Tuesday, September 4, 2012

Upcoming Surge in Domestic Manufacturing

Critics of globalization frequently highlight outsourced manufacturing jobs as its most negative aspect. Better technology and communication allowed for a boom in international trade, including the capacity for corporations to make or buy components for their products abroad. When President Obama asked Apple CEO Steve Jobs how to bring some of those jobs back to the United States, Jobs told him "those jobs aren't coming back." [1] Fortunately, there are numerous reasons to think that this trend is going to change. Consider the following:

Source: http://articles.businessinsider.com/2011-10-21/politics/30305267_1_president-obama-political-ads-morning-in-america-ads

Supply Chains

The international supply chains that enable this global economy are essential to reversing some of the job losses caused by the very same system. Many complex products, like Apple's iPhones, are assembled from components made or purchased all over the world. However, rising logistics costs (especially transportation costs) are likely to encourage corporations to set up shop closer to their consumers or their suppliers, if not both. [2] Combined with issues of risk to the durability of supply for specialized producers abroad, corporations that sell high-tech products are going to want reliable suppliers who are closer to their intended markets and can replicate crucial parts of the supply chain in dire circumstances. In fact, this is already happening with Apple, whose CEO considered it almost impossible less than two years ago. The entire iPhone will never be made in the United States, but at least some of its parts are and will be domestically produced. [3]

Product Changes

The resiliency of a supply chain is critical to the continued production of an item when disaster strikes. Transportation costs are on the rise because of unending instability in the world's leading oil producing region. In the mold of IKEA or India's Tata Nano car, products are being more modular and being shipped to their sales destination before being assembled. [4][5] Why do all of these points come together? They converge because we live in a world that expects almost instant gratification and customizable options to boot. Consider custom computers: you can have a computer built to your specifications and have it arrive withing days. That kind of arrangement is not possible without substantial inventory or domestic manufacturing. As sellers seek to rein in costs, increase profits and maintain competitive options for their customers, they will be look to domestic producers for speed and reliability.


The primary reason for outsourcing jobs is to utilize cheaper labor abroad. Cheaper labor reflects lower productivity, but we would expect both labor costs and productivity to increase over time from technological increases and knowledge gained from such production over time. Is this happening? Yes, and when you combine the start of that trend with the spike in logistical costs, you can see how manufacturing will start returning to the United States. Raymond Sjolseth, President of Seesmart Inc., says "When we do the numbers we're actually ahead manufacturing here instead of paying for air freight and dealing with the logistical issues that we're having in China."  [6]


In the short-term, globalization drove many manufacturing jobs out of the U.S. Now, the supply chains that support globalization are a key part of the impending return of some of those manufacturing jobs. What can national policymakers do to encourage this process. More importantly, what will they do?


[1] "Barack Obama and Steve Jobs argued over outsourcing." The Economic Times, January 22, 2012. <http://articles.economictimes.indiatimes.com/2012-01-22/news/30652794_1_apple-founder-steve-jobs-barack-obama>
[2] "Your Next Supply Chain." MIT Sloan Management Review, Winter 2010.
[3] Hughes, Neil. "Made in America: Apple's supply chain increasing US production." Apple Insider, July 19, 2012. <http://www.appleinsider.com/articles/12/07/19/made_in_america_apples_supply_chain_increasing_us_production.html>
[4] Margonelli, Lisa. "How IKEA designs its sexy price tags." Business 2.0, October, 2002.
[5] Brown, John Sealy and John Hagel. "Learning from Tata's Nano: The innovations of the $2,500 car carry important lessons for Western Executives." Bloomberg Businessweek, 27 February, 2008.
[6] Malone, Scott and Ernest Scheyder. "As China costs rise, technology lures U.S. factories home." Reuters, July 24, 2012. <http://www.reuters.com/article/2012/07/24/us-usa-manufacturing-onshoring-idUSBRE86N05M20120724>

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