Positive Gains … Uncertain Future

Oct. 26, 2012
Good news: reshoring Bad news: growth, taxes, exports, and regulations

Economic issues are dominating the political conversation as we near the November presidential elections.  From my perspective as a manufacturer, there is one encouraging economic trend that is gaining traction, but a number of other issues that need to be resolved no matter who occupies the White House next year.

First, the good news.  For decades, millions of American manufacturing jobs have travelled overseas.  Now, production is returning the United States.  The process – commonly called “reshoring” – accounted for the creation of about 50,000 manufacturing jobs in the last few years.  That’s about 10% of the 495,000 manufacturing job additions since the low in January 2010, according to an article in the September 10 issue of Plant Engineering

Proponents of sending work offshore list low labor costs and outsourcing non-core competencies as the major reasons for assigning production orders to China or other emerging markets. Many of them believe that labor costs in these areas can be low enough that they offset the often hidden costs of manufacturing overseas.  These hidden costs include delivery, quality and communications issues. These factors, plus rising offshore labor rates and increases in transportation costs, make production in the United States increasingly attractive.

For example, with Chinese wages rising at about 17% annually and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. After adjusting for higher American productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30% cheaper than rates in low-cost U.S. states.  Meanwhile, over the last four years, shipping costs have risen 71% because of higher oil prices, as well as reductions in the total number of ships and containers.

The reshoring trend has been documented by a number of sources.  In a recent survey of 252 North American Die Casting Association (NADCA) members, 23% of respondents reported they had gained business from offshore competitors last year.  Other evidence of reshoring’s increase was cited in a PricewaterhouseCoopers (PwC) report this year and an analysis released by The Boston Consulting Group (BCG) last year.

Despite the good news on reshoring, manufacturers still face a tough economy in the months ahead. While there are many aspects of the economy that would affect the manufacturer, there are four issues that matter more than others, according to Dr. Chris Kuehl.  Kuehl is managing partner of Armada Corporate Intelligence and economic analyst for the Fabricators & Manufacturers Association International.

Four issues for manufacturers

The four issues Kuehl cites are economic growth, tax policy, export markets and regulations.  Here are some of the reasons each of these is important to manufacturers.

Economic Growth —The issue that matters most to manufacturers ­ especially in the short term ­ is the potential for immediate growth in the economy. Thus far in 2012, the economy has been stuck in a very slow and unsatisfying growth pattern. The manufacturing community would much prefer growth rates approaching 3% at least and something above 4% would be even better. The projected growth rate for next year is barely 2% and that will do little more than extend the stall. To get immediate growth would require some form of stimulation.  However, the political issues involving any stimulus are fraught with problems, ranging from costs and stimulus targets to fundamental concerns about increasing the debt.

Tax policy —Tax reform that reduces corporate tax rates could have a positive impact for manufacturers.  Even without a rate reduction, arriving at some conclusions about prevailing tax rates would allow manufacturers to plan and budget with more certainty.  However, the widely divergent views on taxes by the two presidential candidates means that tax policies will not be easily resolved.

Export Market —The third issue that matters most for the manufacturer in the U.S. today is continued access to the export market.  Neither party is strongly pro-trade during an election, as it is far too tempting to assign blame to the Chinese or the Europeans, or somebody else for trade problems. Access to export markets is affected by a variety of interrelated factors, including monetary policy, trade pacts and tariffs.  The immigration issue also is a factor because some manufacturers in the U.S. would like to hire more from Mexico ­ if that could be done legally.

Regulations —Regulations affecting health care, the banking system and the environment all have an impact on manufacturers.  The majority of small and mid-sized domestic manufacturers oppose the Affordable Health Care Act on the grounds that it will either cost them money or remove the ability to retain their workers with benefit packages. 

The Dodd-Frank bank reform effort thus far hasgiven rise to over 500 new banking regulations from 27 differentagencies, which have all but stalled lending from the banking community. Thishas meant severe restrictions on access to credit, which slows the industrialcommunity dramatically.

The Environmental Protection Agency continues to pursue the climate change issue and new regulations pop up almost everymonth.

Given the conflicting policies on most of these issues, the perfect political party for the manufacturer would be some kind of hybrid that combined the best of both worlds.  It would be a hybrid that favored lower taxes, targeted stimulus, promotion of exports coupled with some protection from predatory imports and all wrapped around a reduction in regulations that inhibit business growth.  In the ideal world, a party with these policies would help manufacturing continue its resurgence.

John D. Littler is the president of Littler Diecast Corp., Albany, IN, which specializes in machined aluminum alloy and high-strength ZA-12 and ZA-27 zinc diecasting.