentage of the total cost of a manufactured item. When labor constitutes a large percentage of the cost of a manufactured item, it makes strategic sense to manufacture that part in a region where labor costs are as low as possible. In this environment, the cost savings from labor offsets the additional cost of shipping that item across the world.
However, as technology changes this paradigm, labor costs are becoming a smaller percentage of the total cost of a manufactured item. Assuming the cost of the machines associated with Industry 4.0 technologies are similar in different regions, the cost of labor becomes a much less significant driver of onshore vs. offshore economics. When shipping costs and the additional risks associated with overextended supply chains are factored in, it makes sense to localize manufacturing closer to customer markets.
This does not account for the fact that Industry 4.0 technologies require more skilled and more highly trained operators. Labor is not a commodity, and the need for and value of skilled men and women to operate these machines is another factor that will drive more and more organizations to onshore manufacturing operations. This is reflected in the data. A pre-COVID 2020 report identified the United States as the 5th most compelling country for the cost of manufacturing operations.17 The diminishing economic benefit of offshoring is a secular trend that is happening and will continue to accelerate as more and more technology enters into our factories and machine shops.
Resurgence of American Manufacturing
As a result of the combination of the increased risks with the decreased economics of offshoring, many corporate executives are fundamentally rethinking their supply chains for the first time in a generation. This is not to say that there have not been constant adjustments of supply chains—there have, but those adjustments have been around reliability and cost. Now organizations are factoring in risk in a different way than they had previously.
These risk factors—combined with the increasing economic advantage that technology provides towards more localized manufacturing—are driving a generational transformation that will result in more organizations adjusting their manufacturing supply chains. This does not mean that all organizations will decide to bring manufacturing back to the United States, but many will and the advantages of “Made in the USA” will compound over time. This will inject opportunity and drive a revival of the American manufacturing economy.
A Call to Action
We are entering into a generational moment. This is not a call for a corporate decision or political policy that we hope someone should make in order to make this transformation towards localized manufacturing happen. It simply is happening as a result of the underlying tectonic forces that business and national strategy is built upon. The train is leaving the station, so to speak. Our call to action—to manufacturers, educators, corporations, and policy makers—is to seize the moment and be part of the transformation.
To small-medium American manufacturers: Get ready! Embrace these new digital technologies and prepare your businesses for new customers, new industries, and new opportunities. Take personally the challenge to demonstrate that it is better to build here as opposed to there.
To educators and American parents: Change your thinking! Drop the false and biased posture that manufacturing jobs that build are somehow less significant than white collar office jobs. There is honor, pay, stability, and significance in jobs that build, and we would be wise to coach and train our children accordingly.
To corporations: Plan for the future! Act with boldness and set the conditions for your organizations to thrive in the world that is coming, not the world that was. Take the opportunity to recognize the double benefits of increasing your company’s diversity, agility, and resilience while investing in local communities.
To policymakers: Enable the transformation! Rather than trying to regulate, compel, and protect large incumbents, build programs and policies that enable small-medium business to thrive, encourage local investment, and facilitate education and workforce development.
Building with Purpose
We believe in this deeply. The U.S. manufacturing economy has been under-invested in for years, and most innovation in supply chain sourcing has been oriented towards helping large companies connect with international suppliers. Many companies have told us that it is easier to find a manufacturing partner in China than it is to find one on the other side of town or in the next county over.
We built Sustainment to enable small-medium American manufacturers to thrive by providing them a platform for growth and connectivity with new partners and enterprise customers. We are on a mission to increase the capability of the U.S. manufacturing economy for the benefit of our shareholders, our customers and the middle American communities who depend upon them, and the national security industrial base.
By enabling American manufacturing and facilitating new opportunities for small-medium manufacturers, our platform facilitates job creation, community development, and economic growth. We can turn around the decades of consolidation and outsourcing that has crushed small-medium manufacturing businesses. We can allow small-medium manufacturers a cost-efficient mechanism to access customers, talent, and technology, strengthening the capability of the U.S. industrial base. We can provide access to more options for large organizations to competitively and easily build diverse, domestic supply chains that support local communities.
At the core of our mission are the dedicated, skilled men and women that constitute the American manufacturing industrial base. Our belief is that by helping people we can enable job creation, economic development, and the middle American communities that depend on manufacturing, all the while creating value for our company and our shareholders.
