Future_of_American_Manufacturing

Dessein Jeremy BA 3103 Sec003 Dr. Andrea Hornett Assignment #6 Critical analysis #5 “Future of American Manufacturing” Manufacturing in the US: First of all, "manufacturing" as defined by the BLS refers to "establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products." The United States is the world's largest manufacturer, despite manufacturing being a very small portion of the entire US economy as compared to most other countries. The United States is the world’s largest manufacturing economy, employing nearly 12 million Americans in the production of $1.6 trillion in manufactured products, representing 18 percent of the world’s manufactured goods. The issue: A strong U.S. manufacturing base is essential for maintaining U.S. middle class and providing for U.S. national defense. The combination of the current global economic crisis and a decade-long series of bad policies and the lack of a national industrial strategy has created a steady drop in manufacturing jobs. We will critically analyze the manufacturing industry and show how they are impacted by corporate tax rate, free trade agreements and the burden of regulations. Finally we will find out possible alternatives what to do to improve the prospects for U.S. manufacturers. Figure 1: presents a PEST analysis of the manufacturing industry employing Political Factors * Government spending for 2009 * Growth in Cross Border Activities * Government policies * Ecological/environmental regulations * Tax Credit as example for R&D * Employment law * Competitive regulations * International legislation * International pressure from other manufacturing countries * War, terrorism | Economic Factors * US economy trends * General Economic Trends * Exchange rates * International trade and monetary issues * Investment for Modernization * Taxation specific to product/services * Job growth/unemployment * Inflation * Consumer confidence index * Import/export ratios * Production levels | Social Factors * Social factors * Lifestyle changes * Consumer attitudes and opinions * Labour Markets * Household Income * Demographic Trends (age, gender, race, family size, etc.) * Educational Trends * Ethical issues | Technological Factors * R&D Spending in 2008 Budget * Investing in Nanotechnology * Technology legislation * Technology access, licensing, patentsInventions * New discoveries * Energy uses/sources/fuels | The U.S. political environment: Is not as good as in other countries like Asia and Europe (tax brackets, cash grants, cheap credit, low cost utilities and speed regulatory approval). In fact American corporate taxes are among the highest in the industrialized world even with tax breaks. The economical environment: The U.S. economy has been in a sizeable downturn for the last two years. The unemployment rate stay high and the government is losing money. Moreover the U.S regulations (corporate tax rate) are unfavorable for manufacturing industry. The social environment: The United States is undergoing some fundamental sociological changes. A significant trend in the U.S. is workforce diversity. The ability to manage a multiethnic workforce will be a key success factor for many businesses in the future. The fact is this: The manufacturing industry is changing. The industry need more skilled workers because of technology improvements and workers retirement by the end of the decade, they need to be replaced, meaning managers must learn to adapt to a new type of workforce. The manufacturing industry is also overwhelmingly a male dominated industry; few women are employed at management level. The technological environment: The development of market leading technology is often a key to establishing correct returns. It is therefore imperative that managers actively scan the environment for opportunities to exploit new technology. The most important in technology is the value created by new technologies. The manufacturing industry has been marked by continual technological advancements. Figure 2: presents an analysis of the manufacturing industry employing Porter’s Five Force New Market Entrants . Capital requirement (huge amount of capital is require to enter) . Economy of scale (existing firms have the economy of scale) . Product differentiation -strong brand image Substitutes . Product substitution (Better prices, better quality) - Very less time to gain advantage by an innovation - New technology is prompting a raft of substitute services Buyer Power . Substitutes available . Alternative sources of supply available . Low cost of switching between suppliers Competitive Rivalry . Exit barriers . Stability in the country (dependant by actions taken by country) . Industry concentration . Diversity of rivals Supplier Power . Very high in this industry . Satisfactory substitute products are not available to the industry . Suppliers' brands are not usually powerful Figure 2 Porter’s Five Forces Power of suppliers: Manufacturing industry that produces goods requires raw materials. This leads to buyer-supplier relationships between the manufacturing industry and the firms that provide the raw materials Power of buyers: The power of buyers in the manufacturing industry is strong. The price sensitivity of consumers is fairly due to products differentiation. Although customers are price sensitive, their relative bargaining power is weak. Buyers are extremely fragmented as manufactured product is used in so many different applications. The high switching costs of manufacturing industry also reduce the power of buyers. New Market Entrants: The threat of new entry into the manufacturing industry is low to moderate. The manufacturing industry is an industry in which economies of scale are necessary to achieve superior