A Closer Look: US Economy
The Long-Term Potential Upside for US Manufacturing
By: Alex Chausovsky
What you need to know: US manufacturing is well-positioned relative to the rest of the world
There are many misconceptions about the state of US manufacturing. It’s dying. It’s too expensive relative to the rest of the world. Outsourcing is causing manufacturing companies to flee the US in favor of greener foreign pastures. While some of these assertions may have been true in the past, various datapoints show that this is no longer the case.
In recent years, US manufacturing has shown both vigor and resiliency in the face of shifting economic and geopolitical winds. Our analysis suggests that the impacts of recent trade wars and the COVID-19 pandemic present long-term potential upsides for the US manufacturing sector as companies reconsider supply-chain vulnerabilities and seek to develop alternate sourcing methods through reshoring. According to the Reshoring Institute’s 2019 survey of global manufacturing, the institute’s latest such survey, the top three difficulties experienced by US companies that source overseas are:
- Latency/delays in shipping (71% of responders)
- Production schedule delays (63% of responders)
- Inconsistent quality (55% of responders)
The early stages of the COVID-19 pandemic brought about significant disruption and uncertainty regarding supply-chain resiliency, and it highlighted the benefits of near-sourcing. The FM Global Resiliency Index evaluates the supply-chain risk of various trading partners on a scale of 1 to 100, with 100 indicating the most resilient. The 2020 Index output ranks the US at 85.2, far ahead of China (61.8), Mexico (50.5), and Vietnam (49.1) – all top outsourcing targets for manufacturing. For companies seeking to re-shore operations in order to address industry supply-chain vulnerabilities, this data paints the US in a favorable light.
The adage that manufacturing in the US is too expensive relative to the rest of the world (specifically China) is also outdated. The Boston Consulting Group recently published the results of an analysis which shows that the US compares well globally on a Manufacturing Cost Index basis. Taking into account the total cost of labor, energy, and other inputs in 2019, the US has an index value of 100 compared to China’s range of 95-97. While Mexico and Vietnam remain respectively 14% and 6% cheaper, that savings must be viewed in context with those countries’ supply-chain vulnerabilities, as noted above.
These diverse data points show that, considered holistically, US manufacturing is well-positioned relative to the rest of the world. It is encouraging for the future of the domestic manufacturing sector and supports our assertion that manufacturing companies need to plan with optimism and invest for growth in the coming decade.