Helping people is the essence of American entrepreneurialism. Companies are people. The goods and services we build have value when appreciated by people. Valuation and growth metrics are important, but they are reflections of the greater value that we add to people.
Thank you for joining us on this journey.
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1 Murray, Amy. Fiscal Year 2019 Industrial Capabilities Report to Congress. Washington: OSD A&S Industrial Policy, 2020, 100. Accessed December 22, 2020. https://www.businessdefense.gov/Portals/51/Documents/Resources/USA000954-20%20RPT%20Subj%20FY19%20ICR%2007092020.pdf?ver=2020-07-10-124452-180
2 Erixon, Fredrik. The Economic Benefits of Globalization for Business and Consumers. Brussels: European Centre for International Political Economy (ECIPE), 2018. Accessed December 29, 2020. https://ecipe.org/wp-content/uploads/2018/01/Globalization-paper-final.pdf
3 Thomas, Douglas S. Annual Report on U.S. Manufacturing Industry Statistics: 2020. Washington: National Institute of Standards and Technology, U.S. Department of Commerce. Accessed December 30, 2020. https://nvlpubs.nist.gov/nistpubs/ams/NIST.AMS.100-37.pdf
4 Murray, 112.
5 Scott, Robert E. and Mokhiber, Zane. Growing China Trade Deficit Cost 3.7 Million American Jobs Between 2001 and 2018: Jobs Lost in Every U.S. State and Congressional District. Washington: Economic Policy Institute, 2020. Accessed December 29, 2020. https://files.epi.org/pdf/181374.pdf
6 Grundy, Andy. “Contributions of Key Economic Sector Recognized on Manufacturing Day,” United States Census Bureau (Blog), October 2, 2020. https://www.census.gov/library/stories/2020/10/manufacturing-still-among-top-five-united-states-employers.html
7 Murray, 61.
8 The Aging of the Manufacturing Workforce: Challenges and Best Practices. Washington: The Manufacturing Institute, 2019. Accessed December 25, 2020. https://www.themanufacturinginstitute.org/wp-content/uploads/2020/03/MI-Sloan-Aging-in-the-MFG-Workforce-Report.pdf
9 2019 State of the Industry: CNC Machines. Northampton: MachineMetrics, 2019. Accessed December 30, 2020. https://www.machinemetrics.com/hubfs/MachineMetrics%202019%20State%20of%20the%20Industry%20CNC%20Machining.pdf
10 Andreessen, Marc. “It’s Time to Build,” Andreessen Horowitz (blog), April 18, 2020, https://a16z.com/2020/04/18/its-time-to-build/
11 Murray, 112.
12 Lord, Ellen. DoD Instruction 4245.15: Diminishing Manufacturing Sources and Material Shortages Management. Washington: Office of the Under Secretary of Defense for Acquisition and Sustainment. Accessed December 25th, 2020. https://www.esd.whs.mil/Portals/54/Documents/DD/issuances/dodi/424515p.PDF?ver=1nGN1Q4HzmReR3-nCo59UQ%3D%3D
13 Boyd, Bret. “Globalization and the Future of Supply Chains,” Grayline Group (blog), April 1, 2020, https://graylinegroup.com/globalization-and-the-future-of-supply-chains/
14 “Timeline: Key Dates in the U.S.-China Trade War.” Reuters, Thomson Reuters, 15 Jan. 2020, www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKBN1ZE1AA.
15 Wellener, Paul. 2021 Manufacturing Industry Outlook. Ohio: Deloitte, 2020. Accessed December 30, 2020. https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/manufacturing-industry-outlook.html
16Sulavik, Chris and Waller, Tom, eds. Navigating the Fourth Industrial Revolution to the Bottom Line. Washington: PricewaterhouseCoopers, The Manufacturing Institute, 2019. Accessed December 27, 2020. https://www.themanufacturinginstitute.org/wp-content/uploads/2020/03/MI-Smart-Factory-4IR-Report.pdf
17 Lee, Carolyn, Heckler, Bryan, et. al. Cost of Manufacturing Operations Around the Globe. Washington: KPMG, The Manufacturing Institute, 2020. Accessed December 27, 2020. https://www.themanufacturinginstitute.org/wp-content/uploads/2020/10/cost-manufacturing-operations-globe.pdf