The return of manufacturing

David Ignatius of The Washington Post sees a pretty happy future for our economy. It has to do with energy independence, as I posted recently, and also a new future for manufacturing

Energy security would be one building block of a new prosperity. 

The other would be the revival of American manufacturing and other industries. This would be driven in part by the low cost of electricity in the U.S., which West forecasts will be relatively flat through the rest of this decade, and one-half to one-third that of economic competitors such as Spain, France or Germany. 

The coming U.S. manufacturing recovery is the subject of several studies by the Boston Consulting Group. I’ll focus here on the most recent one, “U.S. Manufacturing Nears the Tipping Point,” which appeared in March. 

What’s happening, according to BCG, is a “reshoring” back to America of manufacturing that previously migrated offshore, especially to China. The BCG analysts estimate that by 2015, China’s cost advantage will have shrunk to the point that many manufacturers will prefer to open new plants in the U.S. In the vast manufacturing region surrounding Shanghai, total compensation packages will be about 25 percent of those for comparable workers in low-cost U.S. manufacturing states. But given higher American productivity, effective labor costs will be about 60 percent of those in America – not low enough to compensate U.S. manufacturers for the risks and volatility of operating in China.

In about five years, argue the BCG economists, the cost-risk balance will reach an inflection point in seven key industries where manufacturers had been moving to China: computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metals, plastics and rubber, and transportation goods. 

The industries together amounted to a nearly $2 trillion market in the U.S. in 2010, with China producing about $200 billion of that total. 

As manufacturers in these “tipping point” industries move back to America, BCG estimates, the U.S. economy will add $80 billion to $120 billion in annual output, and 2 million to 3 million new jobs, in direct manufacturing and spinoff employment. To complete this rosy picture, the analysts forecast that in about five years, U.S. exports will increase by at least $65 billion annually. 

Hold on, Dr. Pangloss. Those are just economists’ estimates. What do real manufacturers say? Well, BCG has some new numbers on that, too. In late April, the consulting firm released a survey of executives at 106 U.S.-based companies with annual sales of over $1 billion. Thirty-seven percent of them said they were planning to reshore manufacturing operations or “actively considering” the move. Among larger companies with sales over $10 billion, the positive response rose to 48 percent.

So much for decline and a gloomy future.

New ways of making things

The factory of the past was based on cranking out zillions of identical products, The Economist reports. But the cost of producing much smaller batches of a wider variety, with each product tailored precisely to each customer’s whims, is falling. 

A number of remarkable technologies are converging to let this happen: clever software, novel materials, more dexterous robots, new processes (notably three-dimensional printing) and a whole range of web-based services. 

The old way of making things involved taking lots of parts and screwing or welding them together. Now a product can be designed on a computer and “printed” on a 3D printer, which creates a solid object by building up successive layers of material. The digital design can be tweaked with a few mouseclicks. The 3D printer can run unattended, and can make many things which are too complex for a traditional factory to handle. In time, these amazing machines may be able to make almost anything, anywhere—from your garage to an African village.

The applications of 3D printing are especially mind-boggling. Already, hearing aids and high-tech parts of military jets are being printed in customised shapes. The geography of supply chains will change. An engineer working in the middle of a desert who finds he lacks a certain tool no longer has to have it delivered from the nearest city. He can simply download the design and print it. The days when projects ground to a halt for want of a piece of kit, or when customers complained that they could no longer find spare parts for things they had bought, will one day seem quaint.

Like all revolutions, this one will be disruptive.

Digital technology has already rocked the media and retailing industries, just as cotton mills crushed hand looms and the Model T put farriers out of work. Many people will look at the factories of the future and shudder. They will not be full of grimy machines manned by men in oily overalls. Many will be squeaky clean—and almost deserted. Some carmakers already produce twice as many vehicles per employee as they did only a decade or so ago. Most jobs will not be on the factory floor but in the offices nearby, which will be full of designers, engineers, IT specialists, logistics experts, marketing staff and other professionals. The manufacturing jobs of the future will require more skills. Many dull, repetitive tasks will become obsolete: you no longer need riveters when a product has no rivets.

Read the whole thing. Propping up a failed General Motors looks kinda stupid.

The law of unintended consequences

I hadn't realized this, but apparently the incandescent light bulb will be illegal in 2014. They will be replaced by CFLs, compact fluorescent lamps, those curly things that look like soft ice cream cones.

We recently had an energy audit, heavily subsidized by your taxes. Two people spent two hours going through our house and, among other things, replacing incandescent bulbs with CFLs. One in the garage burned out in two weeks. Others take a while to warm up and reach their full brightness. But, fine.

Now comes word that the last U.S. plant that manufactures the old incandescents in closing. It's a GE factory in Winchester, Virginia. Despite all the hoopla about "green jobs," these thingies will be made in China, because they need more hand labor. It would cost 10 percent more to make them here.

As the Washington Post reports, this trend to overseas manufacturing continues unabated.

Under the pressures of globalization, the number of manufacturing jobs in the United States has been shrinking for decades, from 19.5 million in 1979 to 11.6 million this year, a decline of 40 percent.

At textile mills in North Carolina, at auto parts plants in Ohio, at other assorted manufacturing plants around the country, the closures have pushed workers out, often leaving them to face an onslaught of personal defeats: lower wages, community college retraining and unemployment checks. 

This is bad for these people, but it isn't necessarily bad for the economy. It is an unintended consequence of regulation. And here's another: these CFLs contain mercury.

Now the EPA, which endorses the use of CFLs, also tries to make this mercury seem a non-threat -- it's in rocks and coal, you know. But to my mind the EPA gives the game away with  this warning should you break one of these puppies:

Before Cleanup: Air Out the Room

• Have people and pets leave the room, and don't let anyone walk through the breakage area on their way out.
• Open a window and leave the room for 15 minutes or more.
• Shut off the central forced-air heating/air conditioning system, if you have one.

Cleanup Steps for Hard Surfaces

• Carefully scoop up glass pieces and powder using stiff paper or cardboard and place them in a glass jar with metal lid (such as a canning jar) or in a sealed plastic bag.
• Use sticky tape, such as duct tape, to pick up any remaining small glass fragments and powder.
• Wipe the area clean with damp paper towels or disposable wet wipes. Place towels in the glass jar or plastic bag.
• Do not use a vacuum or broom to clean up the broken bulb on hard surfaces.

Meantime, we all assume an additional cost for using these things. According to Wikipedia:

The retail price includes an amount to pay for recycling, and manufacturers and importers have an obligation to collect and recycle CFLs. Safe disposal requires storing the bulbs unbroken until they can be processed. In the US, The Home Depot is the first retailer to make CFL recycling options widely available. The EPA recommends that, in the absence of local guidelines, fluorescent bulbs be double-bagged in plastic before disposal.

You just can't make one change in the economy. Too many other things you can't imagine will also change.