returns. Therefore initial capital requirements in the manufacturing industry are extremely high. Another threat to new entrants exists with fusion and acquisition; in fact manufacturers compete primarily on cost fusion and acquisition is a good way to reduce their operating cost. Rivalry among Competitive Firms: In manufacturing industry firms are lowering their prices to increase overall company revenues but that decrease the net income. This lead to war between firms competing in the same industry for gaining customer share to increase revenues and profits. Globalization has transformed the historically manufacturing industry (Europe, United States and Japan) into Asia. Threat of Substitute: Manufacturing industry offer products with similar features and functionality. For Instance, the producers of eyeglasses and contact lenses are facing mounting competitive pressures from growing consumer interest in laser surgery. Figure 3: American manufacturing SWOT analysis internal | Strengths * Industry relatively stable * Manufacturing has become highly efficient * Manufacturing engineering skills * Raw material availability * Communication skills * Technology development * Increasing productivity * Strong brand names * Good distribution network | Weaknesses * US Labor rates * US Regulatory burden * High US corporate taxes * Manufacture is a mature industry * Heavy competition and little room for growth * Few government incentive * US is losing its lead in large-scale high-tech manufacturing * U.S. government policy | external | Opportunities * Technology and bio-technology areas (growing market segments) * Exports, strategic alliances and joint ventures * Arrival of new technologies * Loosening of regulation * market segments that require highly specialized workers * Foreign market | Threats * Low wage countries (Foreign competition) * India with its ability to supply highly educated workers at low wages to fill roles in the high-tech manufacturing market segment * New regulation * US relationship with foreign governments * Commodity price increases | The strengths of the manufacturing industry are that it is relatively stable. Although the demand for manufacturing fluctuate with the ups and downs of the economy. Moreover, manufacturing has become highly efficient over the last century, with the ability to maximize productivity of the workers and machines to maximize profits. A weakness of the manufacturing industry is that much of it is built on the production of non-essential goods. This means that a big downturn in the economy can have an important effect on it. Another weakness is that it is a mature industry. This means that there is heavy competition and little place for growth. As a result, the manufacturing industry is unattractive to new entrants. Opportunities in the manufacturing industry are in the technology and bio-technology areas. These are growing market segments with higher profit margins. Additionally, require highly specialized workers, which make it difficult for low wage countries to compete in this market segment. Foreign markets with a growing middle class are providing opportunities for technology and bio-technology manufacturers to increase their profitability through exports. The largest threats to the manufacturing industry in developed nations are from low wage countries. The low wages of these countries have made it impossible for many businesses in developed nations to compete, requiring them to either close or move overseas to find cheap labor. Increasingly, India is an even bigger threat to the manufacturing industry, with its ability to supply highly educated workers at low wages to fill roles in the high-tech manufacturing market segment. Forces Propelling------------> | < -------------Forces Restraining | * Unparalleled individual freedom and political stability * An environment of safety and security * An entrepreneurial business environment with relatively easy access to large and liquid capital markets, which promotes small business start up and creates an environment of innovation. * A skilled workforce with a work ethic that favors high-salaried jobs * Easy access to a large consumer market * A superior system of higher education at colleges and universities. | * Heavy regulation * Safety and security have an important cost * Business environment in other countries are more favorable * Emerging countries like India already compete on skilled workforce * Other countries have also large consumer market * Developing countries also compete on education | The problem/ Challenges: Dramatic decline in manufacturing jobs is a relatively recent. It was after the recession (2001) that employment dipped into the 17.3 millions and then into the 11.7 millions (The lowest employment level since 1950). First reason: U.S. manufacturing employment has fallen because U.S. businesses have changed how they manufacture goods. Advances in computers and robotics enable machines to perform many rote tasks that once required human labor. Manufacturers have replaced human labor with these machines in their production processes. Unskilled manufacturing positions have dropped to high-skilled workers. Between 1992 and 2000, overall manufacturing employment increased, but the number of manufacturing workers with high school education dropped from 11.3 million to 10.5 million. Between 2000 and 2009, it dropped by an additional 37 percent to 6.7 million positions. Manufacturing is becoming a highly skilled occupation that requires less manual labor. The chart shows the capital services used per hour worked in manufacturing and the information processing equipment, such as computers and software, used by all American manufacturers. Manufacturers used more than six times as much information processing as equipment in 2007 than in 1987.Computers and robots now do tasks those once required workers on an assembly line. Second reason: By exploiting the world currency markets, countries like China and Japan effectively subsidize their exports to the United States, and place a tariff on U.S. shipments to them. This manipulation is taking place on a massive scale. By some estimates, China’s Yuan is undervalued by as much as 40 percent compared with the U.S. dollar. China’s currency manipulation has contributed to the dramatic increase in the U.S. trade deficit with China. China’s currency manipulation also attracts foreign investment into China and away from American manufacturing facilities. This flow of investment already has cost American workers their jobs. Alternative/ Implementation: * More Highly Skilled Manufacturing Jobs: Manufacturers need fewer unskilled workers to perform rote tasks, but more highly skilled workers to operate the machines that automated those tasks. Manufacturers have substituted brains for brawn. Manufacturing job opportunities have increased for skilled workers even as overall manufacturing employment has fallen. ‘’In 2009, manufacturers employed 1,214,000 workers with an advanced degree—a 44 percent increase since 1992.’’ (www.manufacturing.gov/) * Implementation: Heavy commitment to improved education and training at all levels and tax incentives for investment in education would be the best solution. * Be focus on research and development: To thrive in competitive markets, manufacturers must innovate, and innovation often relies on research and new technologies. The increases in productivity over the past 50 years have been the result of heavy investment in research and development by the manufacturing sector. * Implementation: The federal government can help create innovation in the manufacturing sector by establishing better policies (tax bracket) for research and development, stronger protection for intellectual property, adequate funding of federal science programs, and a strong patent system. Also the federal government could implement programs that share the risk of development with the private sector. In general the federal government’s support of the research and development infrastructure, through investment in long-term, high-risk research, is critical to the health and vitality of the U.S. economy’s technology engine. * Enforcing trade laws: The U.S. should be standing up to China's unfair and illegal intervention in currency markets. This is a violation of international trade law. * Promote Quality: It has always been a major differentiator in manufacturing. Made in America is a mark of quality. If you are building a new chemical plant, do you want to buy valves and pumps made in China' The answer is no. Look at the recent drywall from China incident making people sick in the US. This example shows a possible impact of low quality and low cost items. * Biotechnology and nanotechnology are emerging fields that may be able to boost the U.S. economy as other industries have done in the past. * Other actions that could maintain and improve the attractiveness of the United States as a location for manufacturing activities: * Available and reasonably priced health care for all; * Sustained and increased support for small and medium-sized enterprises; * Continued attention to the costs of compliance with regulation; * Tax incentives for investment in production activities; * Strengthened public-private partnerships To conclude technological improvements are reducing U.S. manufacturing employment by automating many rote tasks. During the past decade, manufacturing employment has fallen by one-third while manufacturing output has remained roughly constant. This means less expensive manufactured goods, more manufacturing jobs for highly skilled workers, and the elimination of millions of low-skill assembly line positions. These same forces have reduced manufacturing employment around the world (The chart below illustrate this tendency). Increased productivity led Chinese employers to eliminate millions of manufacturing jobs in the late 1990s. Congress can best help the manufacturing sector and the rest of the economy by improving U.S. competitiveness and by creating a better business environment in the U.S. One of the most important actions is to ensure that the United States remains an attractive place to locate businesses that create quality jobs and an attractive place for skilled employees to choose to live. References: Robert Samuelson ‘’The Future of American Manufacturing’’ October 19, 2005 http://economistsview.typepad.com/economistsview/2005/10/the_future_of_a.html Ezra Klein ‘’A new kind of high school in Chicago's inner city will train its students for high-tech, high-pay manufacturing.’’ July 12, 2007 http://www.prospect.org/cs/articles'article=innercity_futurism Brandon Shalton ‘’The Return of Manufacturing in the United States’’ February 22, 2010 http://technorati.com/business/small-business/article/the-return-of-manufacturing-in-the/#ixzz13O1slxx9 americanmanufacturing.org ‘’Manufacturing and Climate Policy’’ http://www.americanmanufacturing.org/category/issues/jobs-and-economy/manufacturing-and-climate-policy Jake Miller ‘’Manufacturing jobs focus of Alliance for American’’ October 30, 2010 http://www.wausaudailyherald.com/article/20101030/WDH0101/10300499/Manufacturing-jobs-focus-of-Alliance-for-American-Manufacturing-meeting Sam Diaz ‘’Intel investing billions in U.S. manufacturing, creating thousands of jobs’’ October 19, 2010 http://www.zdnet.com/blog/btl/intel-investing-billions-in-us-manufacturing-creating-thousands-of-jobs/40681 Annual Survey of Manufactures http://www.census.gov/mcd/